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10-K - 10-K - PARKER HANNIFIN CORPph630201510k.htm
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EX-31.A - EXHIBIT 31.A - PARKER HANNIFIN CORPph6302015ex31a.htm
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Exhibit 13 to Annual Report
On Form 10-K
for Fiscal Year Ended June 30, 2015
By Parker-Hannifin Corporation
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. 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:
changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments, 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;
ability to identify acceptable strategic acquisition targets;
uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions;
the ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;
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;
ability to implement successfully the Company's capital allocation initiatives, including timing, price and execution of share repurchases;
increases in raw material costs that cannot be recovered in product pricing;
the Company's ability to manage costs related to insurance and employee retirement and health care benefits;
threats associated with and efforts to combat terrorism and cyber-security risks;
uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals;
competitive market conditions and resulting effects on sales and pricing; and
global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates and credit availability.
The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended June 30, 2015, and undertakes no obligation to update them unless otherwise required by law.


13-1



MANAGEMENT'S DISCUSSION AND ANALYSIS

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.

The Company's 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. The Company believes the leading economic indicators of these markets that have a 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 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:
 
June 30, 2015

 
March 31, 2015

 
June 30, 2014

United States
53.5

 
51.5

 
55.3

Eurozone countries
52.5

 
52.2

 
51.8

China
49.4

 
49.6

 
50.7

Brazil
46.5

 
46.2

 
48.7

 
Global aircraft miles flown and global revenue passenger miles have both increased approximately seven percent from their comparable 2014 level. The Company anticipates that U.S. Department of Defense spending with regards to appropriations, and operations and maintenance for the U.S. Government's fiscal year 2015 will increase by approximately one percent from the comparable fiscal 2014 level.
 
Housing starts in June 2015 were approximately 27 percent higher than housing starts in both March 2015 and June 2014.

The Company has remained focused on maintaining its financial strength by adjusting its cost structure to reflect changing demand levels, maintaining a strong balance sheet and managing its cash. The Company continues to generate substantial cash flows from operations, has controlled capital spending and has proactively managed working capital. The Company has been able to borrow needed funds at affordable interest rates and had a debt to debt-shareholders' equity ratio of 36.6 percent at June 30, 2015 compared to 39.7 percent at March 31, 2015 and 25.9 percent at June 30, 2014. Net of cash and cash equivalents and marketable securities and other investments, the debt to debt-shareholders' equity ratio was 16.8 percent at June 30, 2015 compared to 20.9 percent at March 31, 2015 and 2.0 percent at June 30, 2014.

The Company believes many opportunities for 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.











13-2



The Company believes it can meet its strategic objectives by:
Serving the customer and continuously enhancing its experience with the Company;
Successfully executing its Win Strategy initiatives relating to premier customer service, financial performance and profitable growth;
Maintaining its decentralized division and sales company structure;
Fostering an 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 its 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. The Company will continue to assess its existing businesses and 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 each of the financial statements presented on pages 13-13 to 13-18. All year references are to fiscal years.

Discussion of Consolidated Statement of Income

The Consolidated Statement of Income summarizes the Company's operating performance over the last three fiscal years.

(dollars in millions)
 
2015
 
2014
 
2013
Net sales
 
$
12,712

 
$
13,216

 
$
13,016

Gross profit margin
 
24.0
%
 
22.9
%
 
22.5
 %
Selling, general and administrative expenses
 
$
1,545

 
$
1,634

 
$
1,555

Selling, general and administrative expenses, as a percent of sales
 
12.2
%
 
12.4
%
 
11.9
 %
Goodwill and intangible asset impairment
 
$

 
$
189

 
$

Interest expense
 
118

 
83

 
92

Other (income), net
 
(43
)
 
(26
)
 
(18
)
Loss (gain) on disposal of assets
 
4

 
(409
)
 
(10
)
Effective tax rate
 
29.3
%
 
33.1
%
 
27.6
 %
Net income attributable to common shareholders
 
$
1,012

 
$
1,041

 
$
948


Net sales in 2015 were 3.8 percent lower than 2014. Acquisitions made in the last 12 months contributed approximately $14 million in sales in 2015 and the effect of currency rate changes decreased net sales in 2015 by approximately $547 million. Excluding the effect of acquisitions and currency rate changes, net sales in 2015 were essentially unchanged from 2014 as an increase in volume experienced in the Diversified Industrial North American operations and the Aerospace Systems Segment was offset by lower volume experienced in the Diversified Industrial International operations.

Net sales in 2014 were 1.5 percent higher than 2013. Acquisitions made during 2014 contributed approximately $74 million in sales and the effect of currency rate changes decreased net sales in 2014 by approximately $22 million. Excluding the effect of acquisitions and currency rate changes, net sales in 2014 were 1.1 percent higher than 2013. The increase in sales in 2014 is primarily due to higher volume experienced in the Diversified Industrial International operations partially offset by lower sales in the Aerospace Systems Segment.

13-3




Gross profit margin increased in 2015 primarily due to lower business realignment charges in the Diversified Industrial International operations and lower product support costs in the Aerospace Systems Segment. Gross profit margin increased in 2014 primarily due to lower defined benefit costs, and a favorable product mix in the Diversified Industrial North American operations, partially offset by higher business realignment charges in the Diversified Industrial International operations and higher product support costs and an unfavorable product mix in the Aerospace Systems Segment. Foreign currency transaction (gain) loss (relating to cash, marketable securities and other investments and intercompany transactions) included in cost of sales for 2015, 2014 and 2013 were $(77.8) million, $5.4 million and $22.4 million, respectively. Pension cost included in cost of sales in 2015, 2014 and 2013 were $169.8 million, $174.8 million and $205.7 million, respectively. The lower pension cost in 2014 primarily resulted from a lower amount of actuarial losses, primarily related to domestic defined benefit plans. Included in cost of sales in 2015, 2014 and 2013 were business realignment charges of $19.4 million, $63.6 million and $8.4 million, respectively.

Selling, general and administrative expenses decreased 5.5 percent in 2015 and increased 5.1 percent in 2014. The decrease in 2015 was primarily due to lower business realignment charges and stock compensation expense, partially offset by higher net expenses associated with the Company's deferred compensation programs. Stock compensation expense decreased primarily as a result of a lower number of stock awards granted in 2015. The increase in selling, general and administrative expenses in 2014 was primarily due to higher business realignment charges and stock compensation expense, partially offset by lower expenses associated with the Company's various other incentive compensation programs. Stock compensation expense in 2014 increased primarily as result of a higher stock price used in the calculation of the fair value of the stock awards at the date of grant. Pension cost included in selling, general and administrative expenses in 2015, 2014 and 2013 were $69.6 million, $64.2 million and $78.5 million, respectively. The lower pension cost in 2014 primarily resulted from a lower amount of actuarial losses, primarily related to domestic defined benefit plans. Included in selling, general and administrative expenses in 2015, 2014 and 2013 were business realignment charges of $12.9 million, $38.9 million and $3.9 million, respectively.

Goodwill and intangible asset impairment related to the Worldwide Energy Products Division. Refer to Note 7 to the Consolidated Financial Statements for further discussion.

Interest expense in 2015 increased primarily due to a higher weighted-average interest rate on borrowings. The higher weighted-average interest rate primarily resulted from the issuance of $1,500 million of medium-term notes during the second quarter of 2015. Interest expense in 2014 decreased primarily due to a lower average interest rate in the debt portfolio, including lower average borrowing rates on commercial paper borrowings, more than offsetting the effect of higher weighted-average borrowings.

Other (income), net in 2015 and 2014 includes $23.2 million and $11.1 million of income, respectively, related to the Company's equity interests in joint ventures.

Loss (gain) on disposal of assets includes a gain of $412.6 million related to the deconsolidation of a subsidiary in 2014 and a net gain of $14.7 million resulting from business divestiture activity in 2013.

