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EX-32 - EXHIBIT 32 - PARKER HANNIFIN CORPph6302017ex32.htm
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EX-12 - EXHIBIT 12 - PARKER HANNIFIN CORPph6302017ex12.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                         
Commission File No. 1-4982
PARKER-HANNIFIN CORPORATION
(Exact name of registrant as specified in its charter)
Ohio
34-0451060
(State or other jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
 
6035 Parkland Boulevard, Cleveland, Ohio
44124-4141
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code (216) 896-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange
on which Registered
Common Shares, $.50 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
Yes  ý    No  ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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.    Yes  ý    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý.
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.
Large Accelerated Filer:
ý
Accelerated Filer:
¨
Non-Accelerated Filer:
¨
Smaller Reporting Company:
¨

(Do not check if a smaller reporting company)

 
 
 
Emerging Growth Company
¨

 
 
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  ¨    No  ý
The aggregate market value of the outstanding common stock held by non-affiliates of the Registrant as of December 31, 2016, excluding, for purpose of this computation only, stock holdings of the Registrant’s Directors and Officers: $18,577,753,996.
The number of Common Shares outstanding on July 31, 2017 was 133,129,936.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Company’s 2017 Annual Meeting of Shareholders to be held on October 25, 2017, are incorporated by reference into Part III of this Annual Report on Form 10-K.




TABLE OF CONTENTS
PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 
 





1


PARKER-HANNIFIN CORPORATION
FORM 10-K
Fiscal Year Ended June 30, 2017
PART I

ITEM 1. Business. Parker-Hannifin Corporation 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 was incorporated in Ohio in 1938. Its principal executive offices are located at 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141, telephone (216) 896-3000. As used in this Annual Report on Form 10-K, unless the context otherwise requires, the term "Company" refers to Parker-Hannifin Corporation and its subsidiaries and the term "year" and references to specific years refer to the applicable fiscal year.
The Company’s investor relations internet website address is www.phstock.com. The Company makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after filing or furnishing such material electronically with the Securities and Exchange Commission. The information contained on or accessible through the Company’s website is not part of this Annual Report on Form 10-K.
The Board of Directors has adopted a written charter for each of the committees of the Board of Directors. These charters, as well as the Company’s Global Code of Business Conduct, Corporate Governance Guidelines and Independence Standards for Directors, are posted and available on the Company’s investor relations internet website at www.phstock.com under the Corporate Governance page. Shareholders may request copies of these corporate governance documents, free of charge, by writing to Parker-Hannifin Corporation, 6035 Parkland Boulevard, Cleveland, Ohio 44124-4141, Attention: Secretary, or by calling (216) 896-3000.
The Company’s manufacturing, service, sales, distribution and administrative facilities are located in 41 states within the United States and in 49 other countries. The Company’s products are sold as original and replacement equipment through sales and distribution centers worldwide. The Company markets its products through direct-sales employees, independent distributors and sales representatives. The Company's products are supplied to approximately 439,000 customers in virtually every significant manufacturing, transportation and processing industry.

The Company has two reporting segments: Diversified Industrial and Aerospace Systems. During 2017, the Company's technologies and systems were used in the products of these two reporting segments. For 2017, total net sales were $12.0 billion. Diversified Industrial Segment products accounted for 81% and Aerospace Systems Segment products accounted for 19% of those net sales.
Markets
The Company’s technologies and systems are used throughout various industries and in various applications. The approximately 439,000 customers who purchase the Company’s products are found throughout nearly every significant manufacturing, transportation and processing industry. No single customer accounted for more than 3% of the Company’s total net sales for the year ended June 30, 2017.

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Diversified Industrial Segment. Sales of Diversified Industrial Segment products are made to both original equipment manufacturers ("OEMs") and distributors who serve the replacement markets in manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural and military machinery and equipment industries. The major markets for products of the Diversified Industrial Segment are listed below by group:
 
 
 
 
Engineered Materials Group:
•    Aerospace
 
•    Chemical processing
 
•    Consumer
 
•    Fluid power
 
•    General industrial
 
•    Information technology
 
•    Life sciences

•    Microelectronics
 
•    Military
 
•    Oil and gas
•    Power generation
•    Renewable energy
 
•    Telecommunications
 
•    Transportation

 
 
 
Filtration
Group:
•    Agriculture
•    Aerospace and defense
•    Construction
 
•    Food and beverage
 
•    Heating, ventilation and air conditioning (HVAC)
 
•    Industrial machinery
 
•     Life sciences

•    Marine
 •    Mining
 •    Oil and gas
 •    Power generation
 •    Renewable energy
 •    Transportation
 •    Water purification

 
 
 
Fluid
Connectors
Group:
•    Aerial lift
 
•    Agriculture
 
•    Bulk chemical handling
 
•    Construction machinery
 
•    Food and beverage
 
•    Fuel and gas delivery
 
•    Industrial machinery

•    Life sciences
 
•    Marine
 
•    Mining
 
•    Mobile
 
•    Oil and gas
 
•    Renewable energy
 
•    Transportation

 
 
 
Instrumentation
Group:

•    Air conditioning
•    Alternative fuels
•    Biopharmaceuticals
•    Chemical
 
•    Diesel engine
•    Food and beverage 
•    Industrial machinery
•    Life sciences
•    Microelectronics


•    Mining
•    Oil and gas
  •    Packaging
•    Pharmaceuticals
  •    Power generation
•    Refining
•    Refrigeration
•    Transportation
•    Water/wastewater


 
 
 

3


Motion Systems
Group:
•    Aerial lift
  •    Agriculture
  •    Battery energy storage
•    Construction machinery
•    Entertainment
  •    Factory automation
•    Forestry
  •    Industrial machinery
•    Machine tools
•    Marine
•    Material handling


  •    Microelectronics
•    Mining
  •    Oil and gas 
•    Packaging
•    Power generation
•    Recreational vehicles
  •    Refuse vehicles
  •    Renewable energy
   •    Transportation
  •    Truck hydraulics
•    Turf equipment

 





Aerospace Systems Segment. Sales of the Aerospace Systems Segment products are made primarily in the commercial and military aerospace markets to both OEMs and to end users for spares, maintenance, repair and overhaul. The major markets for products of the Aerospace Systems Segment are listed below:

•    Aftermarket Services
•    Commercial transports
  •    Engines
  •    General and business aviation
  •    Helicopters
 
•      Military aircraft
•     Missiles
                    •     Power generation
                    •     Regional transports
  •     Unmanned aerial vehicles
 


Principal Products and Methods of Distribution
Although the Company offers hundreds of thousands of individual products, no single product contributed more than 1% to the Company’s total net sales for the year ended June 30, 2017. Listed below are some of the Company’s principal products.
Diversified Industrial Segment. The products produced by the Company’s Diversified Industrial Segment consist of a broad range of motion-control and fluid systems and components, which are described below by group:

Engineered Materials Group: static and dynamic sealing devices, including:
•    Dynamic seals
 •    Elastomeric o-rings
•    Electro-medical instrument design and assembly
 •    Electromagnetic interference shielding
 •    Extruded and precision-cut fabricated elastomeric seals
 •    High-temperature metal seals

•    Homogeneous and inserted elastomeric shapes
 •    Medical device fabrication and assembly
 •    Metal and plastic retained composite seals
 •    Shielded optical windows
 •    Silicone tubing and extrusions
•    Thermal management
•    Vibration dampening



4


Filtration Group: filters, systems and diagnostics solutions to monitor and remove contaminants from fuel, air, oil, water and other liquids and gases, including:
•    Aerospace filters and systems
 •   Air pollution control and dust collection systems and filters
•    Compressed air and gas treatment solutions
 •    Engine fuel, oil, air and closed crankcase ventilation filtration systems
•    Filtration and purification systems
 •    Fluid condition monitoring systems
•    Gas turbine air inlet filters
•    Heating, ventilation and air conditioning (HVAC) filters



 

•    Hydraulic and lubrication filters and systems
•    Industrial and analytical gas generators
•    Instrumentation filters
•    Membrane, fiber, and sintered metal filters
•    Natural gas filters
•    Process liquid, air and gas filters
•    Sterile air filters
•    Water purification filters and systems

Fluid Connectors Group: connectors which control, transmit and contain fluid, including:
•    Check valves
 •    Diagnostic equipment
 •    Hose couplings
 •    Industrial hose
 •    Low pressure fittings and adapters

•    Polytetrafluoroethylene ("PTFE") hose and tubing
 •    Quick couplings
 •    Rubber and thermoplastic hose
 •    Tube fittings and adapters
 •    Tubing and plastic fittings


Motion Systems Group: hydraulic, pneumatic, and electromechanical components and systems for builders and users of industrial and mobile machinery and equipment, including:
•    Accumulators
•    Air regulators/filters
•    Cartridge valves
•    Coolers
•    Electric actuators and stages
•    Electrohydraulic actuators
•    Electronic displays and human machine interfaces
•    Electronic I/O controllers
 •    Fan drives
 •    Grippers
 •    Hydraulic cylinders
 •    Hydraulic motors and pumps
•    Hydraulic systems
•    Hydraulic valves and controls 
•    Hydrostatic steering units





 •    Integrated hydraulic circuits
•    Intensifiers
 •    Inverters
•    Motion controllers
 •    Pneumatic control valves
 •    Pneumatic cylinders
•    Power take-offs
 •    Power units
 •    Pressure and flow controls
•    Rotary actuators
 •    Sensors
•    Servo motors and drives 
•    Telematic controllers
•    Vacuum
•    Variable frequency drives




