Quarterly Report — Form 10-Q Filing Table of Contents
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2: EX-31.A Certification -- §302 - SOA'02 HTML 25K
3: EX-31.B Certification -- §302 - SOA'02 HTML 25K
4: EX-32 Certification -- §906 - SOA'02 HTML 22K
11: R1 Cover Page HTML 72K
12: R2 Consolidated Statement of Income HTML 76K
13: R3 Consolidated Statement of Comprehensive Income HTML 60K
14: R4 Consolidated Balance Sheet HTML 133K
15: R5 Consolidated Balance Sheet (Parenthetical) HTML 36K
16: R6 Consolidated Statement of Cash Flows HTML 121K
17: R7 Consolidated Statement of Cash Flows HTML 22K
(Parenthetical)
18: R8 Business Segment Information HTML 62K
19: R9 Management representation HTML 25K
20: R10 New accounting pronouncements HTML 30K
21: R11 Revenue recognition HTML 84K
22: R12 Earnings per share HTML 42K
23: R13 Share repurchase program HTML 23K
24: R14 Trade accounts receivable, net HTML 29K
25: R15 Non-trade and notes receivable HTML 29K
26: R16 Inventories HTML 29K
27: R17 Business realignment and acquisition integration HTML 63K
charges
28: R18 Equity HTML 156K
29: R19 Goodwill and intangible assets HTML 46K
30: R20 Retirement benefits HTML 45K
31: R21 Debt HTML 23K
32: R22 Income taxes HTML 27K
33: R23 Financial instruments HTML 81K
34: R24 New accounting pronouncements (Policies) HTML 29K
35: R25 Business Segment Information (Tables) HTML 58K
36: R26 Revenue recognition (Tables) HTML 81K
37: R27 Earnings per share (Tables) HTML 41K
38: R28 Non-trade and notes receivable (Tables) HTML 28K
39: R29 Inventories (Tables) HTML 30K
40: R30 Business realignment and acquisition integration HTML 61K
charges (Tables)
41: R31 Equity (Tables) HTML 160K
42: R32 Goodwill and intangible assets (Tables) HTML 46K
43: R33 Retirement benefits (Tables) HTML 42K
44: R34 Financial instruments (Tables) HTML 81K
45: R35 Business Segment Information (Details) HTML 65K
46: R36 Revenue recognition - Revenues by segment and by HTML 53K
platform (Details)
47: R37 Revenue recognition - Revenue by geographic region HTML 36K
(Details)
48: R38 Revenue recognition - Contract assets and HTML 39K
liabilities (Details)
49: R39 Revenue recognition - Narrative (Details) HTML 33K
50: R40 Earnings per share - Computation of basic and HTML 49K
diluted earnings per share (Details)
51: R41 Earnings per share - Narrative (Details) HTML 23K
52: R42 Share repurchase program (Details) HTML 25K
53: R43 Trade accounts receivable, net (Details) HTML 23K
54: R44 Non-trade and notes receivable (Details) HTML 26K
55: R45 Inventories (Details) HTML 30K
56: R46 Business realignment and acquisition integration HTML 37K
charges - Business segment information (Details)
57: R47 Business realignment and acquisition integration HTML 31K
charges - Income statement location (Details)
58: R48 Business realignment and acquisition integration HTML 27K
charges - Narrative (Details)
59: R49 Business realignment and acquisition integration HTML 27K
charges - Acquisition integration charges related
to the Lord and Exotic acquisitions (Details)
60: R50 Equity - Changes in equity (Details) HTML 77K
61: R51 Equity - Changes in accumulated other HTML 47K
comprehensive income (Loss) in Shareholders'
Equity by Component (Details)
62: R52 Equity - Reclassifications out of accumulated HTML 50K
other comprehensive income (Loss) in Shareholders'
Equity (Details)
63: R53 Goodwill and intangible assets - Changes in HTML 34K
carrying amount of goodwill (Details)
64: R54 Goodwill and intangible assets - Intangible assets HTML 33K
by major category (Details)
65: R55 Goodwill and intangible assets - Narrative HTML 35K
(Details)
66: R56 Retirement benefits - Net pension benefit expense HTML 45K
(Details)
67: R57 Retirement benefits - Narrative (Details) HTML 26K
68: R58 Debt (Details) HTML 29K
69: R59 Income taxes (Details) HTML 29K
70: R60 Financial instruments - Carrying values and HTML 27K
estimated fair values of long-term debt (Details)
71: R61 Financial instruments - Narrative (Details) HTML 34K
72: R62 Financial instruments - Fair value of derivative HTML 39K
instruments reported in consolidated balance sheet
(Details)
73: R63 Financial instruments - Gain (Losses) on HTML 29K
Derivative and Non-Derivative Financial
Instruments Recorded in Accumulated Other
Comprehensive (Loss) (Details)
74: R64 Financial instruments - Financial assets and HTML 39K
liabilities measured at fair value (Details)
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(Exact name of registrant as specified in its charter)
iOhio
i34-0451060
(State
or other jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i6035 Parkland Boulevard,
iCleveland,
iOhio
i44124-4141
(Address