Effective tax rate in 2015 was favorably impacted by the re-enactment of the U.S. Research and Development credit, an increase in the federal manufacturing deduction and the absence of discrete tax costs incurred in the prior year. These benefits were partially offset by an unfavorable geographic mix of earnings. The effective tax rate in 2014 was unfavorably impacted by discrete tax costs related to a non-deductible goodwill and intangible asset impairment charge, the deconsolidation of a subsidiary and the expiration of the U.S. Research and Development credit.

Discussion of Business Segment Information
The Business Segment information presents sales, operating income and assets on a basis that is consistent with the manner in which the Company's various businesses are managed for internal review and decision-making.










13-4



Diversified Industrial Segment (dollars in millions)
 
2015
 
2014
 
2013
Sales
 
 
 
 
 
North America
$
5,716

 
$
5,694

 
$
5,638

International
4,741

 
5,288

 
5,110

Operating income
 
 
 
 
 
North America
956

 
946

 
909

International
584

 
572

 
602

Operating income as a percent of sales
 
 
 
 
 
North America
16.7
%
 
16.6
%
 
16.1
%
International
12.3
%
 
10.8
%
 
11.8
%
Backlog
$
1,586

 
$
1,861

 
$
1,803

Assets
8,765

 
9,502

 
9,388

Return on average assets
16.9
%
 
16.1
%
 
16.7
%

Sales in 2015 for the Diversified Industrial North American operations remained relatively flat compared to a 1.0 percent increase from 2013 to 2014. Acquisitions completed within the last 12 months contributed approximately $7 million in sales in 2015 and the effect of currency exchange rates decreased sales in 2015 by $50 million. Excluding acquisitions and the effect of currency rate changes, sales in 2015 in the Diversified Industrial North American operations increased 1.2 percent from 2014 reflecting higher demand from distributors as well as from end-users in the car and light truck, heavy-duty truck, refrigeration and air conditioning and construction equipment markets, partially offset by lower demand in the farm and agriculture equipment market. Excluding acquisitions and the effect of currency rate changes, sales in 2014 increased slightly as higher demand from distributors as well as from end-users in the construction equipment and oil and gas markets was partially offset by lower end-user demand in the heavy-duty truck, farm and agriculture equipment, engine, and car and light truck markets.

Sales in the Diversified Industrial International operations decreased 10.3 percent in 2015 compared to an increase of 3.5 percent from 2013 to 2014. Acquisitions completed within the last 12 months contributed approximately $7 million in sales in 2015. The effect of currency rate changes decreased sales by $487 million, reflecting the strengthening of the U.S. dollar against most currencies. Excluding acquisitions and the effect of currency rate changes, sales in 2015 in the Diversified Industrial International operations decreased 1.3 percent from 2014 primarily due to higher volume in the Asia Pacific region being more than offset by lower volume in Europe, approximately two-thirds of which was due to the absence of sales from divested businesses, and in Latin America. Excluding acquisitions and the effect of currency rate changes, sales in 2014 in the Diversified Industrial International operations increased 3.1 percent from 2013, primarily due to higher volume in all regions with 50 percent of the increase occurring in the Asia Pacific region and one-third of the increase occurring in Europe. The absence of sales from divested businesses was also a contributing factor to the sales fluctuation between 2013 and 2014 in both the Diversified Industrial North American and Diversified Industrial International operations.

The increase in operating margins in 2015 in the Diversified Industrial North American operations was primarily due to the higher sales volume, a favorable product mix and manufacturing efficiencies, partially offset by higher warehouse, shipping, and manufacturing support costs, research and development expenses and raw material costs. Diversified Industrial North American margins in 2015 were also adversely affected by a voluntary retirement expense of $12.7 million. The increase in operating margins in 2015 in the Diversified Industrial International operations was primarily due to lower fixed overhead costs and lower business realignment charges in the current-year, partially offset by higher raw material costs due to changes in currency exchange rates. The increase in operating margins in 2014 in the Diversified Industrial North American operations was primarily due to the higher sales volume, a favorable product mix and lower raw material prices, partially offset by higher intangible asset amortization expense related to 2013 acquisitions. The decrease in operating margins in 2014 in the Diversified Industrial International operations was primarily due to higher business realignment charges and associated operating inefficiencies, partially offset by the impact of the higher sales volume and a favorable product mix.

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

13-5



(dollars in millions)
 
2015
 
2014
 
2013
Diversified Industrial North America
 
$
4

 
$
2

 
$
3

Diversified Industrial International
 
27

 
99

 
10


The business realignment charges consist primarily of severance costs resulting from plant closures as well as general reductions in work force. The majority of the Diversified Industrial International business realignment charges were incurred in Europe. The Company does not anticipate that cost savings realized from the work force reductions taken during 2015 in the Diversified Industrial North American and International operations will have a material impact on future operating income. In 2016, the Company expects to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment. Such actions are expected to result in approximately $100 million in business realignment charges in 2016.

The Company anticipates Diversified Industrial North American sales for 2016 will range from a decrease of three percent to an increase of one percent from the 2015 level and Diversified Industrial International sales for 2016 will decrease between six percent and two percent from the 2015 level. Diversified Industrial North American operating margins in 2016 are expected to range from 15.9 percent to 16.3 percent and Diversified Industrial International margins are expected to range from 12.4 percent to 13.1 percent.

The decrease in total Diversified Industrial Segment backlog in 2015 was primarily due to shipments exceeding orders in all regions. The increase in total Diversified Industrial Segment backlog in 2014 was primarily due to orders exceeding shipments in the Diversified Industrial North American operations. 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.

The decrease in total Diversified Industrial Segment assets in 2015 was primarily due to the effect of currency rate fluctuations and a decrease in trade accounts receivable, net, non-trade and notes receivable and intangible assets, partially offset by an increase in cash and cash equivalents and other assets. The increase in assets in 2014 was primarily due to the effect of currency rate fluctuations and an increase in accounts receivable, partially offset by decreases in goodwill, intangible assets and inventory.

Aerospace Systems Segment (dollars in millions)
    
 
2015
 
2014
 
2013
Sales
$
2,255

 
$
2,235

 
$
2,268

Operating income
299

 
271

 
280

Operating income as a percent of sales
13.3
%
 
12.1
%
 
12.4
%
Backlog
$
1,756

 
$
1,994

 
$
1,936

Assets
1,376

 
1,359

 
1,140

Return on average assets
21.9
%
 
21.7
%
 
25.8
%

Sales in 2015 were higher than the 2014 level as higher volume in the commercial original equipment manufacturer (OEM) and aftermarket businesses was partially offset by lower volume in the military OEM business. Sales in 2014 were lower than the 2013 level as higher volume in the commercial OEM business was offset by the absence of sales from the deconsolidated subsidiary, whose sales are now reported by the joint venture with GE Aviation, as well as lower volume in the military OEM and aftermarket businesses and the commercial aftermarket business.

The higher margin in 2015 was primarily due to the higher sales volume and lower engineering and development costs partially offset by a voluntary retirement expense of $5.4 million. The lower margin in 2014 was primarily due to an unfavorable product mix, the impact of the joint venture with GE Aviation and higher product support costs. Margins in 2015 and 2014 were favorably impacted by the finalization of contract negotiations related to certain programs.

The decrease in backlog in 2015 was primarily due to shipments exceeding orders in all businesses of the Aerospace Systems Segment. The increase in backlog in 2014 was primarily due to orders exceeding shipments in the commercial and military OEM businesses, partially offset by shipments exceeding orders in the military and commercial aftermarket businesses as well as the absence of backlog of the deconsolidated subsidiary. Backlog consists of written firm orders from a customer to deliver

13-6



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.

For 2016, sales are expected to increase between one percent and three percent from the 2015 level and operating margins are expected to range from 14.2 percent to 14.8 percent. A higher concentration of commercial OEM volume in future product mix and higher than expected new product development costs could result in lower margins.

The increase in assets in 2015 was primarily due to an increase in inventory and other assets, partially offset by a decrease in trade accounts receivable, net. The increase in assets in 2014 was primarily due to the investment in the joint venture with GE Aviation.