5


Instrumentation Group: high quality critical flow components for process instrumentation, healthcare and ultra-high-purity applications and components for use in refrigeration and air conditioning systems and in fluid control applications for processing, fuel dispensing, beverage dispensing and mobile emissions, including: 
•    Accumulators
•    Analytical instruments and sample conditioning systems
•    Carbon dioxide controls
•    Compressed natural gas dispensers
•    Cryogenic valves
•    Electronic controllers
•    Electronic valves
•    Filter driers
•    Fluid system and control fittings, meters, valves, regulators, and manifold valves

•    Fluoropolymer chemical delivery fittings, valves and pumps
•    High pressure fittings, valves, pumps and systems
•    High-purity gas delivery fittings, valves and regulators 
•    Minature valves and pumps
•    Natural gas on-board fuel systems
 •    Pressure regulating valves
•    Refrigeration and air conditioning electronic controls and monitoring
 •    Solenoid valves




Diversified Industrial Segment products include standard products, as well as custom products which are engineered and produced to OEMs’ specifications for application to particular end products. Both standard and custom products are also used in the replacement of original products. Diversified Industrial Segment products are marketed primarily through field sales employees and approximately 13,700 independent distributor locations throughout the world.
Aerospace Systems Segment. The principal products of the Company’s Aerospace Systems Segment are used on commercial and military airframe and engine programs and include:
•    Control actuation systems and components
 
•    Engine systems and components
 
•    Fluid conveyance systems and components
•    Fluid metering, delivery and atomization devices
•    Fuel systems and components
•    Fuel tank inerting systems
 

•    Hydraulic systems and components
•    Lubrication components
•    Pneumatic control components
•    Power conditioning and management systems
•    Thermal management
•    Wheels and brakes
  
Aerospace Systems Segment products are marketed by the Company’s regional sales organizations and are sold directly to original equipment manufacturers and end users throughout the world.
Competition
The Company’s business operates in highly competitive markets and industries. The Company offers its products over numerous, varied markets through its divisions operating in 50 countries and consequently has hundreds of competitors when viewed across its various markets and product offerings. The Company’s competitors include U.S. and non-U.S. companies. These competitors and the degree of competition vary widely by product lines, end markets, geographic scope and/or geographic locations. Although each of the Company’s segments has numerous competitors, given the Company’s market and product breadth, no single competitor competes with the Company with respect to all products manufactured and sold by the Company.
In the Diversified Industrial Segment, the Company competes on the basis of product quality and innovation, customer service, manufacturing and distribution capability, and price competitiveness. The Company believes that it is one of the market leaders in most of the major markets for its most significant Diversified Industrial Segment products. The Company has comprehensive motion and control packages for the broadest systems capabilities. While the Company’s primary global competitors include Bosch Rexroth AG, Danaher Corporation, Danfoss A/S, Donaldson Company, Inc., Eaton Corporation plc, Emerson Climate Technologies, Emerson/ASCO, Festo AG, Freudenberg-NOK, Gates Corporation, IMI/Norgren, SMC Corporation, Swagelok Company, and Trelleborg AB, none of these businesses compete with every group in the Company's Diversified Industrial Segment and every product line offered by this segment.
In the Aerospace Systems Segment, the Company has developed alliances with key customers based on the Company’s advanced technological and engineering capabilities, superior performance in quality, delivery, and service, and price

6


competitiveness, which has enabled the Company to obtain significant original equipment business on new aircraft programs for its systems and components and to thereby obtain the follow-on repair and replacement business for these programs. Further, the Aerospace Systems Segment is able to utilize low-cost manufacturing techniques and best cost region strategies to achieve a lower cost producer status. Although the Company believes that it is one of the market leaders in most of the major markets for its most significant Aerospace Systems Segment products, the Company’s primary global competitors for the most significant Aerospace Systems Segment products include Eaton Corporation plc, Honeywell International, Inc., Moog Inc., Triumph Group, Inc., UTC Aerospace Systems, Woodward, Inc. and Zodiac Aerospace SA.
The Company believes that its platform utilizing nine core technologies, which consist of aerospace, electromechanical, filtration, fluid handling, hydraulics, pneumatics, process control, refrigeration, and sealing and shielding, is a positive factor in its ability to compete effectively with both large and small competitors. For both of its segments, the Company believes that the following factors also contribute to its ability to compete effectively:
decentralized operating structure that allows each division to focus on its customers and respond quickly at the local level;
systems solution capabilities that use the Company’s core technologies from both of its segments;
global presence; and
a strong global distribution network.
Research and Product Development
The Company continually researches the feasibility of new products and services through its development laboratories and testing facilities in many of its worldwide manufacturing locations. Its research and product development staff includes chemists, physicists, and mechanical, chemical and electrical engineers.
Total research and development costs relating to the development of new products and services and the improvement of existing products and services amounted to $336.7 million in 2017, $359.8 million in 2016 and $403.1 million in 2015. These amounts include costs incurred by the Company related to independent research and development initiatives as well as costs incurred in connection with research and development contracts. Costs incurred in connection with research and development contracts and included in the total research and development costs reported above for 2017, 2016 and 2015 were $65.3 million, $58.0 million and $57.8 million, respectively.
Patents, Trademarks, Licenses
The Company owns a number of patents, trademarks and licenses related to its products and has exclusive and non-exclusive rights to use a number of patents owned by others. In addition, patent applications on certain products are now pending, although there can be no assurance that patents will be issued. The Company is not dependent to any material extent on any single patent, trademark or license or group of patents, trademarks or licenses.
Backlog and Seasonal Nature of Business
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 Company's backlog by business segment for the past two years is included in Part II, Item 7 of this Annual Report on Form 10-K and is incorporated herein by reference. The Company’s backlog was $3.8 billion at June 30, 2017 and $3.2 billion at June 30, 2016. Approximately 88% of the Company’s backlog at June 30, 2017 is scheduled for delivery in the succeeding twelve months. The Company’s business is generally not seasonal in nature.
Environmental Regulation
Certain of the Company’s operations necessitate the use and handling of hazardous materials and, as a result, the Company is subject to United States federal, state, and local laws and regulations as well as non-U.S. laws and regulations designed to protect the environment and regulate the discharge of materials into the environment. These laws impose penalties, fines and other sanctions for non-compliance and liability for response costs, property damage and personal injury resulting from past and current spills, disposals or other releases of, or exposures to, hazardous materials. Among other environmental laws, the Company is subject to the United States federal "Superfund" law, under which the Company has been designated as a "potentially responsible party" and may be liable for cleanup costs associated with various waste sites, some of which are on the United States Environmental Protection Agency’s Superfund priority list.

7


As of June 30, 2017, the Company was involved in environmental remediation at various United States and non-U.S. manufacturing facilities presently or formerly operated by the Company and as a "potentially responsible party," along with other companies, at off-site waste disposal facilities and regional sites.
The Company believes that its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the consequent financial liability to the Company. Compliance with environmental laws and regulations requires continuing management efforts and expenditures by the Company. Compliance with environmental laws and regulations has not had in the past, and, the Company believes, will not have in the future, a material adverse effect on the capital expenditures, earnings, or competitive position of the Company.
As of June 30, 2017, the Company had a reserve of $20.8 million for environmental matters that were probable and reasonably estimable. This reserve was recorded based upon the best estimate of costs to be incurred in light of the progress made in determining the magnitude of remediation costs, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties.
The Company’s estimated total liability for the above mentioned sites ranges from a minimum of $20.8 million to a maximum of $83.3 million. The largest range of the estimated total liability for any one site is approximately $7.4 million. The actual costs to be incurred by the Company will be dependent on final determination of contamination and required remedial action, negotiations with governmental authorities with respect to cleanup levels, changes in regulatory requirements, innovations in investigatory and remedial technologies, effectiveness of remedial technologies employed, the ability of the other responsible parties to pay, and any insurance or other third-party recoveries.
Energy Matters and Sources and Availability of Raw Materials
The Company’s primary energy source for both of its business segments is electric power. While the Company cannot predict future costs of electric power, the primary source for production of the required electric power is expected to be coal and natural gas from substantial, proven coal and natural gas reserves available to electric utilities. The Company is subject to governmental regulations in regard to energy supplies in the United States and elsewhere. To date, the Company has not experienced any significant disruptions of its operations due to energy curtailments.
Steel, brass, copper, aluminum, nickel, rubber and thermoplastic materials and chemicals are the principal raw materials used by the Company. These materials are expected to be available from numerous sources in quantities sufficient to meet the requirements of the Company.
Employees
The Company employed approximately 56,690 persons as of June 30, 2017, of whom approximately 29,230 were employed by foreign subsidiaries.
Business Segment Information
The Company’s net sales, segment operating income and assets by business segment and net sales and long-lived assets by geographic area for the past three years are included in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference.
Acquisitions
The Company made three acquisitions during 2017, which are more fully discussed in Note 2 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and are incorporated herein by reference.

ITEM 1A. Risk Factors.
The following "risk factors" identify what the Company believes to be the risks that could materially adversely affect the Company’s financial and/or operational performance. These risk factors should be considered and evaluated together with information incorporated by reference or otherwise included elsewhere in this Annual Report on Form 10-K. Additional risks not currently known to the Company or that the Company currently believes are immaterial also may impair the Company’s business, financial condition, results of operations and cash flows.