of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (i216) i896-3000
Securities registered pursuant to Section 12(b) of the Act:
Title
of Each Class
Trading Symbol
Name of Each Exchange on which Registered
iCommon Shares, $.50 par value
iPH
iNew
York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No ☒
Number of Common Shares outstanding at December 31, 2020: i129,081,165
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation
i135,320
i119,741
Amortization
i162,940
i133,559
Share
incentive plan compensation
i79,833
i73,069
Deferred
income taxes
(i3,034)
i8,608
Foreign
currency transaction (gain) loss
(i530)
i6,569
Gain
on property, plant and equipment
(i102,565)
(i4,478)
Gain
on marketable securities
(i6,959)
(i1,969)
Gain
on investments
(i4,783)
(i1,849)
Other
i7,523
i—
Changes
in assets and liabilities, net of effects from acquisitions:
Accounts receivable, net
i79,685
i379,536
Inventories
(i4,264)
i25,724
Prepaid
expenses and other
i27,646
(i50,153)
Other
assets
(i22,052)
(i38,747)
Accounts
payable, trade
i193,901
(i178,013)
Accrued
payrolls and other compensation
(i92,010)
(i117,882)
Accrued
domestic and foreign taxes
i15,244
(i7,699)
Other
accrued liabilities
i53,236
(i76,616)
Pensions
and other postretirement benefits
i35,365
i32,316
Other
liabilities
i30,278
(i19,387)
Net
cash provided by operating activities
i1,353,988
i825,968
CASH
FLOWS FROM INVESTING ACTIVITIES
Acquisitions (net of cash of $i82,192 in 2019)
i—
(i5,075,605)
Capital
expenditures
(i92,907)
(i118,593)
Proceeds
from sale of property, plant and equipment
i124,428
i20,993
Purchases
of marketable securities and other investments
(i16,029)
(i190,129)
Maturities
and sales of marketable securities and other investments
i52,019
i198,872
Other
i11,183
i9,374
Net
cash provided by (used in) investing activities
i78,694
(i5,155,088)
CASH
FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options
i3,137
i1,923
Payments
for common shares
(i60,825)
(i136,815)
(Payments
for) proceeds from notes payable, net
(i113,500)
i931,546
Proceeds
from long-term borrowings
i—
i1,721,181
Payments
for long-term borrowings
(i1,210,848)
(i236,505)
Dividends
paid
(i227,228)
(i227,025)
Net
cash (used in) provided by financing activities
(i1,609,264)
i2,054,305
Effect
of exchange rate changes on cash
i55,802
i3,403
Net
decrease in cash and cash equivalents
(i120,780)
(i2,271,412)
Cash
and cash equivalents at beginning of year
i685,514
i3,219,767
Cash
and cash equivalents at end of period
$
i564,734
$
i948,355
See
accompanying notes to consolidated financial statements.
- 5 -
PARKER-HANNIFIN CORPORATION
BUSINESS SEGMENT INFORMATION
(Dollars in thousands)
(Unaudited)
i
The
Company operates in itwo reportable business segments: Diversified Industrial and Aerospace Systems.
Diversified Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural, and military machinery and equipment and has a significant portion of international operations. Sales are made directly to major original equipment manufacturers
("OEMs") and through a broad distribution network to smaller OEMs and the aftermarket.
Aerospace Systems - This segment designs and manufactures products and provides aftermarket support for commercial, business jet, military and general aviation aircraft, missile and spacecraft markets. The Aerospace Systems Segment provides a full range of systems and components for hydraulic, pneumatic and fuel applications.
(Dollars in thousands, except per share amounts or as otherwise noted)
iAs
used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.
1. Management representation
In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of December 31, 2020, the results of operations for the three and six months ended December 31,
2020 and 2019 and cash flows for the six months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2020 Annual Report on Form 10-K.
The novel coronavirus ("COVID-19") pandemic is having, and will likely continue to have, an adverse effect on our business, and its future impacts remain highly uncertain and unpredictable. Therefore, accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.
The
Company has evaluated subsequent events that occurred through the date these financial statements were issued. No subsequent events have occurred that required adjustment to or disclosure in these financial statements.
2. iiNew
accounting pronouncements/
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. We adopted ASU 2016-13 on
July 1, 2020. The adoption of this guidance, using the modified retrospective method, did not result in a cumulative-effect adjustment to retained earnings and did not have a material impact on the consolidated financial statements or related disclosures.