Corporate general and administrative expenses were $215.4 million in 2015 compared to $181.9 million in 2014 and $185.8 million in 2013. As a percent of sales, corporate general and administrative expenses increased to 1.7 percent of sales compared to 1.4 percent in both 2014 and 2013. The higher expense in 2015 was primarily due to an increase in incentive compensation expense and higher net expenses associated with the Company's deferred compensation programs. Corporate general and administrative expenses in 2015 included $3.1 million in voluntary retirement expense. The lower expense in 2014 was primarily due to lower compensation expense and lower net expenses associated with the Company's deferred compensation programs, partially offset by higher research and development expense.

Corporate assets decreased 10.8 percent in 2015 compared to an increase of 19.9 percent from 2013 to 2014. The decrease in Corporate assets in 2015 was primarily due to the effect of currency rate fluctuations and changes in cash and cash equivalents, marketable securities and other investments, non-trade and notes receivable and other assets. The change in assets in 2014 was primarily due to fluctuations in the amount of cash and cash equivalents and marketable securities and other investments.

Other expense (income) (in the Business Segment Information) (dollars in millions)
Expense (income)
2015
 
2014
 
2013
Foreign currency transaction
$
(77.8
)
 
$
5.4

 
$
22.4

Stock-based compensation
57.2

 
71.5

 
50.9

Pensions
96.6

 
108.0

 
139.8

Divestitures and asset sales and writedowns
4.5

 
(408.9
)
 
(11.9
)
Goodwill and intangible asset impairment

 
189.1

 

Other items, net
(8.1
)
 
3.9

 
2.0

 
$
72.4

 
$
(31.0
)
 
$
203.2

Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities and other investments and intercompany transactions. A significant portion of the foreign currency transaction gain in 2015 related to intercompany loans and was attributable to the Swiss National Bank lifting the cap on the fluctuation of the exchange rate used to measure the Swiss Franc against the Euro. The Company has since settled these particular intercompany loans. The decrease in stock-based compensation expense in 2015 is primarily due to fewer stock awards granted in 2015. The increase in stock-based compensation in 2014 was primarily due to a higher stock price used in the calculation of the fair value of the stock awards at the date of grant. Included in divestitures and asset sales and writedowns for 2014 is a gain of approximately $413 million resulting from the deconsolidation of a subsidiary. Refer to Note 2 to the Consolidated Financial Statements for further discussion. Refer to Note 7 to the Consolidated Financial Statements for further discussion of the goodwill and intangible asset impairment.












13-7





Discussion of Consolidated Balance Sheet

The Consolidated Balance Sheet shows the Company's financial position at year-end, compared with the previous year-end. This discussion provides information to assist in assessing factors such as the Company's liquidity and financial resources.

(dollars in millions)
 
2015

 
2014

Cash
 
$
1,914

 
$
2,187

Trade accounts receivable, net
 
1,620

 
1,858

Inventories
 
1,300

 
1,372

Long-term debt
 
2,724

 
1,508

Shareholders' equity
 
5,104

 
6,659

Working capital
 
$
3,233

 
$
2,819

Current ratio
 
2.4

 
1.9

Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $1,777 million and $2,126 million held by the Company's foreign subsidiaries at June 30, 2015 and June 30, 2014, respectively. Generally, cash and cash equivalents and marketable securities and other investments held by foreign subsidiaries are not readily available for use in the United States without adverse tax consequences. The Company's principal sources of liquidity are its cash flows provided by operating activities, commercial paper borrowings or borrowings directly from its line of credit. The Company does not believe the level of its non-U.S. cash position will have an adverse effect on working capital needs, planned growth, repayment of maturing debt, benefit plan funding, dividend payments or share repurchases.

Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to trade receivables for the Company was 48 days in both 2015 and 2014. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.

Inventories decreased $71 million primarily due to the effect of foreign currency translation, which decreased inventories by $107 million. Excluding the effect of foreign currency translation, inventory levels increased in the Aerospace Systems Segment and the Diversified Industrial International operations and inventory levels decreased in the Diversified Industrial North American operations. Days supply of inventory on hand was 65 days in 2015 and 61 days in 2014.
Long-term debt increased as the Company issued $1,500 million of medium-term notes in 2015. Refer to Note 9 to the Consolidated Financial Statements for further discussion.

Shareholders' equity activity during 2015 included a decrease of $1,394 million related to share repurchases, a decrease of $765 million related to foreign currency translation adjustments and a decrease of $150 million related to pensions and postretirement benefits.

Discussion of Consolidated Statement of Cash Flows

The Consolidated Statement of Cash Flows reflects cash inflows and outflows from the Company's operating, investing and financing activities.

A summary of cash flows follows:

(dollars in millions)
 
2015
 
2014
 
2013
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
1,302

 
$
1,388

 
$
1,191

Investing activities
 
(579
)
 
(646
)
 
(810
)
Financing activities
 
(1,045
)
 
(958
)
 
576

Effect of exchange rates
 
(111
)
 
48

 
(14
)
Net (decrease) increase in cash and cash equivalents
 
$
(433
)
 
$
(168
)
 
$
943



13-8





Cash Flows From Operating Activities in 2015 reflects a reduction of $257 million for cash used by working capital items. Cash flow from operating activities in 2014 benefited from a $294 million increase in cash provided by working capital items, partially offset by a $184 million decrease in net income after consideration of non-cash items, including a $413 million gain on the deconsolidation of a subsidiary and a $189 million impairment charge. Refer to Note 2 and Note 7 to the Consolidated Financial Statements for further discussion of the gain on deconsolidation and impairment charge, respectively. The Company also made voluntary cash contributions to the Company's domestic qualified defined benefit plan of $75 million and $226 million in 2014 and 2013, respectively.

Cash Flows Used In Investing Activities in 2015 includes $356 million in net purchases of marketable securities and other investments. Cash flows used in investing activities in 2014 includes $625 million in purchases of marketable securities and other investments and $202 million in proceeds from the sale of a 50 percent equity interest in a subsidiary related to the joint venture with GE Aviation (refer to Note 2 to the Consolidated Financial Statements for further discussion).

Cash Flows Used In Financing Activities during 2015 includes the issuance of $1,500 million of medium-term notes and the repayment of commercial paper notes outstanding at the time of the debt issuance. The Company repurchased 11.1 million common shares for $1,394 million during 2015 as compared to the repurchase of 1.7 million common shares for $200 million in 2014 and 3.0 million common shares for $257 million in 2013. Cash flows used in financing activities during 2014 increased from 2013 primarily due to a lower level of borrowings required to support acquisition activity.

Dividends have been paid for 260 consecutive quarters, including a yearly increase in dividends for the last 59 fiscal years. The current annual dividend rate is $2.52 per common share.

The Company's goal is to maintain no less than an "A" rating on senior debt to ensure availability and reasonable cost of external funds. As one means of achieving this objective, the Company has established a financial goal of maintaining a ratio of debt to debt-shareholders' equity of no more than 37 percent.

Debt to Debt-Shareholders' Equity Ratio (dollars in millions)
 
2015
 
2014
  Debt
 
$
2,947

 
$
2,325

  Debt & Shareholders' Equity
 
8,051

 
8,984

  Ratio
 
36.6
%
 
25.9
%

As of June 30, 2015, the Company had a line of credit totaling $2,000 million through a multi-currency revolving credit agreement with a group of banks, all of which was available at June 30, 2015. Refer to Note 8 to the Consolidated Financial Statements for further discussion.

The Company is currently authorized to sell up to $1,850 million of short-term commercial paper notes. There were no outstanding commercial paper notes as of June 30, 2015, and the largest amount of commercial paper notes outstanding during the last quarter of 2015 was $475 million.

The Company's credit agreements and indentures governing certain debt agreements contain various covenants, the violation of which would limit or preclude the use of the applicable agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the applicable agreements. The Company is in compliance with all covenants and expects to remain in compliance during the term of the credit agreements and indentures.













13-9






Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $155.2 million at June 30, 2015. Payment of these obligations would result from settlements with worldwide taxing authorities. Due to the difficulty in determining the timing of the settlements, these obligations are not included in the following summary of the Company's fixed contractual obligations. References to Notes are to the Notes to the Consolidated Financial Statements.