8


The Company may be subject to risks arising from uncertainty in worldwide and regional economic conditions.
The Company's business is sensitive to global macro-economic conditions. Moderate economic growth persists in the economic regions in which the Company conducts substantial operations. Future macroeconomic downturns may have an adverse effect on the business, results of operations and financial condition of the Company and its distributors, customers and suppliers, and on activity in many of the industries and markets in which the Company and its distributors, customers and suppliers operate. Among the economic factors which may have such an effect are manufacturing and other end-market activity, currency exchange rates, air travel trends, difficulties entering new markets, and general economic conditions such as inflation, deflation, interest rates and credit availability. These factors may, among other things, negatively impact the level of purchases, capital expenditures, and creditworthiness of the Company and its distributors, customers and suppliers, and, therefore, the Company’s revenues, operating profits, margins, and order rates.
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 cannot predict changes in worldwide or regional economic conditions, as such conditions are highly volatile and beyond the Company’s control. If these conditions deteriorate or remain at depressed levels for extended periods, however, the Company’s business, results of operations and financial condition could be materially adversely affected.
The Company may be subject to risks relating to its non-U.S. operations.
The Company’s net sales derived from customers outside the United States were approximately 40% in 2017, 41% in 2016 and 42% in 2015. In addition, many of the Company’s manufacturing operations and suppliers are located outside the United States. The Company expects net sales from non-U.S. markets to continue to represent a significant portion of its total net sales. The Company’s non-U.S. operations are subject to risks in addition to those facing its domestic operations, including:
fluctuations in currency exchange rates;
limitations on ownership and on repatriation of earnings;
transportation delays and interruptions;
political, social and economic instability and disruptions;
government embargoes or trade restrictions;
the imposition of duties and tariffs and other trade barriers;
import and export controls;
labor unrest and current and changing regulatory environments;
the potential for nationalization of enterprises;
difficulties in staffing and managing multi-national operations;
limitations on the Company’s ability to enforce legal rights and remedies;
potentially adverse tax consequences; and
difficulties in implementing restructuring actions on a timely basis.
If the Company is unable to successfully manage the risks associated with expanding its global business or adequately manage operational fluctuations internationally, the risks could have a material adverse effect on the Company’s business, results of operations or financial condition.

The Company may be subject to risks relating to acquisitions and joint ventures, and risks relating to the integration of acquired companies, including risks related to the integration of CLARCOR Inc. ("Clarcor").

The Company expects to continue its strategy of identifying and acquiring businesses with complementary products and services, and entering into joint ventures, which it believes will enhance its operations and profitability. However, there can be no assurance that the Company will be able to continue to find suitable businesses to purchase or joint venture opportunities or that it will be able to acquire such businesses or enter into such joint ventures on acceptable terms. Furthermore, there are no

9


assurances that the Company will be able to avoid acquiring or assuming unexpected liabilities. If the Company is unable to avoid these risks, its results of operations and financial condition could be materially adversely affected.
In addition, the Company may not be able to integrate successfully any businesses that it purchases into its existing business or that any acquired businesses or joint ventures will be profitable. Specifically, the Company is devoting significant management attention and resources to integrating the business practices and operations of Clarcor with the businesses of the Company. The Company may encounter the following difficulties during the integration process of Clarcor:
the consequences of a change in tax treatment, including the cost of integration and compliance and the possibility that the full benefits anticipated to result from the Clarcor acquisition may not be realized;
delays in the integration of management teams, strategies, operations, products, and services;
differences in business backgrounds, corporate cultures, and management philosophies that may delay successful integration;
the ability to retain key employees;
the ability to create and enforce uniform standards, controls, procedures, policies, and information systems;
challenges of integrating complex systems, technologies, networks, and other assets of Clarcor, into the Company’s, in a manner that minimizes any adverse impact or disruptions to customers, suppliers, employees, and other constituencies; and
unknown liabilities and unforeseen increased expenses or delays associated with the integration beyond current estimates.

The successful integration of new businesses and the success of joint ventures also depend on the Company’s ability to manage these new businesses and cut excess costs. If the Company is unable to avoid these risks, its results of operations and financial condition could be materially adversely affected.
The Company’s results may be adversely affected if expanded operations from the acquisition of Clarcor are not effectively managed.
The Company’s acquisition of Clarcor greatly expanded the size and complexity of its business. The Company’s future success depends, in part, on the ability to manage this expanded business, which may pose substantial challenges for management, including challenges related to the management and monitoring of the expanded global operations and new manufacturing processes and products, and the associated costs and complexity. There can be no assurance of successful management of these matters or that the Company will realize the expected benefits of the acquisition of Clarcor.
The Company may be subject to risks relating to organizational changes.
The Company regularly executes organizational changes such as acquisitions, divestitures and realignments to support its growth and cost management strategies. The Company also engages in initiatives aimed to increase productivity, efficiencies and cash flow and to reduce costs. The Company further commits significant resources to identify, develop and retain key employees to ensure uninterrupted leadership and direction. If the Company is unable to successfully manage these and other organizational changes, the ability to complete such activities and realize anticipated synergies or cost savings as well as the Company's results of operations and financial condition could be materially adversely affected. The Company also cannot offer assurances that any of these initiatives will continue to be beneficial to the extent anticipated, or that the estimated efficiency improvements, incremental cost savings or cash flow improvements will be realized as anticipated or at all.
The Company may be subject to risks relating to its information technology systems.
The Company relies extensively on information technology systems to manage and operate its business, some of which are managed by third parties. The security and functionality of these information technology systems, and the processing of data by these systems, are critical to our business operations. If these systems, or any part of the systems, are damaged, intruded upon, attacked, shutdown or cease to function properly (whether by planned upgrades, force majeure, telecommunications failures, hardware or software break-ins or viruses, or other cybersecurity incidents) and the Company suffers any resulting interruption in its ability to manage and operate its business or if its products are effected, the Company's results of operations and financial condition could be materially adversely affected.
The Company may be subject to risks relating to changes in the demand for and supply of its products.
Demand for and supply of the Company’s products may be adversely affected by numerous factors, some of which the Company cannot predict or control. Such factors include:

10


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, and changes in contract cost and revenue estimates for new development programs;
changes in product mix;
changes in the market acceptance of the Company’s products;
increased competition in the markets the Company serves;
declines in the general level of industrial production;
weakness in the end-markets the Company serves;
fluctuations in the availability or the prices of raw materials; and
fluctuations in currency exchange rates.
If any of these factors occur, the demand for and supply of the Company’s products could suffer, which could materially adversely affect the Company’s results of operations.
The Company may be subject to risks relating to the development of new products and technologies.
The markets in which the Company operates are characterized by rapidly changing technologies and frequent introductions of new products and services. The Company’s ability to develop new products based on technological innovation can affect its competitive position and often requires the investment of significant resources. If the Company does not develop, or has difficulties or delays in the development of, innovative new and enhanced products and services, or fails to gain market or regulatory acceptance of new products and technologies, the Company's revenues may be materially reduced and the Company's competitive position could be materially adversely affected. In addition, the Company may invest in research and development of products and services, or in acquisitions or other investments, that do not lead to significant revenue, which could adversely affect our profitability.
The Company may be subject to risks arising from price and supply fluctuations in raw materials used in the Company’s production processes and by its suppliers of component parts.
The Company’s supply of raw materials for its businesses could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect the Company’s results of operations and profit margins. Although the Company generally attempts to manage these fluctuations by, among other things, passing along increased raw material prices to its customers in the form of price increases, there may be a time delay between the increased raw material prices and the Company’s ability to increase the price of its products, or the Company may be unable to increase the prices of its products due to pricing pressure, contract terms or other factors which could adversely impact results of operations and cash flows.
The Company’s suppliers of component parts may significantly and quickly increase their prices in response to increases in costs of raw materials that they use to manufacture the component parts. As a result, the Company may not be able to increase its prices commensurately with its increased costs. Consequently, the Company’s results of operations or financial condition could be materially adversely affected.
The Company may be subject to risks arising from changes in the competitive environment in which it operates.
The Company’s operations are subject to competition from a wide variety of global, regional and local competitors, which could adversely affect the Company’s results of operations by creating downward pricing pressure and/or a decline in the Company’s margins or market shares. To compete successfully, the Company must excel in terms of product quality and innovation, technological and engineering capability, manufacturing and distribution capability, delivery, price competitiveness, and customer service.
The Company may be subject to risks relating to changes in its tax rates or exposure to additional income tax liabilities.
The Company is subject to income taxes in the United States and various non-U.S. jurisdictions. The Company's domestic and international tax liabilities are dependent upon the location of earnings among these different jurisdictions. The Company’s future results of operation could be adversely affected by changes in the Company's effective tax rate as a result of changes in the mix of earnings in countries with differing statutory tax rates, changes in overall profitability, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets or changes in tax laws or regulations.