3. iRevenue recognition
iRevenue
is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. A majority of the Company’s revenues are recognized at a point in time. However, a portion of the Company’s revenues are recognized over time.
iDiversified Industrial Segment revenues by technology platform:
Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract
liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms established in the contract with the customer.
At
December 31, 2020, the change in net contract liabilities was primarily due to timing differences between when revenue was recognized and the receipt of advance payments. During the six months ended December 31, 2020, approximately $i27 million of revenue was recognized that was included in the contract
liabilities at June 30, 2020.
Remaining performance obligations
Our backlog represents written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. We believe our backlog represents our unsatisfied or partially unsatisfied performance obligations. Backlog at December 31, 2020 was $i5,762
million, of which approximately i83 percent is expected to be recognized as revenue within the next i12
months and the balance thereafter.
- 8 -
4. iEarnings per share
iThe
following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and six months ended December 31, 2020 and 2019.
Increase
in weighted average common shares from dilutive effect of equity-based awards
i2,061,874
i2,098,448
i1,621,801
i1,723,616
Diluted
- weighted average common shares, assuming exercise of equity-based awards
i131,075,655
i130,495,381
i130,482,564
i130,154,079
Basic
earnings per share
$
i3.47
$
i1.59
$
i5.97
$
i4.23
Diluted
earnings per share
$
i3.41
$
i1.57
$
i5.89
$
i4.17
/
For
the three months ended December 31, 2020 and 2019, i247,107 and i2,718
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 six months ended December 31, 2020 and 2019, i636,032 and i767,692
common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
5. iShare 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 i35 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 current-year quarter, the Company reinitiated the share repurchase program, which was suspended in March 2020 in response to business uncertainty resulting from the COVID-19 pandemic. We did inot repurchase any shares under the program during the current-year quarter.
6.
iTrade accounts receivable, net
Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. We evaluate the collectibility of our receivables based on historical experience and current and forecasted economic conditions based on management's judgment. Additionally, receivables are written off to bad debt when management makes a final determination of uncollectibility. Allowance
for credit losses was $i17,056 and $i11,644 at December 31,
2020 and June 30, 2020, respectively.
7. Non-trade and notes receivable
i
The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
9.
iBusiness realignment and acquisition integration charges
We incurred business realignment and acquisition integration charges in the first six months of fiscal 2021 and 2020. During fiscal 2021, business realignment charges primarily consisted of actions taken to address the impact of COVID-19 on our business. In both fiscal 2021 and 2020, business realignment charges included severance costs related to actions taken under the
Company's simplification initiative aimed at reducing organizational and process complexity as well as plant closures. A majority of the business realignment charges were incurred in North America and Europe. We believe the realignment actions will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital.
i
Business realignment charges presented in the Business Segment Information are as follows:
During
the first six months of fiscal 2021, approximately $i32 million in payments were made relating to business realignment charges. Remaining payments related to business realignment actions of approximately $i26
million, a majority of which are expected to be paid by December 31, 2021, 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.
- 10 -
We also incurred the following acquisition integration charges related to the fiscal 2020 acquisitions of LORD Corporation ("Lord") and Exotic Metals Forming Company ("Exotic"):
Changes
in accumulated other comprehensive (loss) in shareholders' equity by component for the six months ended December 31, 2020 and 2019 are as follows:
iSignificant
reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three and six months ended December 31, 2020 and 2019 are as follows:
Details about Accumulated Other Comprehensive (Loss) Components
Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)
The
acquisitions line represents adjustments to the Lord goodwill allocation during the measurement period subsequent to its acquisition date. The impact of these adjustments during the first six months of fiscal 2021 was immaterial to our results of operations and financial position. At December 31, 2020, purchase price allocations for both Lord and Exotic are complete.
We did not identify any events or circumstances during the first six months of fiscal 2021 that required performance of an interim goodwill impairment test. However, the effects 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 goodwill impairment test in future periods.
Intangible assets are amortized using the straight-line method over
their legal or estimated useful lives. iThe following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:
Total
intangible amortization expense for the six months ended December 31, 2020 was $i162,940. The estimated amortization expense for the five years ending June 30, 2021 through 2025 is $i322,168,
$i307,106, $i297,073, $i287,768
and $i273,650, respectively.
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No material intangible asset impairments occurred during the six months ended December 31, 2020.
-
13 -
12. iRetirement benefits
iNet
pension benefit expense recognized included the following components:
During
the three months ended December 31, 2020 and 2019, we recognized $i385 and $i510,
respectively, in expense related to other postretirement benefits. During the six months ended December 31, 2020 and 2019, we recognized $i770 and $i967,
respectively, in expense related to other postretirement benefits. Components of retirement benefits expense, other than service cost, are included in other (income), net in the Consolidated Statement of Income.