(dollars in millions)
 
Payments due by period
Contractual obligations
 
Total

 
Less than 1 year

 
1-3 years

 
3-5 years

 
More than 5 years

Long-term debt (Note 9)
 
$
2,947

 
$
223

 
$
499

 
$
100

 
$
2,125

Interest on long-term debt
 
1,838

 
126

 
242

 
181

 
1,289

Operating leases (Note 9)
 
236

 
76

 
86

 
31

 
43

Retirement benefits (Note 10)
 
333

 
284

 
12

 
12

 
25

Total
 
$
5,354

 
$
709

 
$
839

 
$
324

 
$
3,482



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 the Company does not anticipate any material non-performance by any of the counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.
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. Gains or losses on derivatives that are not hedges are adjusted to fair value through the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive 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. The Company's objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting its exposure to changes in near-term interest rates. A 100 basis point increase in near-term interest rates would increase annual interest expense on variable rate debt existing at June 30, 2015 by approximately $6 million.

Off-Balance Sheet Arrangements

The Company does not have off-balance sheet arrangements.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management's judgment.

Revenue Recognition - Substantially all of the Diversified Industrial Segment revenues are recognized when persuasive evidence of an arrangement exists, product has shipped and the risks and rewards of ownership have transferred or services have been rendered, the price to the customer is fixed and determinable and collectibility is reasonably assured, which is generally at the time the product is shipped. The Aerospace Systems Segment recognizes revenues primarily using the percentage-of-completion method and the extent of progress toward completion is primarily measured using the units-of-delivery method. The Company estimates costs to complete long-term contracts for purposes of evaluating and establishing contract reserves. The estimation of these costs requires substantial judgment on the part of management due to the duration of

13-10



the contractual agreements as well as the technical nature of the products involved. Adjustments to cost estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.

Impairment of Goodwill and Long-Lived Assets - Goodwill is tested for impairment, at the reporting unit level, on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. For the Company, a reporting unit is one level below the operating segment level. Determining whether an impairment has occurred requires the valuation of the respective reporting unit, which the Company has consistently estimated using primarily a discounted cash flow model. The Company believes that the use of a discounted cash flow model results in the most accurate calculation of a reporting unit's fair value since the market value for a reporting unit is not readily available. The discounted cash flow analysis requires several assumptions including future sales growth and operating margin levels as well as assumptions regarding future industry specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions used in the discounted cash flow analysis. The Company has consistently used a discount rate commensurate with its cost of capital, adjusted for inherent business risks, and an appropriate terminal growth factor. The Company also reconciles the estimated aggregate fair value of its reporting units as derived from the discounted cash flow analysis to the Company's overall market capitalization.
The results of the Company's 2015 annual goodwill impairment test performed as of December 31, 2014 indicated that no goodwill impairment existed. During 2014, the Company made a decision to restructure and change the strategic direction of its Worldwide Energy Products Division (EPD). The Company calculated the fair value of EPD using assumptions reflecting the Company's current strategic direction for this reporting unit, the results of which indicated that the carrying value of EPD exceeded its fair value. As a result, the Company estimated the implied fair value of EPD's goodwill, which resulted in a non-cash impairment charge of $140.3 million. The fair value of EPD was calculated using both a discounted cash flow analysis and estimated fair market values of comparable businesses.

The Company continually monitors its reporting units for impairment indicators and updates assumptions used in the most recent calculation of the fair value of a reporting unit as appropriate. The Company is unaware of any current market trends that are contrary to the assumptions made in the estimation of the fair value of any of its reporting units. If actual experience is not consistent with the assumptions made in the estimation of the fair value of the reporting units, especially assumptions regarding penetration into new markets and the recovery of the current economic environment, it is possible that the estimated fair value of certain reporting units could fall below their carrying value resulting in the necessity to conduct additional goodwill impairment tests.

Long-lived assets held for use, which primarily includes finite-lived intangible assets and plant and equipment, 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 are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During 2015, there were no events or circumstances that indicated that the carrying value of the Company's long-lived assets held for use were not recoverable. During 2014, in connection with the goodwill impairment review discussed above, the Company determined certain intangible assets of EPD, primarily trademarks and customer lists, and plant and equipment were impaired resulting in a non-cash impairment charge of $48.6 million. The fair value of EPD's intangible assets and plant and equipment were determined using the income approach for each asset.

Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels and amortization periods for actuarial gains and losses.

Assumptions are determined based on Company data and appropriate market indicators, and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements. For the Company's domestic qualified defined benefit plan, a 50 basis point change in the assumed long-term rate of return on plan assets is estimated to have an $11 million effect on annual pension expense and a 50 basis point decrease in the discount rate is estimated to increase annual pension expense by $22 million. As of June 30, 2015, $1,225 million of past years' net actuarial losses related to the Company's domestic qualified defined benefit plan are subject to amortization in the future. These losses will generally be amortized over approximately eight years and will negatively affect earnings in the future. Actuarial gains experienced in future years will help reduce the effect of the actuarial loss amortization. Further information on pensions is provided in Note 10 to the Consolidated Financial Statements.


13-11






Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the balances as new information becomes available. For those tax positions where it is more likely than not that a tax benefit will be sustained, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon examination by a taxing authority that has full knowledge of all relevant information will be recorded. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. Further information on income taxes is provided in Note 4 to the Consolidated Financial Statements.

Loss Contingencies - The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability and litigation reserves. Establishing loss accruals for these matters requires management's estimate and judgment with regards to risk exposure and ultimate liability or realization. These loss accruals are reviewed periodically and adjustments are made to reflect the most recent facts and circumstances.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." ASU 2015-07 removes the requirement to categorize all investments within the fair value hierarchy for which the fair value is measured using the net asset value per share practical expedient and to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. During the fourth quarter of 2015, the Company adopted ASU 2015-07. The changes resulting from the adoption of ASU 2015-07, including revising the prior year presentation, are reflected in the retirement benefits and financial instruments disclosures within Note 10 and Note 15 to the Consolidated Financial Statements, respectively. The adoption of ASU 2015-07 did not affect the Company's results of operations, statement of financial position or statement of cash flows.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect ASU 2015-03 will have a material impact on its statement of financial position or financial statement disclosures.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has not yet determined the effect that ASU 2014-09 will have on its results of operations, statement of financial position or financial statement disclosures.


13-12



Consolidated Statement of Income

 
 
For the years ended June 30,
(Dollars in thousands, except per share amounts)
 
2015

 
2014

 
2013

Net Sales
 
$
12,711,744

 
$
13,215,971

 
$
13,015,704

Cost of sales
 
9,655,245

 
10,188,227

 
10,086,675

Gross profit
 
3,056,499

 
3,027,744

 
2,929,029

Selling, general and administrative expenses
 
1,544,746

 
1,633,992

 
1,554,973

Goodwill and intangible asset impairment (Note 7)
 

 
188,870

 

Interest expense
 
118,406

 
82,566

 
91,552

Other (income), net
 
(43,374
)
 
(25,513
)
 
(18,198
)
Loss (gain) on disposal of assets (Note 2)
 
4,481

 
(408,891
)
 
(10,299
)
Income before income taxes
 
1,432,240

 
1,556,720

 
1,311,001

Income taxes (Note 4)
 
419,687

 
515,302

 
362,217

Net Income
 
1,012,553

 
1,041,418

 
948,784

Less: Noncontrolling interest in subsidiaries' earnings
 
413

 
370

 
357

Net Income Attributable to Common Shareholders
 
$
1,012,140

 
$
1,041,048

 
$
948,427

 
 
 
 
 
 
 
Earnings per Share Attributable to Common Shareholders (Note 5)
 
 
 
 
 
 
Basic earnings per share
 
$
7.08

 
$
6.98

 
$
6.36

Diluted earnings per share
 
$
6.97

 
$
6.87

 
$
6.26


The accompanying notes are an integral part of the financial statements.