11


In addition, the amount of income taxes paid by the Company is subject to ongoing audits by United States federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to the Company’s tax liabilities, which could have a material adverse effect on the Company’s results of operations.
The Company may be subject to product liability risks.
The Company’s businesses expose it to potential product liability risks that are inherent in the design, manufacture and sale of its products and the products of third-party vendors that the Company uses or resells. Significant product liability claims could have a material adverse effect on the Company’s financial condition, liquidity and results of operations. Although the Company currently maintains what it believes to be suitable and adequate product liability insurance, there can be no assurance that the Company will be able to maintain its insurance on acceptable terms or that its insurance will provide adequate protection against all potential significant liabilities.
The Company may be subject to risks arising from litigation, and legal and regulatory proceedings and obligations.
From time to time, the Company is subject to litigation or other commercial disputes and other legal and regulatory proceedings relating to its business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal or regulatory proceedings, the Company cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An unfavorable outcome could materially adversely impact the Company’s business, financial condition or results of operations. Furthermore, as required by U.S. generally accepted accounting principles, the Company establishes reserves based on its assessment of contingencies, including contingencies related to legal claims asserted against it. Subsequent developments in legal proceedings may affect the Company's assessment and estimates of the loss contingency recorded as a reserve and require the Company to make payments in excess of our reserves, which could have an adverse effect on the Company's results of operations.
The Company is subject to national and international laws and regulations, such as the anti-corruption laws of the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, relating to its business and its employees. Despite the Company's policies, procedures and compliance programs, its internal controls and compliance systems may not be able to protect the Company from prohibited acts willfully committed by its employees, agents or business partners that would violate such applicable laws and regulations. Any such improper acts could damage the Company's reputation, subject it to civil or criminal judgments, fines or penalties, and could otherwise disrupt the Company's business, and as a result, could materially adversely impact the Company's business, financial condition or results of operations.
The Company may be subject to risks relating to the preservation of its intellectual property.
Protecting the Company’s intellectual property is critical to its innovation efforts. The Company owns a number of patents, trade secrets, copyrights, trademarks, trade names and other forms of intellectual property in its products and services throughout the world and in the operation of its business. The Company also has exclusive and non-exclusive rights to intellectual property owned by others. The Company’s intellectual property may be challenged or infringed upon by third parties or the Company may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. In addition, the global nature of the Company’s business increases the risk that the Company’s intellectual property may be subject to infringement or other unauthorized use or disclosure by others. In some cases, the Company’s ability to protect its intellectual property rights by legal recourse or otherwise may be limited, particularly in countries where laws or enforcement practices are inadequate or undeveloped. Unauthorized use or disclosure of the Company’s intellectual property rights or the Company's inability to preserve existing intellectual property rights could adversely impact the Company’s competitive position and results of operations.
The Company may be subject to risks arising from the impact of environmental regulations.
The Company’s operations necessitate the use and handling of hazardous materials and, as a result, it is subject to various United States federal, state and local laws and regulations, as well as non-U.S. laws, designed to protect the environment and to regulate the discharge of materials into the environment. These laws impose penalties, fines and other sanctions for non-compliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or the exposure to, hazardous materials. Among other laws, the Company is subject to the United States federal "Superfund" law, under which it has been designated as a "potentially responsible party" and may be liable for clean-up costs associated with various waste sites, some of which are on the United States Environmental Protection Agency’s Superfund priority list. The Company could incur substantial costs as a result of non-compliance with or liability for cleanup or other costs or damages under environmental laws, including the Superfund law.

12


In addition, increased worldwide focus on climate change issues has led to recent legislative and regulatory efforts to limit greenhouse gas emissions, including regulation of such emissions through a "cap-and-trade" system globally. Increased regulation of greenhouse gas emissions and other climate changes concerns could subject the Company to additional costs and restrictions, including increased energy and raw material costs. Until definitive regulations are adopted, the Company is not able to predict how such regulations would affect the Company’s business, operations or financial results.
The Company may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted in the future, these laws could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company may be subject to risks relating to increasing costs of certain employee and retiree benefits.
The funding requirements and the amount of expenses recorded for the Company’s defined benefit pension plans are dependent on changes in market interest rates and the value of plan assets, which are dependent on actual plan asset returns. Significant changes in market interest rates and decreases in the fair value of plan assets and investment losses on plan assets would increase funding requirements and expenses and may adversely impact the Company’s results of operations.
The Company absorbs a portion of healthcare costs for its employees. If healthcare costs rise significantly and the Company continues to absorb the majority of these costs, these increasing costs may adversely impact the Company's future results of operations.
The Company may be subject to risks arising from regulations applicable to companies doing business with the United States government.
In addition to the risks identified herein, doing business with the United States government subjects the Company to unusual risks, including dependence on the level of government spending and compliance with and changes in governmental procurement regulations. Agreements relating to the sale of products to government entities may be subject to termination, reduction or modification, either at the convenience of the government or for the Company’s failure to perform under the applicable contract. The Company is subject to government investigations of business practices and compliance with government procurement regulations. If the Company were charged with wrongdoing as a result of any such investigation, it could be suspended from bidding on or receiving awards of new government contracts, which could have a material adverse effect on the Company’s results of operations.

ITEM 1B. Unresolved Staff Comments. None.


13



ITEM 1C. Executive Officers of the Registrant.
The Company’s executive officers as of August 15, 2017, were as follows:
Name
 
Position
 
Officer
Since(1)
 
Age as of
8/15/2017
Thomas L. Williams
 
Chairman of the Board, Chief Executive Officer and Director
 
2005
 
58

Lee C. Banks
 
President, Chief Operating Officer and Director
 
2001
 
54

Catherine A. Suever
 
Executive Vice President – Finance & Administration and Chief Financial Officer
 
2010
 
58

Mark J. Hart
 
Executive Vice President – Human Resources & External Affairs
 
2016
 
52

Robert W. Bond
 
Vice President
 
2000
 
59

William R. "Skip" Bowman
 
Vice President and President - Instrumentation Group
 
2016
 
59

Yoon "Michael" Chung
 
Vice President – eBusiness, IoT and Services
 
2008
 
54

William G. Eline
 
Vice President – Chief Information Officer
 
2002
 
61

Thomas C. Gentile
 
Vice President – Global Supply Chain
 
2017
 
45

Kurt A. Keller
 
Vice President and President – Asia Pacific Group
 
2009
 
59

Todd M. Leombruno
 
Vice President and Controller
 
2017
 
47

Joseph R. Leonti
 
Vice President, General Counsel and Secretary
 
2014
 
45

Robert W. Malone
 
Vice President and President – Filtration Group
 
2014
 
53

M. Craig Maxwell
 
Vice President – Chief Technology and Innovation Officer
 
2003
 
59

Jennifer A. Parmentier
 
Vice President and President – Engineered Materials Group
 
2015
 
50

Andrew D. Ross
 
Vice President and President – Fluid Connectors Group
 
2012
 
50

Roger S. Sherrard
 
Vice President and President – Aerospace Group
 
2003
 
51

Andrew M. Weeks
 
Vice President and President – Motion Systems Group
 
2015
 
54

 
(1)Executive officers of the Company are elected by the Board of Directors to serve for a term of one year or until their respective successors are elected, except in the case of death, resignation or removal. Messrs. Eline, Keller, Maxwell, and Sherrard have served in the executive capacities indicated above opposite their respective names during each of the past five years.
Mr. Williams has been a Director since January 2015; Chief Executive Officer since February 2015; and Chairman of the Board since January 2016. He was an Executive Vice President from August 2008 to February 2015 and an Operating Officer from November 2006 to February 2015. He is also a Director of Chart Industries, Inc.
Mr. Banks has been a Director since January 2015 and President and Chief Operating Officer since February 2015. He was an Executive Vice President from August 2008 to February 2015 and an Operating Officer from November 2006 to February 2015. He is also a Director of Nordson Corporation.
Ms. Suever has been Executive Vice President - Finance & Administration and Chief Financial Officer since April 2017. She was Vice President and Controller from December 2010 to April 2017.
Mr. Hart has been Executive Vice President - Human Resources & External Affairs since January 2016. He was Vice President - Total Rewards from August 2013 to January 2016; and Area Vice President - Human Resources of the Fluid Connectors Group, Filtration Group and Climate and Industrial Controls Group from October 2010 to August 2013.
Mr. Bond has been Vice President since August 2017. He was Vice President - eBusiness, IoT and Services from September 2015 until July 2017; Vice President from July 2000 to September 2015; and President of the Fluid Connectors Group from March 2005 to September 2015.
Mr. Bowman has been Vice President and President - Instrumentation Group since September 2016. He was Vice President, Operations - Filtration Group from March 2015 to August 2016; and Vice President, Operations - Fluid Connectors Group from November 2007 to February 2015.

14


Mr. Chung has been Vice President - eBusiness, IoT and Services since August 2017. He was President of the Automation Group from July 2012 until July 2017; and has been a Vice President since March 2008. He was President of the Asia Pacific Group from March 2008 to July 2012.
Mr. Gentile has been Vice President - Global Supply Chain since July 2017. He was General Manager of the Company's domnick hunter Process Filtration Division from December 2013 to July 2017; and Vice President, Supply Chain - Filtration Group from July 2008 to December 2013.
Mr. Leombruno has been Vice President and Controller since July 2017. He was Vice President and Controller - Engineered Materials Group from January 2015 to June 2017; and Director of Investor Relations from June 2012 to December 2014.
Mr. Leonti has been Vice President, General Counsel and Secretary since July 2014. He was Assistant Secretary from April 2011 to July 2014; and Associate General Counsel from January 2008 to July 2014.
Mr. Malone has been Vice President and President of the Filtration Group since December 2014. He was Vice President - Operations of the Filtration Group from January 2013 to December 2014; and President and Chief Executive Officer of Purolator Filters (a German joint venture) from April 2006 to January 2013.
Ms. Parmentier has been Vice President and President of the Engineered Materials Group since September 2015. She was General Manager of the Hose Products Division from May 2014 to September 2015; General Manager of the Sporlan Division from May 2012 to May 2014; and Business Unit Manager of the Sporlan Division from December 2008 to May 2012.
Mr. Ross has been Vice President since July 2012 and President of the Fluid Connectors Group since September 2015. He was President of the Engineered Materials Group from July 2012 to September 2015; Vice President - Operations of the Hydraulics Group from July 2011 to July 2012; and General Manager of the Hydraulic Valve Division from June 2007 to July 2011.
Mr. Weeks has been Vice President and President of the Motion Systems Group since September 2015. He was Vice President - Operations of the Aerospace Group from April 2013 to September 2015; and Senior Vice President and General Manager of the Fluid and Electrical Distribution Division of Eaton Corporation plc (power management company) from July 2003 to April 2013.