13. iDebt
During the three months ended December 31, 2020, we repaid the remaining $i539
million balance of the $i925 million term loan. During the first six months of fiscal 2021, we repaid the remaining $i890 million and $i320
million balances related to the $i925 million and $i800 million term loans, respectively.
14.
iIncome taxes
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), a significant tax-and-spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act did not result in a material impact on our effective tax rate.
On December 27, 2020, the Consolidated
Appropriations Act, 2021, was signed into law. In addition to providing funding for the government, this law provides further COVID-19 economic relief, and extends certain expiring tax provisions. This act did not result in a material impact on our effective tax rate.
We file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world. We are open to assessment on our U.S. federal income tax returns by the Internal Revenue Service for fiscal years after 2013, and our state and local returns for fiscal years after 2013. We are also open to assessment for significant foreign jurisdictions for fiscal years after 2008. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements.
As
of December 31, 2020, we had gross unrecognized tax benefits of $ii103,565/,
all of which, if recognized, would impact the effective tax rate. The accrued interest related to the gross unrecognized tax benefits, excluded from the amount above, is $i16,761. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately $i40,000
as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of gross unrecognized tax benefits within the next 12 months is expected to be insignificant.
15. iFinancial instruments
Our financial instruments consist primarily of cash and cash equivalents, marketable
securities and other investments, accounts receivable and long-term investments, as well as obligations under accounts payable, trade, notes payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable, accounts payable, trade and notes payable approximate fair value.
Marketable securities and other investments include deposits and equity investments. Deposits are recorded at cost, and equity investments are recorded at fair value. Changes in fair value related to equity investments are recorded in net income. Unrealized gains and losses related to equity investments were not material as of December 31, 2020 and 2019.
- 14 -
iThe
carrying value of long-term debt and estimated fair value of long-term debt are as follows:
The
fair value of long-term debt is classified within level 2 of the fair value hierarchy.
We utilize derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions and we do not anticipate any material non-performance by any of the counterparties. We do not
hold or issue derivative financial instruments for trading purposes.
The Company’s €i700 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.
iThe location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
The
cross-currency swap, forward exchange contracts and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. We have not entered into any master netting arrangements.
The cross-currency swap contracts have been designated as hedging instruments. The forward exchange and costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
Derivatives not designated as hedges are adjusted to fair value by recording gains
and losses through the cost of sales caption in the Consolidated Statement of Income.
Derivatives designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive (loss) on the Consolidated Balance Sheet until the hedged item is recognized in earnings. We assess the effectiveness of the €i359 million and ¥i2,149
million cross-currency swap hedging instruments using the spot method. Under this method, the periodic interest settlements are recognized directly in earnings through interest expense.
Net gains of $i24 million relating to forward exchange contracts were recorded within cost of sales in the Consolidated Statement of Income for the six months
ended December 31, 2020. All other gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the three and six months ended December 31, 2020 and 2019 were not material.
- 15 -
i(Losses)
gains on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) on the Consolidated Balance Sheet are as follows:
During the
first six months of fiscal 2021, the periodic interest settlements related to the cross-currency swaps were not material. No portion of these financial instruments were excluded from the effectiveness testing during the six months ended December 31, 2019.
i
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at December 31, 2020 and June 30,
2020 are as follows:
The
fair values of the equity securities are determined using the closing market price reported in the active market in which the fund is traded.
Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of the fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.
The primary investment objective for all
investments is the preservation of principal and liquidity while earning income.
There are no other financial assets or financial liabilities that are marked to market on a recurring basis.
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:
At
December 31, 2020, global aircraft miles flown decreased by approximately 57 percent and available revenue passenger miles decreased by approximately 66 percent from their comparable prior-year period. The Company anticipates that U.S. Department of Defense spending with regard to appropriations and operations and maintenance for the U.S. Government’s fiscal year 2021 will be approximately four percent lower than the comparable fiscal 2020 level.
Housing starts in December 2020 were approximately five percent higher than housing starts in December 2019 and approximately 41 percent higher than housing starts in June 2020.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. Given the unpredictable nature of COVID-19's
impact on the global economy, the statistics included above may not be reflective of recent or future activity.