13-13



Consolidated Statement of Comprehensive Income

 
 
For the years ended June 30,
(Dollars in thousands)
 
2015

 
2014

 
2013

Net Income
 
$
1,012,553

 
$
1,041,418

 
$
948,784

Less: Noncontrolling interests in subsidiaries' earnings
 
413

 
370

 
357

Net income attributable to common shareholders
 
1,012,140

 
1,041,048

 
948,427

 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 Foreign currency translation adjustment (net of tax of $(30,923), $4,692 and $1,239 in 2015, 2014 and 2013)
 
(765,356
)
 
192,925

 
(18,974
)
  Retirement benefits plan activity (net of tax of $88,547, $(54,473) and $(195,884) in 2015, 2014 and 2013)
 
(149,710
)
 
91,182

 
325,066

  Other (net of tax of $(101) in 2015, 2014 and 2013)
 
(303
)
 
205

 
204

      Other comprehensive income (loss)
 
(915,369
)
 
284,312

 
306,296

Less: Other comprehensive (loss) for noncontrolling interests
 
(249
)
 
(23
)
 
(1,771
)
Other comprehensive income (loss) attributable to common shareholders
 
(915,120
)
 
284,335

 
308,067

Total Comprehensive Income Attributable to Common Shareholders
 
$
97,020

 
$
1,325,383

 
$
1,256,494


The accompanying notes are an integral part of the financial statements.


13-14



Business Segment Information

(Dollars in thousands)
 
2015

 
2014

 
2013

Net Sales:
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
North America
 
$
5,715,742

 
$
5,693,527

 
$
5,637,657

International
 
4,741,376

 
5,287,916

 
5,110,332

Aerospace Systems
 
2,254,626

 
2,234,528

 
2,267,715

 
 
$
12,711,744

 
$
13,215,971

 
$
13,015,704

Segment Operating Income:
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
North America
 
$
955,501

 
$
946,493

 
$
908,719

International
 
583,937

 
572,476

 
602,480

Aerospace Systems
 
298,994

 
271,238

 
280,286

Total segment operating income
 
1,838,432

 
1,790,207

 
1,791,485

Corporate administration
 
215,396

 
181,926

 
185,767

Income before interest expense and other
 
1,623,036

 
1,608,281

 
1,605,718

Interest expense
 
118,406

 
82,566

 
91,552

Other expense (income)
 
72,390

 
(31,005
)
 
203,165

Income before income taxes
 
$
1,432,240

 
$
1,556,720

 
$
1,311,001

 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Diversified Industrial
 
$
8,765,468

 
$
9,501,837

 
$
9,388,027

Aerospace Systems (a)
 
1,375,913

 
1,359,130

 
1,139,967

Corporate (b)
 
2,153,656

 
2,413,395

 
2,012,904

 
 
$
12,295,037

 
$
13,274,362

 
$
12,540,898

 
 
 
 
 
 
 
Property Additions (c):
 
 
 
 
 
 
Diversified Industrial
 
$
190,580

 
$
189,832

 
$
312,392

Aerospace Systems
 
18,427

 
23,261

 
20,838

Corporate
 
6,520

 
3,247

 
7,105

 
 
$
215,527

 
$
216,340

 
$
340,335

 
 
 
 
 
 
 
Depreciation:
 
 
 
 
 
 
Diversified Industrial
 
$
174,102

 
$
187,347

 
$
187,014

Aerospace Systems
 
19,509

 
19,193

 
19,498

Corporate
 
9,165

 
8,425

 
7,210

 
 
$
202,776

 
$
214,965

 
$
213,722







13-15



(Dollars in thousands)
 
2015

 
2014

 
2013

By Geographic Area (d)
 
 
 
 
 
 
Net Sales:
 
 
 
 
 
 
North America
 
$
7,891,571

 
$
7,853,603

 
$
7,844,552

International
 
4,820,173

 
5,362,368

 
5,171,152

 
 
$
12,711,744

 
$
13,215,971

 
$
13,015,704

Long-Lived Assets:
 
 
 
 
 
 
North America
 
$
856,947

 
$
861,300

 
$
871,958

International
 
807,075

 
962,994

 
936,282

 
 
$
1,664,022

 
$
1,824,294

 
$
1,808,240


The accounting policies of the business segments are the same as those described in the Significant Accounting Policies footnote except that the business segment results are prepared on a basis that is consistent with the manner in which the Company’s management disaggregates financial information for internal review and decision-making.

(a)
Includes an investment in a joint venture in which ownership is 50 percent or less and in which the Company does not have operating control (2015 - $251,365; 2014 - $263,246).
(b)
Corporate assets are principally cash and cash equivalents, marketable securities and other investments, domestic deferred income taxes, deferred compensation plan assets, headquarters facilities and the major portion of the Company’s domestic data processing equipment.
(c)
Includes the value of net plant and equipment at the date of acquisition of acquired companies (2013 - $74,439).
(d)
Net sales are attributed to countries based on the location of the selling unit. North America includes the United States, Canada and Mexico. No country other than the United States represents greater than 10 percent of consolidated sales. Long-lived assets are comprised of plant and equipment based on physical location.


13-16



Consolidated Balance Sheet
(Dollars in thousands)
 
 
June 30,
 
2015

 
2014

Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents (Note 1)
 
$
1,180,584

 
$
1,613,555

Marketable securities and other investments (Note 1)
 
733,490

 
573,701

Trade accounts receivable, net (Note 1)
 
1,620,194

 
1,858,176

Non-trade and notes receivable (Note 1)
 
364,534

 
388,437

Inventories (Note 6)
 
1,300,459

 
1,371,681

Prepaid expenses
 
241,684

 
129,837

Deferred income taxes (Notes 1 and 4)
 
142,147

 
136,193

Total Current Assets
 
5,583,092

 
6,071,580

Plant and equipment (Note 1)
 
4,862,611

 
5,152,591

Less: Accumulated depreciation
 
3,198,589

 
3,328,297

 
 
1,664,022

 
1,824,294

Investments and other assets (Note 1)
 
1,091,805

 
1,018,781

Intangible assets, net (Notes 1 and 7)
 
1,013,439

 
1,188,282

Goodwill (Notes 1 and 7)
 
2,942,679

 
3,171,425

Total Assets
 
$
12,295,037

 
$
13,274,362

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current Liabilities
 
 
 
 
Notes payable and long-term debt payable within one year (Notes 8 and 9)
 
$
223,142

 
$
816,622

Accounts payable, trade
 
1,092,138

 
1,252,040

Accrued payrolls and other compensation
 
409,762

 
453,321

Accrued domestic and foreign taxes
 
140,295

 
223,611

Other accrued liabilities
 
484,793

 
507,202

Total Current Liabilities
 
2,350,130

 
3,252,796

Long-term debt (Note 9)
 
2,723,960

 
1,508,142

Pensions and other postretirement benefits (Note 10)
 
1,699,197

 
1,346,224

Deferred income taxes (Notes 1 and 4)
 
77,967

 
94,819

Other liabilities
 
336,214

 
409,573

Total Liabilities
 
7,187,468

 
6,611,554

Equity (Note 11)
 
 
 
 
Shareholders' Equity
 
 
 
 
Serial preferred stock, $.50 par value, authorized 3,000,000 shares; none issued
 

 

Common stock, $.50 par value, authorized 600,000,000 shares; issued 181,046,128 shares in 2015 and 2014
 
90,523

 
90,523

Additional capital
 
622,729

 
595,498

Retained earnings
 
9,841,885

 
9,174,189

Accumulated other comprehensive (loss)
 
(1,738,618
)
 
(823,498
)
Treasury shares at cost: 42,487,389 in 2015 and 32,143,315 in 2014
 
(3,712,232
)
 
(2,377,284
)
Total Shareholders' Equity
 
5,104,287

 
6,659,428

Noncontrolling interests
 
3,282

 
3,380

Total Equity
 
5,107,569

 
6,662,808

Total Liabilities and Equity
 
$
12,295,037

 
$
13,274,362

The accompanying notes are an integral part of the financial statements.