ITEM 2. Properties. The Company’s corporate headquarters is located in Cleveland, Ohio, and, at June 30, 2017, the Company had 336 manufacturing plants, 133 distribution centers and 157 sales and administrative offices throughout the world, none of which were individually material to its operations. The facilities are situated in 41 states within the United States and in 49 other countries. The Company owns the majority of its manufacturing plants and its leased properties primarily consist of sales and administrative offices and distribution centers. The number of facilities used by each of the Company’s operating segments is summarized by type and geographic location in the tables below:
 
 
Type of Facility
 
Manufacturing
Plants
 
Distribution
Centers
 
Sales and
Administrative Offices
Diversified Industrial
318

 
129

 
143

Aerospace Systems
18

 
4

 
14

Total
336

 
133

 
157

 
 
Geographic Location
 
North America
 
Europe
 
Asia-Pacific
 
Latin America
Diversified Industrial
296

 
165

 
117

 
12

Aerospace Systems
30

 
4

 
2

 

Total
326

 
169

 
119

 
12







15



Several facilities are shared between the Company’s operating segments. To avoid double counting, each shared facility is counted once, primarily in the Diversified Industrial Segment.
The Company believes that its properties have been adequately maintained, are in good condition generally and are suitable and adequate for its business as presently conducted. The extent to which the Company uses its properties varies by property and from time to time. The Company believes that its restructuring efforts have brought capacity levels closer to present and anticipated needs. Most of the Company’s manufacturing facilities remain capable of handling volume increases.


ITEM 3. Legal Proceedings. None.

ITEM 4. Mine Safety Disclosures. Not applicable.

PART II



ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a)
Market for the Registrant’s Common Equity. The Company’s common stock is listed for trading on the New York Stock Exchange (NYSE) under the symbol "PH". Information regarding stock price as reported on the NYSE and dividend information with respect to the Company’s common stock, is included in the table below.
(In dollars)
 
1st

 
2nd

 
3rd

 
4th

 
Fiscal Year

2017
High
$
126.59

 
$
145.44

 
$
161.23

 
$
166.60

 
$
166.60

 
Low
105.00

 
118.77

 
139.92

 
151.17

 
105.00

 
Dividends
0.63

 
0.63

 
0.66

 
0.66

 
2.58

 
 
 
 
 
 
 
 
 
 
 
2016
High
$
117.98

 
$
108.00

 
$
113.51

 
$
117.78

 
$
117.98

 
Low
94.64

 
93.47

 
83.32

 
99.10

 
83.32

 
Dividends
0.63

 
0.63

 
0.63

 
0.63

 
2.52

 
 
 
 
 
 
 
 
 
 
 
2015
High
$
127.60

 
$
133.41

 
$
129.54

 
$
125.33

 
$
133.41

 
Low
105.91

 
99.82

 
115.86

 
115.65

 
99.82

 
Dividends
0.48

 
0.63

 
0.63

 
0.63

 
2.37

As of July 31, 2017, the number of shareholders of record of the Company was 3,519.
(b)
Use of Proceeds. Not Applicable.










16



(c)
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
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
April 1, 2017 through April 30, 2017
 
96,400

 
$
158.85

 
96,400

 
17,559,246

May 1, 2017 through May 31, 2017
 
110,000

 
$
158.39

 
110,000

 
17,449,246

June 1, 2017 through June 30, 2017
 
108,919

 
$
158.44

 
108,919

 
17,340,327

Total:
 
315,319

 
$
158.55

 
315,319

 
17,340,327

 
(1)
On August 16, 1990, the Company publicly announced that its Board of Directors authorized the repurchase by the Company of up to 3 million shares of its common stock. From time to time thereafter, the Board of Directors has adjusted the overall maximum number of shares authorized for repurchase under this program. On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under this program so that, beginning on such date, the 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 year. There is no expiration date for this program.



ITEM 6. Selected Financial Data.
(Amounts in thousands, except per share information)
 
2017
 
2016
 
2015
 
2014
 
2013
Net sales
 
$
12,029,312

 
$
11,360,753

 
$
12,711,744

 
$
13,215,971

 
$
13,015,704

Net income attributable to common shareholders
 
983,412

 
806,840

 
1,012,140

 
1,041,048

 
948,427

Basic earnings per share
 
7.37

 
5.96

 
7.08

 
6.98

 
6.36

Diluted earnings per share
 
7.25

 
5.89

 
6.97

 
6.87

 
6.26

Cash dividends per share
 
$
2.58

 
$
2.52

 
$
2.37

 
$
1.86

 
$
1.70

Total assets (1)
 
15,489,904

 
12,034,142

 
12,254,279

 
13,249,907

 
12,490,956

Long-term debt (1)
 
4,861,895

 
2,652,457

 
2,698,957

 
1,498,234

 
1,484,438


(1) Amounts revised to present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of that debt liability in accordance with Accounting Standards Update 2015-03. Refer to Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information.

17



ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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, including the integration of Clarcor; 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;
availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;
ability to manage costs related to insurance and employee retirement and health care benefits;
compliance costs associated with environmental laws and regulations;
potential labor disruptions;
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, 2017, and undertakes no obligation to update them unless otherwise required by law.













18



Overview

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, 2017

 
March 31, 2017

 
June 30, 2016

United States
57.8

 
57.2

 
52.8

Eurozone countries
57.4

 
56.2

 
52.8

China
50.4

 
51.2

 
48.6

Brazil
50.5

 
49.6

 
43.2

 
Global aircraft miles flown increased by approximately six percent and global revenue passenger miles increased approximately seven percent from their comparable 2016 levels. 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 2017 will increase slightly from the comparable fiscal 2016 level.
 
Housing starts in June 2017 were unchanged from housing starts in March 2017 but were two percent higher than housing starts in June 2016.

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.

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.

19



During 2017, the Company completed three acquisitions, including the acquisition of Clarcor which is further discussed in Note 2 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 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 the financial statements presented in Part II, Item 8 of this Annual Report on Form 10-K. The term "year" and references to specific years refer to the applicable fiscal year.


Discussion of Consolidated Statement of Income

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

(dollars in millions)
 
2017
 
2016
 
2015
Net sales
 
$
12,029

 
$
11,361

 
$
12,712

Gross profit margin
 
23.6
%
 
22.3
%
 
24.0
%
Selling, general and administrative expenses
 
$
1,454

 
$
1,359

 
$
1,545

Selling, general and administrative expenses, as a percent of sales
 
12.1
%
 
12.0
%
 
12.2
%
Interest expense
 
162

 
137

 
118

Other (income), net
 
(61
)
 
(62
)
 
(43
)
(Gain) loss on disposal of assets
 
(43
)
 
(11
)
 
4

Effective tax rate
 
26.0
%
 
27.6
%
 
29.3
%
Net income attributable to common shareholders
 
$
983

 
$
807

 
$
1,012


Net sales in 2017 were 5.9 percent higher than 2016. The increase in net sales in 2017 was primarily a result of acquisitions made in the last 12 months (which contributed approximately $558 million in sales in 2017) and an increase in volume in both the Diversified Industrial International operations and the Aerospace Systems Segment, partially offset by the effect of currency rate changes (which decreased net sales in 2017 by approximately $84 million). Net sales in 2016 were 10.6 percent lower than 2015. The decrease in net sales in 2016 was primarily due to a decrease in volume in both the Diversified Industrial North American and Diversified Industrial International operations and the effect of currency rate changes (which decreased net sales in 2016 by approximately $403 million), partially offset by sales from acquisitions (which contributed approximately $42 million in sales in 2016).

Gross profit margin increased in 2017 primarily due to lower operating expenses resulting from the Company's simplification initiative and other restructuring activities, primarily experienced in the Diversified Industrial Segment, partially offset by lower margins in the Aerospace Systems Segment and higher amortization expense in the Diversified Industrial Segment. Gross profit margin decreased in 2016 primarily due to both lower sales volume, resulting in manufacturing inefficiencies, and higher business realignment charges in the Diversified Industrial Segment, partially offset by a favorable product mix and lower engineering costs 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 2017, 2016 and 2015 was $8.1 million, $22.7 million and $(77.8) million, respectively. Pension cost included in cost of sales in 2017, 2016 and 2015 was $135.0 million, $172.4 million and $169.8 million, respectively. Included in cost of sales in 2017, 2016 and 2015 were business realignment charges of $35.9 million, $76.2 million and $19.4 million, respectively.