We continue to monitor the impact of the COVID-19 pandemic, which has negatively impacted, 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. These developments include the availability and effectiveness of vaccines, 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 strategically reducing costs through elimination of discretionary spending and targeted restructuring. 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
Three
Months Ended
Six Months Ended
December 31,
December 31,
(dollars in millions)
2020
2019
2020
2019
Net sales
$
3,412
$
3,498
$
6,642
$
6,832
Gross
profit margin
26.2
%
23.3
%
26.2
%
24.4
%
Selling, general and administrative expenses
$
357
$
491
$
726
$
890
Selling,
general and administrative expenses, as a percent of sales
10.5
%
14.0
%
10.9
%
13.0
%
Interest expense
$
63
$
83
$
129
$
153
Other
(income), net
$
(104)
$
(14)
$
(109)
$
(61)
Effective tax rate
22.4
%
19.7
%
22.4
%
21.0
%
Net
income
$
447
$
205
$
769
$
544
Net income, as a percent of sales
13.1
%
5.8
%
11.6
%
8.0
%
Net
sales for the current-year quarter and first six months of fiscal 2021 decreased slightly compared to the comparable prior-year periods. Lower volume in the Aerospace Systems Segment and Diversified Industrial North American businesses, partially offset by higher volume in the Diversified Industrial International businesses, contributed to the decrease in the current-year quarter. The decrease in sales in the first six months of fiscal 2021 was due to lower volume in all segments. Acquisitions contributed approximately $89 million and $394 million in net sales during the current-year quarter and first six
- 18 -
months of fiscal 2021, respectively. The effect of currency rate changes increased net sales by approximately $39 million and $65 million in the
current-year quarter and first six months of fiscal 2021, respectively. These increases were primarily due to a $40 million and $71 million increase in the Diversified Industrial International businesses during the current-year quarter and first six months of fiscal 2021, respectively. These increases were partially offset by a decrease in the North American businesses in both periods.
Gross profit margin (calculated as net sales minus cost of sales, divided by net sales) increased in the current-year quarter and first six months of fiscal 2021 primarily due to higher margins in both the Diversified Industrial North American and International businesses. Gross profit margin also benefited from the absence of acquisition-related expenses, which were included in cost of sales in the prior-year quarter and first six months of fiscal 2020, of $49 million and $51 million, respectively. Cost
of sales for the current-year and prior-year quarter also included business realignment and acquisition integration charges of $15 million and $8 million, respectively, and $27 million and $12 million for the first six months of fiscal 2021 and 2020, respectively.
Selling, general and administrative expenses ("SG&A") decreased during the current-year quarter and first six months of fiscal 2021 primarily due to the absence of acquisition-related expenses of $100 million and $115 million, which were incurred in the prior-year quarter and first six months of fiscal 2020, respectively. SG&A also benefited from lower discretionary spending and wage and salary expense resulting from actions taken in response to current business conditions resulting from the COVID-19 pandemic. 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 $9 million for the current-year and prior-year quarter, respectively, and $14 million and $14 million for the first six months of fiscal 2021 and 2020, respectively.
Interest expense for the current-year quarter decreased from the prior-year quarter primarily due to lower average debt outstanding. Interest expense decreased in the first six months of fiscal 2021 due to both lower average debt outstanding and lower interest rates.
Other (income), net included the following:
Three
Months Ended
Six Months Ended
(dollars in millions)
December 31,
December 31,
Expense (income)
2020
2019
2020
2019
Income related to equity method investments
$
(10)
$
(21)
$
(19)
$
(44)
Non-service
components of retirement benefit cost
14
14
26
25
(Gain) loss on disposal of assets
(102)
6
(102)
(4)
Interest
income
(2)
(8)
(3)
(26)
Other items, net
(4)
(5)
(11)
(12)
$
(104)
$
(14)
$
(109)
$
(61)
(Gain)
loss on disposal of assets for the current-year quarter and first six months of fiscal 2021 includes a gain on the sale of land of approximately $101 million.
Effective tax rate for the current-year quarter and first six months of fiscal 2021 was higher than the comparable prior-year periods primarily due to an overall decrease in discrete tax benefits. The fiscal 2021 effective tax rate is expected to be approximately 23 percent.
- 19 -
BUSINESS SEGMENT INFORMATION
Diversified
Industrial Segment
Three Months Ended
Six Months Ended
December 31,
December
31,
(dollars in millions)
2020
2019
2020
2019
Net sales
North America
$
1,567
$
1,616
$
3,095
$
3,240
International
1,260
1,147
2,389
2,226
Operating
income
North America
282
211
550
487
International
$
220
$
154
$
407
$
322
Operating
margin
North America
18.0
%
13.1
%
17.8
%
15.0
%
International
17.5
%
13.4
%
17.0
%
14.5
%
Backlog
$
2,499
$
2,321
$
2,499
$
2,321
The
Diversified Industrial Segment operations experienced the following percentage changes in net sales in the current-year period versus the comparable prior-year period:
Diversified Industrial
North America – as reported
(3.0)
%
(4.5)
%
Acquisitions
3.1
%
5.8
%
Currency
(0.2)
%
(0.3)
%
Diversified
Industrial North America – without acquisitions and currency
(5.9)
%
(10.0)
%
Diversified Industrial International – as reported
9.8
%
7.3
%
Acquisitions
3.2
%
6.1
%
Currency
3.5
%
3.1
%
Diversified
Industrial International – without acquisitions and currency
3.1
%
(1.9)
%
Total Diversified Industrial Segment – as reported
2.3
%
0.3
%
Acquisitions
3.1
%
5.9
%
Currency
1.4
%
1.1
%
Total
Diversified Industrial Segment – without acquisitions and currency
(2.2)
%
(6.7)
%
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 3.0 percent and 4.5 percent during the current-year quarter and first six months of fiscal 2021, respectively. The effect of acquisitions increased sales by approximately $50 million and $188 million in the current-year quarter and first six months of fiscal 2021, respectively. 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 and first six months of fiscal 2021 decreased primarily due to lower demand from distributors and end users in various markets, including the oil and gas, construction equipment, heavy-duty truck, industrial machinery, and material handling markets, partially offset by an increase in end-user demand in the life sciences,
refrigeration, farm and agriculture, and semiconductor markets.