13-17



Consolidated Statement of Cash Flows
 
 
For the years ended June 30,
(Dollars in thousands)
 
2015

 
2014

 
2013

Cash Flows From Operating Activities
 
 
 
 
 
 
Net income
 
$
1,012,553

 
$
1,041,418

 
$
948,784

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation
 
202,776

 
214,965

 
213,722

Amortization
 
114,715

 
121,737

 
121,902

Goodwill and intangible asset impairment
 

 
188,870

 

Stock incentive plan compensation
 
96,093

 
103,161

 
84,996

Deferred income taxes
 
18,865

 
(74,139
)
 
(1,368
)
Foreign currency transaction (gain) loss
 
(77,784
)
 
5,398

 
19,497

Loss on disposal of assets
 
14,953

 
2,997

 
2,746

Gain on sale of businesses
 
(6,420
)
 

 
(14,637
)
Net gain on deconsolidation
 

 
(412,612
)


Loss on sale of marketable securities
 
3,817

 

 

Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
 
 
 
Accounts receivable
 
143,179

 
(99,144
)
 
(21,206
)
Inventories
 
(70,377
)
 
(3,816
)
 
98,518

Prepaid expenses
 
(116,561
)
 
58,117

 
(47,451
)
Other assets
 
20,976

 
(79,158
)
 
(16,007
)
Accounts payable, trade
 
(86,750
)
 
92,927

 
(66,082
)
Accrued payrolls and other compensation
 
(12,657
)
 
20,840

 
(45,771
)
Accrued domestic and foreign taxes
 
(66,870
)
 
86,745

 
(17,054
)
Other accrued liabilities
 
(46,633
)
 
(23,480
)
 
(62,728
)
Pensions and other postretirement benefits
 
156,859

 
99,569

 
(16,691
)
Other liabilities
 
1,207

 
43,498

 
9,765

Net cash provided by operating activities
 
1,301,941

 
1,387,893

 
1,190,935

Cash Flows From Investing Activities
 
 
 
 
 
 
Acquisitions (less cash acquired of $8,332 in 2015, $1,780 in 2014 and $33,932 in 2013)
 
(18,618
)
 
(17,593
)
 
(621,144
)
Capital expenditures
 
(215,527
)
 
(216,340
)
 
(265,896
)
Proceeds from disposal of assets
 
19,655

 
14,368

 
25,047

Proceeds from sale of businesses
 
37,265

 

 
73,515

Net proceeds from deconsolidation
 

 
202,498

 

Purchase of marketable securities and other investments
 
(1,747,333
)
 
(624,880
)
 

Maturities and sales of marketable securities and other investments
 
1,391,396

 

 

Other
 
(46,001
)
 
(4,454
)
 
(21,367
)
Net cash used in investing activities
 
(579,163
)
 
(646,401
)
 
(809,845
)
Cash Flows From Financing Activities
 
 
 
 
 
 
Proceeds from exercise of stock options
 
3,355

 
8,013

 
32,204

Payments for common shares
 
(1,398,446
)
 
(204,043
)
 
(258,007
)
Tax benefit from stock incentive plan compensation
 
23,429

 
33,732

 
66,030

Acquisition of noncontrolling interests
 

 

 
(1,091
)
(Payments for) proceeds from notes payable, net
 
(815,171
)
 
(515,387
)
 
1,319,524

Proceeds from long-term borrowings
 
1,483,015

 
748

 
3,768

Payments for long-term borrowings
 
(537
)
 
(2,934
)
 
(331,245
)
Dividends paid
 
(340,389
)
 
(278,244
)
 
(255,009
)
Net cash (used in) provided by financing activities
 
(1,044,744
)
 
(958,115
)
 
576,174

Effect of exchange rate changes on cash
 
(111,005
)
 
48,766

 
(14,169
)
Net (decrease) increase in cash and cash equivalents
 
(432,971
)
 
(167,857
)
 
943,095

Cash and cash equivalents at beginning of year
 
1,613,555

 
1,781,412

 
838,317

Cash and cash equivalents at end of year
 
$
1,180,584

 
$
1,613,555

 
$
1,781,412

Supplemental Data:
 
 
 
 
 
 
Cash paid during the year for:
 
 
 
 
 
 
Interest
 
$
105,202

 
$
77,144

 
$
88,084

Income taxes
 
515,350

 
472,369

 
311,988


The accompanying notes are an integral part of the financial statements.

13-18



Consolidated Statement of Equity
(Dollars in thousands)
 
 Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Shares
 
Noncontrolling Interests
 
 Total
Balance June 30, 2012
 
$
90,523

 
$
640,249

 
$
7,787,175

 
$
(1,415,900
)
 
$
(2,205,532
)
 
$
9,215

 
$
4,905,730

Net income
 

 

 
948,427

 

 

 
357

 
948,784

Other comprehensive income (loss)
 

 

 

 
308,067

 

 
(1,771
)
 
306,296

Dividends paid
 

 

 
(254,283
)
 

 

 
(726
)
 
(255,009
)
Stock incentive plan activity
 

 
(34,678
)
 
(60,049
)
 

 
188,423

 

 
93,696

Acquisition activity
 

 
3,181

 

 

 


 
(4,020
)
 
(839
)
Shares purchased at cost
 

 

 

 

 
(257,177
)
 

 
(257,177
)
Balance June 30, 2013
 
$
90,523

 
$
608,752

 
$
8,421,270

 
$
(1,107,833
)
 
$
(2,274,286
)
 
$
3,055

 
$
5,741,481

Net income
 

 

 
1,041,048

 

 

 
370

 
1,041,418

Other comprehensive income (loss)
 

 

 

 
284,335

 

 
(23
)
 
284,312

Dividends paid
 

 

 
(278,222
)
 

 

 
(22
)
 
(278,244
)
Stock incentive plan activity
 

 
(13,254
)
 
(9,907
)
 

 
97,002

 

 
73,841

Shares purchased at cost
 

 

 

 

 
(200,000
)
 

 
(200,000
)
Balance June 30, 2014
 
$
90,523

 
$
595,498

 
$
9,174,189

 
$
(823,498
)
 
$
(2,377,284
)
 
$
3,380

 
$
6,662,808

Net income
 

 

 
1,012,140

 

 

 
413

 
1,012,553

Other comprehensive (loss)
 

 

 


 
(915,120
)
 

 
(249
)
 
(915,369
)
Dividends paid
 

 

 
(340,132
)
 

 

 
(257
)
 
(340,389
)
Stock incentive plan activity
 

 
27,231

 
(4,312
)
 

 
58,630

 


 
81,549

Liquidation activity
 

 

 


 

 

 
(5
)
 
(5
)
Shares purchased at cost
 

 

 


 

 
(1,393,578
)
 


 
(1,393,578
)
Balance June 30, 2015
 
$
90,523

 
$
622,729

 
$
9,841,885

 
$
(1,738,618
)
 
$
(3,712,232
)
 
$
3,282

 
$
5,107,569


The accompanying notes are an integral part of the financial statements.