Selling, general and administrative expenses increased 7.0 percent in 2017 and decreased 12.0 percent in 2016. The increase in 2017 was primarily due to higher amortization expense resulting from current-year acquisitions and higher acquisition expenses partially offset by lower expenses resulting from the Company's simplification initiative, lower expenses associated with the Company's deferred compensation program and lower professional services expenses. The decrease in 2016 was primarily due to lower research and development expenses, lower incentive compensation expense and lower stock compensation expense, partially offset by higher business realignment charges. Pension cost included in selling, general and administrative expenses in 2017, 2016 and 2015 was $65.8 million, $74.4 million and $69.6 million, respectively. Included in

20


selling, general and administrative expenses in 2017, 2016 and 2015 were business realignment charges of $19.7 million, $21.1 million and $12.9 million, respectively.

Interest expense in 2017 increased primarily due to higher weighted-average borrowings partially offset by lower weighted-average interest rates. Interest expense in 2016 increased primarily due to higher weighted-average borrowings and higher weighted-average interest rates.

Other (income), net in 2017, 2016 and 2015 includes $42.4 million, $25.6 million and $23.2 million of income, respectively, related to the Company's equity interests in joint ventures.

(Gain) loss on disposal of assets includes a gain of $42 million related to the sale of a product line in 2017 and a gain of $11.5 million related to the sale of businesses in 2016.

Effective tax rate in 2017 was favorably impacted by an increase of discrete tax benefits, mostly related to stock-based compensation expense. The effective tax rate in 2016 was favorably impacted by an increase of discrete tax benefits, an increase in the U.S. Research and Development credit, and an increase in the U.S. Foreign Tax Credit. These benefits were partially offset by an unfavorable geographic mix of earnings.

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.

Diversified Industrial Segment (dollars in millions)
 
2017
 
2016
 
2015
Sales
 
 
 
 
 
North America
$
5,367

 
$
4,955

 
$
5,716

International
4,378

 
4,145

 
4,741

Operating income
 
 
 
 
 
North America
874

 
790

 
956

International
579

 
448

 
584

Operating income as a percent of sales
 
 
 
 
 
North America
16.3
%
 
15.9
%
 
16.7
%
International
13.2
%
 
10.8
%
 
12.3
%
Backlog
$
2,041

 
$
1,455

 
$
1,586

Assets
13,367

 
8,729

 
8,735

Return on average assets
13.1
%
 
14.2
%
 
16.9
%

Sales in 2017 for the Diversified Industrial North American operations increased 8.3 percent from 2016 compared to decreasing 13.3 percent between 2015 and 2016. Acquisitions completed within the last 12 months contributed approximately $436 million in sales in 2017 and the effect of currency exchange rates decreased sales in 2017 by $17 million. Excluding acquisitions and the effect of currency rate changes, sales in 2017 in the Diversified Industrial North American operations remained flat from 2016 reflecting higher demand from distributors being offset by lower demand from end-users in the heavy-duty truck, cars and light trucks, life sciences, and oil and gas markets. Excluding acquisitions and the effect of currency rate changes, sales in 2016 in the Diversified Industrial North American operations decreased 12.4 percent from 2015 reflecting lower demand from distributors and end-users in most markets. The markets that experienced the largest decline in end-user demand were the oil and gas, construction equipment and farm and agriculture equipment markets.

Sales in the Diversified Industrial International operations increased 5.6 percent in 2017 after a decrease of 12.6 percent from 2015 to 2016. Acquisitions completed within the last 12 months contributed approximately $121 million in sales in 2017. The effect of currency rate changes decreased sales by $66 million, reflecting the strengthening of the U.S. dollar primarily against currencies in the United Kingdom, the Eurozone countries and China. Excluding acquisitions and the effect of currency rate changes, sales in 2017 in the Diversified Industrial International operations increased 4.3 percent from 2016, primarily due to higher volume in the Asia Pacific region and Latin America, partially offset by lower volume in Europe. Within the Asia Pacific region, higher demand was experienced from distributors as well as end-users in the semiconductor, cars and light

21


trucks, telecommunications, construction equipment and engine markets. Within Latin America, higher demand was experienced from distributors and end-user demand in the agriculture equipment market. Within Europe, higher demand from distributors and end-user demand in the construction equipment, forestry, and miscellaneous manufacturing markets was more than offset by lower end-user demand in the general industrial machinery, oil and gas, and marine markets. Excluding acquisitions and the effect of currency rate changes, sales in 2016 in the Diversified Industrial International operations decreased 6.1 percent from 2015, primarily due to lower volume in all regions, with approximately 55 percent of the decrease occurring in Europe and approximately 35 percent of the decrease occurring in the Asia Pacific region. Within these regions, the largest decrease in sales was experienced from distributors and end-users in the oil and gas, marine, engine, and construction equipment markets.

The increase in operating margins in 2017 in the Diversified Industrial North American operations was primarily due to lower operating expenses resulting from the Company's simplification initiative and other restructuring activities, resulting in manufacturing efficiencies, partially offset by higher acquisition-related expenses and higher amortization expense. The increase in operating margins in 2017 in the Diversified Industrial International operations was primarily due to the higher sales volume, lower operating expenses resulting from restructuring activities and the Company's simplification initiative, resulting in manufacturing efficiencies. The decrease in operating margins in 2016 in the Diversified Industrial North American operations was primarily due to the lower sales volume and higher business realignment charges, partially offset by lower operating expenses primarily resulting from the Company's simplification initiative. The decrease in operating margins in 2016 in the Diversified Industrial International operations was primarily due to the lower sales volume, an unfavorable product mix and higher business realignment charges, partially offset by lower operating expenses primarily resulting from the Company's simplification initiative and prior-year restructuring activities.

The following business realignment charges are included in Diversified Industrial North America and Diversified Industrial International operating income:
   
(dollars in millions)
 
2017
 
2016
 
2015
Diversified Industrial North America
 
$
20

 
$
31

 
$
4

Diversified Industrial International
 
33

 
60

 
27


The business realignment charges consist primarily 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. The majority of the Diversified Industrial International business realignment charges were incurred in Europe. In addition to the business realignment charges presented in the table above, the Company recognized $12 million of expense associated with enhanced retirement benefits in connection with a plant closure during 2016. The Company anticipates that cost savings realized from the work force reduction measures taken during 2017 will increase 2018 operating income by approximately three percent in the Diversified Industrial North American operations and by approximately four percent in the Diversified Industrial International operations. In 2018, the Company expects to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment, including the integration of 2017 acquisitions. Such actions are expected to result in approximately $110 million in charges in 2018.

The Company anticipates Diversified Industrial North American sales for 2018 will increase between 19 and 23 percent from the 2017 level and Diversified Industrial International sales for 2018 will increase between eight percent and 12 percent from the 2017 level. The primary driver for the increase in sales in 2018 in both the Diversified Industrial North American and Diversified Industrial International businesses is expected to be the sales contribution from 2017 acquisitions. Diversified Industrial North American operating margins in 2018 are expected to range from 16.1 percent to 16.5 percent and Diversified Industrial International margins are expected to range from 13.4 percent to 13.8 percent.

The increase in total Diversified Industrial Segment backlog in 2017 was primarily due to current-year acquisitions as well as orders exceeding shipments in all regions, with North America and Europe each accounting for approximately 40 percent of the increase. The decrease in total Diversified Industrial Segment backlog in 2016 was primarily due to shipments exceeding orders primarily in North America and Europe, with North America accounting for approximately 70 percent of the decrease and Europe accounting for approximately 30 percent of the decrease. 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.


22


The increase in total Diversified Industrial Segment assets in 2017 was primarily due to current-year acquisitions, partially offset by the effect of currency rate fluctuations. The decrease in total Diversified Industrial Segment assets in 2016 was primarily due to the effect of currency rate fluctuations and a decrease in prepaid expenses, inventory, intangible assets, trade accounts receivable, net and plant and equipment, net, partially offset by an increase in marketable securities and other investments, cash and cash equivalents, deferred income taxes and goodwill.


Aerospace Systems Segment (dollars in millions)
    
 
2017
 
2016
 
2015
Sales
$
2,285

 
$
2,260

 
$
2,255

Operating income
337

 
338

 
299

Operating income as a percent of sales
14.8
%
 
14.9
%
 
13.3
%
Backlog
$
1,753

 
$
1,762

 
$
1,756

Assets
1,413

 
1,431

 
1,376

Return on average assets
23.7
%
 
24.1
%
 
21.9
%

Sales in 2017 were higher than the 2016 level primarily due to higher volume in the military original equipment manufacturer ("OEM") and commercial and military aftermarket businesses, partially offset by lower volume in the commercial OEM business. Sales in 2016 were higher than the 2015 level as higher volume in the military OEM and commercial and military aftermarket businesses was partially offset by lower volume in the commercial OEM business.

The slightly lower margin in 2017 was primarily due to an unfavorable OEM product mix, higher warranty-related costs, higher favorable contract settlements in 2016, and higher business realignment expenses, partially offset by higher aftermarket profitability and lower engineering development and operating expenses. The higher margin in 2016 was primarily due to a favorable product mix, favorable contract settlements, lower engineering development expenses and lower operating costs.