Sales in the current-year quarter and first six months of fiscal 2021 for the Diversified Industrial International operations increased 9.8 percent and 7.3 percent from the prior-year quarter and first six months of fiscal 2020, respectively. The effect of acquisitions increased sales by approximately $37 million and $136 million in the current-year quarter and first six months of fiscal 2021, respectively. The effect of currency exchange rates increased sales by approximately $40 million and $71 million in
- 20 -
the current-year quarter and first six months of fiscal 2021, respectively. Excluding the effects of acquisitions and changes in currency exchange rates,
Diversified Industrial International sales for the current-year quarter increased 3.1 percent from the prior-year quarter and decreased 1.9 percent during the first six months of fiscal 2021. In the current-year quarter, the Asia Pacific and Latin America regions contributed to the increase in sales, partially offset by a decrease in sales in Europe. During the first six months of fiscal 2021, the decrease in sales is attributable to lower sales in Europe, partially offset by an increase in sales in the Asia Pacific and Latin America regions.
Within Europe, the decrease in sales in the current-year quarter was primarily due to lower demand from distributors and end users in various markets, including the industrial machinery, machine tool, engine and forestry markets, partially offset by an increase in end-user demand in the power generation and heavy-duty truck markets. During the first six months of
fiscal 2021, the decrease in sales was primarily due to lower demand from distributors and end users in various markets, including the industrial machinery, construction equipment and machine tool markets, partially offset by an increase in end-user demand in the power generation and semiconductor markets.
Within the Asia Pacific region, the increase in sales in the current-year quarter was primarily due to an increase in end-user demand in the construction equipment, heavy-duty truck, semiconductor and life science markets, partially offset by a decrease in end-user demand in the oil and gas market. During the first six months of fiscal 2021, the increase in sales was primarily due to an increase in end-user demand in the construction equipment, engine and semiconductor markets, partially offset by a decrease in end-user demand in the oil and gas market and lower demand from distributors.
Within
Latin America, the increase in sales in the current-year quarter and the first six months of fiscal 2021 was primarily due to an increase in end-user demand in the farm and agriculture, cars and light truck and life science markets, partially offset by a decrease in end-user demand in the oil and gas and mining markets.
Diversified Industrial Segment operating margins increased in the current-year quarter and first six months of fiscal 2021 within both the North American and International businesses primarily due to benefits from overall cost reductions, including lower discretionary spending, wage and salary reductions, prior-year restructuring actions in response to current business conditions resulting from the COVID-19 pandemic and the absence of acquisition-related expenses. These benefits were partially offset by higher intangible asset amortization expense and higher business realignment charges.
The
following business realignment and acquisition integration charges are included in Diversified Industrial North American and Diversified Industrial International operating income:
Three Months Ended
Six Months Ended
December
31,
December 31,
(dollars in millions)
2020
2019
2020
2019
Diversified Industrial North America
$
5
$
8
$
9
$
13
Diversified
Industrial International
15
8
25
11
During the first six months of fiscal 2021, business realignment charges primarily included actions taken to address the impact of COVID-19 on our business. The business realignment charges also consisted of severance costs related to actions taken under the Company's simplification initiative implemented by operating units throughout the world as well as plant
closures. Acquisition integration charges relate to the fiscal 2020 acquisition of LORD Corporation ("Lord"). Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe. We anticipate that cost savings realized from the workforce reduction measures taken in the first six months of fiscal 2021 will not materially impact operating income in fiscal 2021 and will increase operating income by approximately one percent in fiscal 2022 for both the Diversified Industrial North American and International businesses. We expect to continue to take actions necessary to integrate acquisitions and structure appropriately the operations of the Diversified Industrial Segment, especially in light of the rapidly changing business conditions resulting from the COVID-19 pandemic. We currently anticipate incurring approximately $31 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 December 31, 2020 increased from the prior-year quarter primarily due to orders exceeding shipments in the International businesses, slightly offset by shipments exceeding orders in the North American businesses. Within the International businesses, the Asia Pacific region and Europe accounted for approximately 50 percent and 40 percent of the increase, respectively.