13-19



Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)


1.
Significant Accounting Policies
The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are summarized below.
Nature of Operations - 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. The Company evaluates performance based on segment operating income before corporate and administrative expenses, interest expense and income taxes.
The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Diversified Industrial Segment products are marketed primarily through field sales employees and independent distributors. The Diversified Industrial North American operations have manufacturing plants and distribution networks throughout the United States, Canada and Mexico and primarily service North America. The Diversified Industrial International operations provide Parker products and services to 47 countries throughout Europe, Asia Pacific, Latin America, the Middle East and Africa.
The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft and also performs a vital role in naval vessels and land-based weapons systems. This Segment serves original equipment and maintenance, repair and overhaul customers worldwide. Aerospace Systems Segment products are marketed by field sales employees and are sold directly to manufacturers and end-users.
See the table of Business Segment Information on pages 13-15 and 13-16 for further disclosure of business segment information.
There are no individual customers to whom sales are more than four percent of the Company's consolidated sales. Due to the diverse group of customers throughout the world, the Company does not consider itself exposed to any concentration of credit risks.
The Company manufactures and markets its products throughout the world. Although certain risks and uncertainties exist, the diversity and breadth of the Company's products and geographic operations mitigate the risk that adverse changes with respect to any particular product and geographic operation would materially affect the Company's operating results.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Basis of Consolidation - The consolidated financial statements include the accounts of all majority-owned domestic and foreign subsidiaries. All intercompany transactions and profits have been eliminated in the consolidated financial statements. The Company does not have off-balance sheet arrangements. Within the Business Segment Information, intersegment and interarea sales have been eliminated.
Revenue Recognition - Revenue is recognized when persuasive evidence of an arrangement exists, product has shipped and the risks and rewards of ownership have transferred or services have been rendered, the price to the customer is fixed and determinable and collectibility is reasonably assured, which is generally at the time the product is shipped. Shipping and handling costs billed to customers are included in net sales and the related costs in cost of sales. Taxes collected from customers and remitted to governmental authorities are excluded from revenue.
Long-term Contracts - The Company enters into long-term contracts primarily for the production of aerospace products. For financial statement purposes, revenues are primarily recognized using the percentage-of-completion method. The extent of progress toward completion is primarily measured using the units-of-delivery method. Unbilled costs on these contracts are included in inventory. Progress payments are netted against the inventory balances. The Company estimates costs to complete long-term contracts for purposes of evaluating and establishing contract reserves. Adjustments to cost estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.


13-20



Cash - Cash equivalents consist of short-term highly liquid investments, with a three-month or less maturity, carried at cost plus accrued interest, which are readily convertible into cash.
Marketable Securities and Other Investments - Consist of short-term highly liquid investments, with stated maturities of greater than three months from the date of purchase, carried at cost plus accrued interest, and investments classified as available-for-sale, which are carried at fair value with unrealized gains and losses recorded in accumulated other comprehensive (loss). Gains and losses on available-for-sale investments are calculated based on the first-in, first-out method. The Company has the ability to liquidate the available-for-sale investments after giving appropriate notice to the issuer.
Trade Accounts Receivable, Net - Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. Receivables are written off to bad debt primarily when, in the judgment of the Company, the receivable is deemed to be uncollectible due to the insolvency of the debtor. Allowance for doubtful accounts was $9,284 and $16,040 at June 30, 2015 and June 30, 2014, respectively.
Non-Trade and Notes Receivable - The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:

June 30,
 
2015

 
2014

Notes receivable
 
$
90,470

 
$
117,400

Reverse repurchase agreements
 
113,558

 
54,772

Accounts receivable, other
 
160,506

 
216,265

Total
 
$
364,534

 
$
388,437

Reverse repurchase agreements are collateralized lending arrangements and have a maturity longer than three months from the date of purchase. The Company does not record an asset or liability for the collateral associated with the reverse repurchase agreements.    
         
Plant, Equipment and Depreciation - Plant and equipment are recorded at cost and are depreciated principally using the straight-line method for financial reporting purposes. Depreciation rates are based on estimated useful lives of the assets, generally 40 years for buildings, 15 years for land improvements and building equipment, seven to 10 years for machinery and equipment, and three to eight years for vehicles and office equipment. Improvements, which extend the useful life of property, are capitalized, and maintenance and repairs are expensed. The Company reviews plant and equipment for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When plant and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in current income.

The plant and equipment caption in the Consolidated Balance Sheet is comprised of the following components:
June 30,
 
2015

 
2014

Land and land improvements
 
$
294,537

 
$
326,008

Buildings and building equipment
 
1,457,650

 
1,535,634

Machinery and equipment
 
3,017,011

 
3,210,172

Construction in progress
 
93,413

 
80,777

Total
 
$
4,862,611

 
$
5,152,591


Investments and Other Assets - Investments in joint-venture companies in which ownership is 50 percent or less and in which the Company does not have operating control are stated at cost plus the Company's equity in undistributed earnings and amounted to $315,989 and $324,610 at June 30, 2015 and June 30, 2014, respectively. A significant portion of the underlying net assets of the joint ventures are related to goodwill. The Company's share of earnings from these investments were immaterial to the Company's results of operations.
Goodwill - The Company conducts a formal impairment test of goodwill on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.


13-21



Intangible Assets - Intangible assets primarily include patents, trademarks and customer lists and are recorded at cost and amortized on a straight-line method. Patents are amortized over the shorter of their remaining useful or legal life. Trademarks are amortized over the estimated time period over which an economic benefit is expected to be received. Customer lists are amortized over a period based on anticipated customer attrition rates. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.
Income Taxes - Income taxes are provided based upon income for financial reporting purposes. Deferred income taxes arise from temporary differences in the recognition of income and expense for tax purposes. Tax credits and similar tax incentives are applied to reduce the provision for income taxes in the year in which the credits arise. The Company recognizes accrued interest related to unrecognized tax benefits in income tax expense. Penalties, if incurred, are recognized in income tax expense.
Product Warranty - In the ordinary course of business the Company warrants its products against defect in design, materials and workmanship over various time periods. The warranty accrual at June 30, 2015 and 2014 is immaterial to the financial position of the Company and the change in the accrual during 2015, 2014 and 2013 was immaterial to the Company's results of operations and cash flows.
Foreign Currency Translation - Assets and liabilities of foreign subsidiaries are translated at current exchange rates, and income and expenses are translated using weighted-average exchange rates. The effects of these translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in the accumulated other comprehensive (loss) component of shareholders' equity. Such adjustments will affect net income only upon sale or liquidation of the underlying foreign investments, which is not contemplated at this time. Exchange (gains) losses from transactions in a currency other than the local currency of the entity involved are included within cost of goods sold caption in the Consolidated Statement of Income and were $(77,784), $5,398 and $22,380, in 2015, 2014 and 2013, respectively.
Subsequent Events - The Company has evaluated subsequent events that have occurred through the date of filing of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015. No subsequent events occurred that required adjustment to or disclosure in these financial statements.
Recent Accounting Pronouncements - In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." ASU 2015-07 removes the requirement to categorize all investments within the fair value hierarchy for which the fair value is measured using the net asset value per share practical expedient and to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. During the fourth quarter of 2015, the Company adopted ASU 2015-07. The changes resulting from the adoption of ASU 2015-07, including revising the prior year presentation, are reflected in the retirement benefits and financial instruments disclosures within Note 10 and Note 15 to the Consolidated Financial Statements, respectively. The adoption of ASU 2015-07 did not affect the Company's results of operations, statement of financial position or statement of cash flows.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect ASU 2015-03 will have a material impact on its statement of financial position or financial statement disclosures.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has not yet determined the effect that ASU 2014-09 will have on its results of operations, statement of financial position or financial statement disclosures.







13-22




2.
Acquisitions, Deconsolidation of Subsidiary and Divestitures
Acquisitions - During 2015, the Company completed four acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $27 million. Total purchase price for the four acquisitions was approximately $27 million in cash.
During 2014, the Company completed three acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $14 million. Total purchase price for the three acquisitions was approximately $19 million in cash.
During 2013, the Company completed eight acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were approximately $484 million. Total purchase price for the eight acquisitions was approximately $621 million in cash and $114 million in assumed debt.
The results of operations for all acquisitions are included as of the respective dates of acquisition. The initial purchase price allocation and subsequent purchase price adjustments for acquisitions in 2015, 2014 and 2013 are presented below. Some of the 2015 acquisitions are still subject to purchase price adjustments.
 