The decrease in backlog in 2017 was primarily due to shipments exceeding orders in the commercial and military OEM businesses, partially offset by orders exceeding shipments in the commercial and military aftermarket businesses. The increase in backlog in 2016 was primarily due to orders exceeding shipments in the military OEM and commercial and military aftermarket businesses, partially offset by shipments exceeding orders in the commercial OEM business. 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.

For 2018, sales are expected to increase between one percent and three percent from the 2017 level and operating margins are expected to range from 15.5 percent to 15.9 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 decrease in assets in 2017 was primarily due to a decrease in trade accounts receivable, intangible assets and other assets, partially offset by an increase in cash and cash equivalents and inventory. The increase in assets in 2016 was primarily due to an increase in trade accounts receivable, net and other assets, partially offset by a decrease in inventory.

Corporate general and administrative expenses were $172.6 million in 2017 compared to $173.2 million in 2016 and $215.4 million in 2015. As a percent of sales, corporate general and administrative expenses in 2017 were 1.4 percent of sales compared to 1.5 percent in 2016 and 1.7 percent in 2015. The lower expense in 2017 was primarily due to lower expenses associated with the Company's deferred compensation program as well as lower professional services fees. The lower expense in 2016 was primarily due to a decrease in research and development expense and lower incentive compensation expense.

Corporate assets decreased 62.1 percent in 2017 compared to a decrease of 12.5 percent from 2015 to 2016. The decrease in Corporate assets in 2017 was primarily due to decreases in cash and cash equivalents, marketable securities and non-current deferred taxes. Decreases in these assets in 2017 primarily resulted from the Clarcor acquisition. The decrease in Corporate assets in 2016 was primarily due to decreases in marketable securities and other investments, non-trade and notes receivable, cash and cash equivalents and the effect of currency rate fluctuations, partially offset by an increase in deferred income taxes.



23



Other expense (in the Business Segment Information)
(dollars in millions)
2017
 
2016
 
2015
Foreign currency transaction
$
8

 
$
23

 
$
(78
)
Stock-based compensation
52

 
49

 
57

Pensions
78

 
116

 
97

Divestitures and asset sales and writedowns
(43
)
 
(11
)
 
4

Interest income
(12
)
 
(18
)
 
(15
)
Acquisition expenses
41

 

 

Other items, net
3

 
(8
)
 
7

 
$
127

 
$
151

 
$
72

Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities and other investments and intercompany transactions. The lower pension expense in 2017 is primarily due to the use of the spot yield curve approach to estimate the interest cost component of net periodic pension cost. Previously, this cost component of net periodic pension cost was estimated using a single-weighted average discount rate. Divestitures and asset sales and writedowns in 2017 includes a gain on the sale of the Company's Autoline product line. Acquisition expenses in 2017 primarily relate to the Clarcor acquisition (see Note 2 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion).

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)
 
2017
 
2016
Cash
 
$
924

 
$
2,104

Trade accounts receivable, net
 
1,931

 
1,594

Inventories
 
1,549

 
1,173

Deferred income tax asset
 
36

 
605

Intangible assets
 
2,307

 
923

Goodwill
 
5,587

 
2,903

Notes payable and long-term debt payable within one year
 
1,008

 
362

Long-term debt
 
4,862

 
2,652

Shareholders' equity
 
5,262

 
4,575

Working capital
 
$
1,384

 
$
2,842

Current ratio
 
1.4

 
2.2

Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $874 million and $2,065 million held by the Company's foreign subsidiaries at June 30, 2017 and June 30, 2016, 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. During 2017, the Company utilized approximately $1,774 million in cash from its foreign subsidiaries principally to fund the acquisition of Clarcor stock and foreign assets. 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 51 days in 2017 and 49 days in 2016. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.



24




Inventories increased $376 million from 2016 primarily due to acquisitions (which accounted for an increase of $295 million), as well an increase in inventories in the Diversified Industrial International businesses and the Aerospace Systems Segment. Days supply of inventory on hand was 67 days in 2017 and 62 days in 2016.

Deferred income tax asset as of June 30, 2017 decreased compared to June 30, 2016 primarily as a result of the Clarcor acquisition. Refer to Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Intangible assets and goodwill as of June 30, 2017 both increased compared to June 30, 2016 primarily due to current-year acquisitions. Refer to Note 7 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Notes payable and long-term debt payable within one year and long-term debt as of June 30, 2017 increased from the June 30, 2016 amounts due primarily to new debt issuances as well as higher commercial paper notes outstanding. Refer to Notes 8 and 9 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Shareholders' equity activity during 2017 included a decrease of $265 million related to share repurchases, a decrease of $82 million related to foreign currency translation adjustments and an increase of $385 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)
 
2017
 
2016
 
2015
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
1,302

 
$
1,211

 
$
1,363

Investing activities
 
(3,365
)
 
(265
)
 
(579
)
Financing activities
 
1,783

 
(843
)
 
(1,106
)
Effect of exchange rates
 
(57
)
 
(62
)
 
(111
)
Net (decrease) increase in cash and cash equivalents
 
$
(337
)
 
$
41

 
$
(433
)

Cash Flows From Operating Activities in 2017 reflects an increase in net income from 2016 of $177 million and a reduction of $28 million for cash used by working capital items. Cash flows from operating activities in 2016 reflects a decrease in net income from 2015 of $205 million and an increase of $120 million for cash provided by working capital items. Cash flows from operating activities in 2015 reflects a reduction of $257 million for cash used by working capital items. The Company also made voluntary cash contributions to the Company's domestic qualified defined benefit plan of $220 million in 2017 and $200 million in 2016.

Cash Flows Used In Investing Activities in 2017 includes $4,069 million related to acquisition activity, primarily related to Clarcor. Cash flows used in investing activities in 2017, 2016 and 2015 includes $814 million, $(51) million and $(356) million, respectively, in net maturities (purchases) of marketable securities and other investments.

Cash Flows Used In Financing Activities during 2017 included the issuance of approximately $2,646 million of notional borrowings of long-term debt as well as the repayment of long-term debt of approximately $381 million, which includes debt assumed in the Clarcor acquisition. The Company repurchased 2.0 million common shares for $265 million during 2017 as compared to the repurchase of 5.1 million common shares for $558 million in 2016 and 11.1 million common shares for $1,394 million in 2015.



25


Dividends have been paid for 268 consecutive quarters, including a yearly increase in dividends for the last 61 years. The current annual dividend rate is $2.64 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. In periods following significant capital deployment, including for share repurchases or acquisitions, certain of the ratings assigned to the Company's senior debt may be, and at June 30, 2017 were, lower than the stated goal. The Company's ability to borrow funds at desirable tenors and interest rates in February 2017 was not significantly impacted by certain ratings on senior debt that were below an "A" level. The Company does not believe that its ability to borrow funds in the future at desirable tenors and affordable interest rates will be impacted if certain of its ratings are below an "A" level at the time of such borrowings. At June 30, 2017, 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
 
A-
Moody's Investor Services, Inc.
 
Baa1
Standard & Poor's
 
A

As of June 30, 2017, the Company had a line of credit totaling $2,000 million through a multi-currency revolving credit agreement with a group of banks, $1,466 million of which was available at June 30, 2017. Refer to Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

The Company is currently authorized to sell up to $2,000 million of short-term commercial paper notes. There were $534 million outstanding commercial paper notes as of June 30, 2017, and the largest amount of commercial paper notes outstanding during the last quarter of 2017 was $827 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.

Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $163 million at June 30, 2017. 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 in Part II, Item 8 of this Annual Report on Form 10-K.

(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)
 
$
5,383

 
$
475

 
$
569

 
$
114

 
$
4,225

Interest on long-term debt
 
2,649

 
190

 
318

 
299

 
1,842

Operating leases (Note 9)
 
239

 
81

 
92

 
34

 
32

Retirement benefits (Note 10)
 
123

 
75

 
12

 
11

 
25

Total
 
$
8,394

 
$
821

 
$
991

 
$
458

 
$
6,124


Off-Balance Sheet Arrangements

The Company does not have off-balance sheet arrangements.










26





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 judgment on the part of management due to the duration of 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 2017 annual goodwill impairment test performed as of December 31, 2016 indicated that no goodwill impairment existed. 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 2017, 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.

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. Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to

27


relevant cash outflows. Previously, these costs were determined using a single-weighted average discount rate. The change does not affect the measurement of the Company's benefit obligations. The new method provides a more precise measure of service and interest costs by improving the correlation between projected benefit cash flows and the discrete spot yield curve rates and was accounted for as a change in estimate prospectively beginning in the first quarter of 2017. Annual net periodic pension expense in 2017 was lower by approximately $30 million compared to the previous method. Annual net periodic postretirement cost was not materially different.

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 a $14 million effect on annual pension expense and a 50 basis point decrease in the discount rate is estimated to increase annual pension expense by $26 million. As of June 30, 2017, $1,081 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 seven 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 in Part II, Item 8 of this Annual Report on Form 10-K.

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 in Part II, Item 8 of this Annual Report on Form 10-K.

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
Recently issued accounting pronouncements are described in Note 1 to the Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.


ITEM 7A. 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 Part II, Item 8 of this Annual Report on Form 10-K. 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, 2017 by approximately $12 million.


28




29



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Parker-Hannifin Corporation
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of Parker-Hannifin Corporation and subsidiaries (the "Company") as of June 30, 2017 and 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended June 30, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited the Company's internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.
As described in Management's Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at three entities, which were acquired on various dates during the year ended June 30, 2017, and whose financial statements constitute approximately 32.0 percent and 4.7 percent of total assets and net sales, respectively, of the consolidated financial statement amounts as of and for the year ended June 30, 2017. Accordingly, our audit did not include the internal control over financial reporting at the three entities acquired during the year ended June 30, 2017.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.