- 21 -
As of December 31,
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 60 percent and 40 percent of the change, respectively. Within the International businesses, Europe and the Asia Pacific region accounted for approximately 60 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
Three Months Ended
Six Months Ended
December 31,
December
31,
(dollars in millions)
2020
2019
2020
2019
Net sales
$
585
$
735
$
1,159
$
1,366
Operating
income
$
91
$
121
$
177
$
244
Operating margin
15.5
%
16.5
%
15.3
%
17.9
%
Backlog
$
3,263
$
3,183
$
3,263
$
3,183
The
decrease in net sales in the Aerospace Systems Segment for the current-year quarter and first six months of fiscal 2021 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 $3 million and $71 million increase in sales from prior-year acquisitions for the current-year quarter and first six months of fiscal 2021, respectively.
Operating margin decreased during the current-year quarter and first six months of fiscal 2021 primarily due to lower sales volume in the commercial OEM and aftermarket businesses, lower aftermarket profitability and higher business realignment charges primarily due to current economic conditions resulting from COVID-19, partially offset by lower engineering development expenses
and benefits from prior-year restructuring actions. The significantly reduced production rate of the Boeing 737 MAX also contributed to lower operating margin.
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 $2 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 six months of fiscal 2021 will increase operating income by approximately two percent in fiscal 2021 and 2022.
The increase in backlog from the prior-year
quarter and from the June 30, 2020 amount of $3,021 million is primarily due to orders exceeding shipments in the military OEM business, partially offset by shipments exceeding orders in the military aftermarket, commercial OEM and aftermarket businesses. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
Corporate general and administrative expenses
Three
Months Ended
Six Months Ended
(dollars in millions)
December 31,
December 31,
Expense (income)
2020
2019
2020
2019
Corporate general and administrative expense
$
39
$
36
$
75
$
85
Corporate
general and administrative expense, as a percent of sales
1.1
%
1.0
%
1.1
%
1.2
%
During the current-year quarter and first six months of fiscal 2021, 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. In the current year quarter, an
increase in deferred compensation expense and charitable contributions more than offset these benefits.
- 22 -
Other (income) expense (in the Business Segment Information) included the following:
Three
Months Ended
Six Months Ended
(dollars in millions)
December 31,
December 31,
Expense (income)
2020
2019
2020
2019
Foreign currency transaction
$
4
$
8
$
(1)
$
7
Stock-based
compensation
9
8
46
37
Pensions
6
8
10
17
Acquisition expenses
—
100
—
115
(Gain)
loss on disposal of assets
(102)
6
(102)
(4)
Interest income
(2)
(8)
(3)
(26)
Other
items, net
(1)
(9)
(11)
(18)
$
(86)
$
113
$
(61)
$
128
Foreign
currency transaction primarily relates to the impact of exchange rates on cash, marketable securities and other investments, forward contracts and intercompany transactions.
(Gain) loss on disposal of assets for the current-year quarter and first six months of fiscal 2021 includes a gain on the sale of land of approximately $101 million.
Cash
(comprised of cash and cash equivalents and marketable securities and other investments) includes $548 million and $726 million held by the Company's foreign subsidiaries at December 31, 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 49 days at December 31, 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 December 31, 2020 increased by $56 million (which includes an increase of $52 million from the effect of foreign currency translation). After consideration of the effects of foreign currency translation, inventories increased primarily due to an increase in the Diversified Industrial Segment, partially offset by a decrease in the Aerospace Systems Segment. Days supply of inventory on hand was 84 days at December 31, 2020, 89 days at June 30,
2020 and 84 days at December 31, 2019.
Long-term debt decreased by $1,050 million from prior year-end primarily due to the repayment of term loans. Refer to Note 13 to the Consolidated Financial Statements for further discussion.
Shareholders’ equity activity during the first six months of fiscal 2021 included an increase of approximately $347 million as a result of foreign currency translation.
- 23 -
CONSOLIDATED STATEMENT OF CASH FLOWS
Six
Months Ended
December 31,
(dollars in millions)
2020
2019
Cash provided by (used in):
Operating activities
$
1,354
$
826
Investing
activities
79
(5,155)
Financing activities
(1,609)
2,054
Effect of exchange rates
56
4
Net decrease in cash and cash equivalents
$
(120)
$
(2,271)
Cash
flows from operating activities for the first six months of fiscal 2021 was higher than the first six 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 six months of fiscal 2020 includes acquisition-related activity of $5,076 million. Additionally, the first six months of fiscal 2021 includes net proceeds from the sale of land of approximately $111 million.