2015

 
2014

 
2013

Assets:
 
 
 
 
 
Accounts receivable
$
7,656

 
$
954

 
$
91,668

Inventories
3,099

 
2,184

 
93,915

Prepaid expenses
91

 
57

 
4,672

Deferred income taxes
5

 
189

 
(1,713
)
Plant and equipment
1,123

 
11,211

 
74,439

Intangible and other assets
7,794

 
5,646

 
280,001

Goodwill
10,430

 
3,195

 
317,879

 
30,198

 
23,436

 
860,861

Liabilities and equity:
 
 
 
 
 
Notes payable

 

 
11,920

Accounts payable, trade
2,689

 
915

 
46,596

Accrued payrolls and other compensation
243

 
263

 
12,099

Accrued domestic and foreign taxes
777

 
1

 
7,073

Other accrued liabilities
5,267

 
3,864

 
16,805

Long-term debt

 

 
102,122

Pensions and other postretirement benefits

 

 
2,125

Deferred income taxes
2,604

 

 
39,214

Other liabilities

 
800

 
689

Noncontrolling interests

 

 
1,074

 
11,580

 
5,843

 
239,717

Net assets acquired
$
18,618

 
$
17,593

 
$
621,144


Deconsolidation of Subsidiary - During 2014, the Company and GE Aviation, a non-related party, finalized a joint venture in which the Company sold a 50 percent equity interest in one of its wholly-owned subsidiaries. The sale of the 50 percent equity interest in the wholly-owned subsidiary resulted in a loss of control of the subsidiary, and therefore it was deconsolidated from the Company's financial statements during 2014.

The Company recognized a pre-tax gain of $413 million on the deconsolidation, measured as the fair value of the consideration received for the 50 percent equity interest in the former subsidiary and the fair value of the retained investment less the carrying amount of the former subsidiary's net assets. Approximately $186 million of the pre-tax gain is attributable to the remeasurement of the retained investment in the former subsidiary to its current fair value. The gain is reflected in the loss (gain) on disposal of assets caption in the Consolidated Statement of Income and the other expense (income) caption in the Business Segment Information.


13-23



Divestitures - During 2013, the Company completed several divestitures, the primary ones being the automotive businesses of its Mobile Climate Systems division and its Turkey refrigeration components business. The Company recorded a net pre-tax gain during 2013 of approximately $18 million related to these divestitures. The gain is reflected in the loss (gain) on disposal of assets caption in the Consolidated Statement of Income.


3.
Charges Related to Business Realignment
To structure its businesses in light of current and anticipated customer demand, the Company incurred business realignment charges in 2015, 2014 and 2013.
Business realignment charges by business segment are as follows:
 
2015

 
2014

 
2013

Diversified Industrial
$
30,882

 
$
101,524

 
$
12,234

Aerospace Systems
967

 
925

 

Work force reductions by business segment are as follows:
 
2015

 
2014

 
2013

Diversified Industrial
668

 
1,581

 
725

Aerospace Systems
21

 
44

 

The charges primarily consist of severance costs related to plant closures as well as general work force reductions implemented by various operating units throughout the world, with the majority of charges relating to realignment activities in Europe. Also in 2015, $458 of severance costs for 18 people were included in the Corporate administration caption in the Business Segment Information. In addition, $2,399 and $1,331 of fixed asset write-downs were recognized during 2015 and 2014, respectively, in connection with plant closures in the Diversified Industrial Segment and are reflected in the other expense (income) caption in the Business Segment Information. During 2013, $1,918 of severance costs for 98 people were recognized in connection with the Company's divestiture of its Turkey refrigeration components business and is reflected in the other expense (income) caption in the Business Segment Information. The Company believes the realignment actions taken will positively impact future results of operations, but will have no material effect on liquidity and sources and uses of capital.
The business realignment charges are presented in the Consolidated Statement of Income as follows:
 
2015

 
2014

 
2013

Cost of sales
$
19,419

 
$
63,575

 
$
8,354

Selling, general and administrative expenses
12,888

 
38,874

 
3,880

Loss (gain) on disposal of assets
2,399

 
1,331

 
1,918

As of June 30, 2015, approximately $17 million in severance payments have been made relating to charges incurred during 2015, the remainder of which are expected to be paid by June 30, 2016. Severance payments relating to prior-year actions are being made as required. Remaining severance payments related to current-year and prior-year actions of approximately $34 million are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the realignment actions described above, the timing and amount of which are not known at this time.













13-24



4.
Income Taxes
Income before income taxes was derived from the following sources:

 
2015

 
2014

 
2013

United States
$
779,782

 
$
1,115,010

 
$
653,622

Foreign
652,458

 
441,710

 
657,379

 
$
1,432,240

 
$
1,556,720

 
$
1,311,001

Income taxes include the following:
 
2015

 
2014

 
2013

Federal
 
 
 
 
 
  Current
$
185,761

 
$
377,404

 
$
167,350

  Deferred
28,108

 
(45,643
)
 
26,523

Foreign
 
 
 
 
 
  Current
189,826

 
168,177

 
176,739

  Deferred
(11,208
)
 
(28,016
)
 
(28,472
)
State and local
 
 
 
 
 
  Current
25,235

 
43,860

 
19,496

  Deferred
1,965

 
(480
)
 
581

 
$
419,687

 
$
515,302

 
$
362,217


A reconciliation of the Company's effective income tax rate to the statutory Federal rate follows:
 
2015

 
2014

 
2013

Statutory Federal income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
State and local income taxes
1.1

 
1.8

 
1.0

Goodwill and intangible asset impairment

 
4.5

 

Tax related to international activities
(4.5
)
 
(5.6
)
 
(5.8
)
Cash surrender value of life insurance
(0.1
)
 
(0.9
)
 
(0.7
)
Federal manufacturing deduction
(1.6
)
 
(1.0
)
 
(1.0
)
Research tax credit
(0.8
)
 
(0.3
)
 
(1.1
)
Other
0.2

 
(0.4
)
 
0.2

Effective income tax rate
29.3
 %
 
33.1
 %
 
27.6
 %

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. The differences comprising the net deferred taxes shown on the Consolidated Balance Sheet at June 30 were as follows:

13-25



 
2015

 
2014

Retirement benefits
$
614,127

 
$
550,034

Other liabilities and reserves
127,838

 
128,848

Long-term contracts
49,929

 
46,006

Stock-based incentive compensation
66,015

 
64,267

Loss carryforwards
316,994

 
340,676

Unrealized currency exchange gains and losses
(17,218
)
 
25,182

Inventory
16,659

 
18,668

Foreign tax credit carryforward
29,965

 
51,875

Depreciation and amortization
(531,258
)
 
(571,107
)
Valuation allowance
(330,006
)
 
(348,837
)
Net deferred tax asset
$
343,045

 
$
305,612

 
 
 
 
Change in net deferred tax asset:
 
 
 
Provision for deferred tax
$
(18,865
)
 
$
74,139

Items of other comprehensive (loss)
57,523

 
(49,882
)
Acquisitions and other
(1,225
)
 
6,539

Total change in net deferred tax
$
37,433

 
$
30,796


As of June 30, 2015, the Company has recorded deferred tax assets of $316,994 resulting from $1,112,078 in loss carryforwards. A valuation allowance of $305,825 related to the loss carryforwards has been established due to the uncertainty of their realization. Of this valuation allowance, $279,850 relates to non-operating entities whose loss carryforward utilization is considered to be remote. Some of the loss carryforwards can be carried forward indefinitely; others can be carried forward from three to 20 years. In addition, a valuation allowance of $24,181 related to future deductible items has been established due to the uncertainty of their realization. These future deductible items are recorded in the other liabilities and reserves line in the table above.
Provision has not been made for additional U.S. or foreign taxes on undistributed earnings of certain international operations as those earnings will continue to be reinvested. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the eventual remittance of such earnings. Accumulated undistributed earnings reinvested in international operations amounted to approximately $3,000,000 at June 30, 2015.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 
2015

 
2014

 
2013

Balance July 1
$
164,813

 
$
107,440

 
$
109,735

Additions for tax positions related to current year
6,090

 
7,752

 
10,285

Additions for tax positions of prior years
14,989

 
55,136

 
10,719

Reductions for tax positions of prior years
(6,945
)
 
(1,359
)
 
(20,683
)
Reductions for settlements

 
(1,856
)
 
(4,266
)
Reductions for expiration of statute of limitations
(6,251
)
 
(5,005
)
 
(437
)
Effect of foreign currency translation
(27,008
)
 
2,705

 
2,087

Balance June 30
$
145,688

 
$
164,813

 
$
107,440