Cash flows from financing activities for the first six months of fiscal 2021 includes net commercial paper repayments of $114 million compared to net borrowings of $932 million in the first six months of fiscal 2020. Cash flows from financing activities in the first six months of fiscal 2021
also includes term loan repayments of $1,210 million while the first six months of fiscal 2020 includes proceeds from the issuance of the $925 million and $800 million term loans. Refer to Note 13 to the Consolidated Financial Statements for further discussion.
Our goal is to maintain a strong investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At December 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+
We continue to actively monitor our liquidity position and working capital needs and prioritize capital expenditures related to safety and strategic investments. The Company remains in a stable overall capital resources and liquidity position that is adequate to meet its projected needs. During the current-year quarter, the
Company reinitiated the share repurchase program, which was suspended in March 2020 in response to business uncertainty resulting from the COVID-19 pandemic. We did not repurchase any shares under the program during the current-year quarter. We intend to resume quarterly share repurchases under the program of $50 million in the third quarter of fiscal 2021. Although we cannot reasonably estimate the duration of the pandemic or its ultimate impact on our business, we believe the Company is well positioned to manage through the current economic uncertainty and capitalize on its position as the global leader in motion and control technologies as the economy recovers.
At December 31, 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 $1,890 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.
- 24 -
As of December 31, 2020, the Company was authorized to sell up to $2,500 million of short-term commercial paper notes. As of December 31, 2020, $610 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $840 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 December 31, 2020, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At December 31, 2020, the Company's debt to
debt-shareholders' equity ratio was 0.51 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and indentures.
- 25 -
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 Lord and EMFCO Holdings Incorporated, parent company of Exotic; and our ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;
•our ability to effectively manage expanded operations from the acquisitions of Lord and Exotic;
•the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;
•increased cybersecurity threats and sophisticated computer
crime;
•business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;
•the development of new products and technologies requiring substantial investment;
•availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;
•disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development
programs, and changes in product mix;
•uncertainties surrounding the ultimate resolution of outstanding legal and regulatory proceedings, including the outcome of any appeals;
•additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;
•potential product liability risks;
•our ability to enter into, own, renew and maintain intellectual property and know-how;
•our leverage and future debt service obligations;
•potential impairment of goodwill;
•compliance
costs associated with environmental laws and climate change regulations;
•our ability to manage costs related to insurance and employee retirement and health care benefits;
•compliance with federal rules, regulations, audits and investigations associated with being a provider of products to the United States government; and
•our ability to implement successfully the Company's capital allocation initiatives, including timing, price and execution of share repurchases.
The Company makes these statements as of the date of the filing
of its Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, and undertakes no obligation to update them unless otherwise required by law.
- 26 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manages foreign currency transaction and translation risk by utilizing derivative and non-derivative financial instruments, including forward exchange contracts,
costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges. The derivative financial instrument contracts are with major investment grade financial institutions and we do not anticipate any material non-performance by any of the counterparties. We do not hold or issue derivative financial instruments for trading purposes.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Further information on the fair value of these contracts
is provided in Note 15 to the Consolidated Financial Statements. Derivatives that are not designated as hedges are adjusted to fair value by recording gains and losses through the Consolidated Statement of Income. Derivatives that are designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. For cross-currency swaps measured using the spot method, the periodic interest settlements are recognized directly in earnings through interest expense. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive income (loss) and remains there until the underlying net investment is sold or substantially liquidated.
The
Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. Our objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting our exposure to changes in near-term interest rates.
As discussed elsewhere in this report, the COVID-19 pandemic 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.
ITEM 4. CONTROLS AND PROCEDURES
The
Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2020. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of December 31, 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 December 31, 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 December 31, 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.
-
27 -
PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a)Unregistered Sales of Equity Securities. Not applicable.
(b)Use of
Proceeds. Not applicable.
(c)Issuer Purchases of Equity Securities.
Period
(a) Total Number of Shares Purchased
(b) Average Price
Paid Per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
(1)On
October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under the Company's share repurchase program, first announced on August 16, 1990, so that, beginning on October 22, 2014, the maximum aggregate number of shares authorized for repurchase was 35 million shares. There is no limitation on the amount of shares that can be repurchased in a fiscal year. There is no expiration date for this program. During the current-year quarter, the Company reinitiated the share repurchase program, which was suspended in March 2020 in response to
business uncertainty resulting from the COVID-19 pandemic. We did not repurchase any shares under the program during the current-year quarter.
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ITEM 6. Exhibits.
The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K:
Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
*
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three and six months ended December 31, 2020 and 2019,
(ii) Consolidated Statement of Comprehensive Income for the three and six months ended December 31, 2020 and 2019, (iii) Consolidated Balance Sheet at December 31, 2020 and June 30, 2020, (iv) Consolidated Statement of Cash Flows for the six months ended December 31, 2020 and 2019, and (v) Notes to Consolidated Financial Statements for the six months ended December 31, 2020.
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