30



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Parker-Hannifin Corporation and subsidiaries as of June 30, 2017 and 2016, the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.


/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
August 25, 2017

31



Consolidated Statement of Income

 
 
For the years ended June 30,
(Dollars in thousands, except per share amounts)
 
2017

 
2016

 
2015

Net Sales
 
$
12,029,312

 
$
11,360,753

 
$
12,711,744

Cost of sales
 
9,188,962

 
8,823,384

 
9,655,245

Gross profit
 
2,840,350

 
2,537,369

 
3,056,499

Selling, general and administrative expenses
 
1,453,935

 
1,359,360

 
1,544,746

Interest expense
 
162,436

 
136,517

 
118,406

Other (income), net
 
(61,401
)
 
(62,199
)
 
(43,374
)
(Gain) loss on disposal of assets (Note 2)
 
(43,261
)
 
(11,037
)
 
4,481

Income before income taxes
 
1,328,641

 
1,114,728

 
1,432,240

Income taxes (Note 4)
 
344,797

 
307,512

 
419,687

Net Income
 
983,844

 
807,216

 
1,012,553

Less: Noncontrolling interest in subsidiaries' earnings
 
432

 
376

 
413

Net Income Attributable to Common Shareholders
 
$
983,412

 
$
806,840

 
$
1,012,140

 
 
 
 
 
 
 
Earnings per Share Attributable to Common Shareholders (Note 5)
 
 
 
 
 
 
Basic earnings per share
 
$
7.37

 
$
5.96

 
$
7.08

Diluted earnings per share
 
$
7.25

 
$
5.89

 
$
6.97


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

32


Consolidated Statement of Comprehensive Income

 
 
For the years ended June 30,
(Dollars in thousands)
 
2017

 
2016

 
2015

Net Income
 
$
983,844

 
$
807,216

 
$
1,012,553

Less: Noncontrolling interests in subsidiaries' earnings
 
432

 
376

 
413

Net income attributable to common shareholders
 
983,412

 
806,840

 
1,012,140

 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 Foreign currency translation adjustment and other (net of tax of $40,935, $(2,342) and $(31,024) in 2017, 2016 and 2015)
 
(80,865
)
 
(203,299
)
 
(765,659
)
  Retirement benefits plan activity (net of tax of $(218,590), $152,203 and $88,547 in 2017, 2016 and 2015)
 
384,784

 
(286,044
)
 
(149,710
)
      Other comprehensive income (loss)
 
303,919

 
(489,343
)
 
(915,369
)
Less: Other comprehensive income (loss) for noncontrolling interests
 
358

 
(196
)
 
(249
)
Other comprehensive income (loss) attributable to common shareholders
 
303,561

 
(489,147
)
 
(915,120
)
Total Comprehensive Income Attributable to Common Shareholders
 
$
1,286,973

 
$
317,693

 
$
97,020


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


33


Business Segment Information

(Dollars in thousands)
 
2017

 
2016

 
2015

Net Sales:
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
North America
 
$
5,366,809

 
$
4,955,211

 
$
5,715,742

International
 
4,377,776

 
4,145,272

 
4,741,376

Aerospace Systems
 
2,284,727

 
2,260,270

 
2,254,626

 
 
$
12,029,312

 
$
11,360,753

 
$
12,711,744

Segment Operating Income:
 
 
 
 
 
 
Diversified Industrial:
 
 
 
 
 
 
North America
 
$
873,552

 
$
789,667

 
$
955,501

International
 
579,207

 
448,457

 
583,937

Aerospace Systems
 
337,496

 
337,531

 
298,994

Total segment operating income
 
1,790,255

 
1,575,655

 
1,838,432

Corporate administration
 
172,632

 
173,203

 
215,396

Income before interest expense and other
 
1,617,623

 
1,402,452

 
1,623,036

Interest expense
 
162,436

 
136,517

 
118,406

Other expense
 
126,546

 
151,207

 
72,390

Income before income taxes
 
$
1,328,641

 
$
1,114,728

 
$
1,432,240

 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Diversified Industrial
 
$
13,366,981

 
$
8,728,671

 
$
8,734,942

Aerospace Systems (a)
 
1,412,707

 
1,430,577

 
1,375,845

Corporate (b)
 
710,216

 
1,874,894

 
2,143,492

 
 
$
15,489,904

 
$
12,034,142

 
$
12,254,279

 
 
 
 
 
 
 
Property Additions:
 
 
 
 
 
 
Diversified Industrial
 
$
148,765

 
$
134,618

 
$
190,580

Aerospace Systems
 
16,929

 
10,857

 
18,427

Corporate
 
38,054

 
3,932

 
6,520

 
 
$
203,748

 
$
149,407

 
$
215,527

 
 
 
 
 
 
 
Depreciation:
 
 
 
 
 
 
Diversified Industrial
 
$
176,823

 
$
163,014

 
$
174,102

Aerospace Systems
 
17,484

 
18,469

 
19,509

Corporate
 
8,561

 
8,825

 
9,165

 
 
$
202,868

 
$
190,308

 
$
202,776







34


(Dollars in thousands)
 
2017

 
2016

 
2015

By Geographic Area (c)
 
 
 
 
 
 
Net Sales:
 
 
 
 
 
 
North America
 
$
7,585,689

 
$
7,144,481

 
$
7,891,571

International
 
4,443,623

 
4,216,272

 
4,820,173

 
 
$
12,029,312

 
$
11,360,753

 
$
12,711,744

Long-Lived Assets:
 
 
 
 
 
 
North America
 
$
1,145,127

 
$
817,872

 
$
856,947

International
 
792,165

 
750,228

 
807,075

 
 
$
1,937,292

 
$
1,568,100

 
$
1,664,022


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 (2017 - $240,182; 2016 - $241,728; 2015 - $251,365).
(b)
Amounts in 2016 and 2015 have been adjusted to reflect the retrospective adoption of Accounting Standards Update 2015-03 in the first quarter of 2017. 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)
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.


35


Consolidated Balance Sheet
(Dollars in thousands)
 
 
June 30,
 
2017

 
2016

Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents (Note 1)
 
$
884,886

 
$
1,221,653

Marketable securities and other investments (Note 1)
 
39,318

 
882,342

Trade accounts receivable, net (Note 1)
 
1,930,751

 
1,593,920

Non-trade and notes receivable (Note 1)
 
254,987

 
232,183

Inventories (Note 6)
 
1,549,494

 
1,173,329

Prepaid expenses
 
120,282

 
104,360

Total Current Assets
 
4,779,718

 
5,207,787

Plant and equipment (Note 1)
 
5,186,748

 
4,737,141

Less: Accumulated depreciation
 
3,249,456

 
3,169,041

Plant and equipment, net
 
1,937,292

 
1,568,100

Deferred income taxes (Notes 1 and 4)
 
36,057

 
605,155

Investments and other assets (Note 1)
 
842,475

 
827,492

Intangible assets, net (Notes 1 and 7)
 
2,307,484

 
922,571

Goodwill (Notes 1 and 7)
 
5,586,878

 
2,903,037

Total Assets
 
$
15,489,904

 
$
12,034,142

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current Liabilities
 
 
 
 
Notes payable and long-term debt payable within one year (Notes 8 and 9)
 
$
1,008,465

 
$
361,787

Accounts payable, trade
 
1,300,496

 
1,034,589

Accrued payrolls and other compensation
 
435,911

 
382,945

Accrued domestic and foreign taxes
 
153,137

 
127,597

Other accrued liabilities
 
497,851

 
458,970

Total Current Liabilities
 
3,395,860

 
2,365,888

Long-term debt (Note 9)
 
4,861,895

 
2,652,457

Pensions and other postretirement benefits (Note 10)
 
1,406,082

 
2,076,143

Deferred income taxes (Notes 1 and 4)
 
221,790

 
54,395

Other liabilities
 
336,931

 
306,581

Total Liabilities
 
10,222,558

 
7,455,464

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 2017 and 2016
 
90,523

 
90,523

Additional capital
 
543,879

 
628,451

Retained earnings
 
10,930,348

 
10,302,866

Accumulated other comprehensive (loss)
 
(1,924,204
)
 
(2,227,765
)
Treasury shares at cost: 47,854,475 in 2017 and 47,033,896 in 2016
 
(4,378,897
)
 
(4,218,820
)
Total Shareholders' Equity
 
5,261,649

 
4,575,255

Noncontrolling interests
 
5,697

 
3,423

Total Equity
 
5,267,346

 
4,578,678

Total Liabilities and Equity
 
$
15,489,904

 
$
12,034,142


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

36


Consolidated Statement of Cash Flows
 
 
For the years ended June 30,
(Dollars in thousands)
 
2017

 
2016

 
2015

Cash Flows From Operating Activities
 
 
 
 
 
 
Net income
 
$
983,844

 
$
807,216

 
$
1,012,553

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation
 
202,868

 
190,308

 
202,776

Amortization
 
152,361

 
116,535

 
114,715

Stock incentive plan compensation
 
80,339

 
71,293

 
96,093

Deferred income taxes
 
37,024

 
(65,686
)
 
18,865

Foreign currency transaction loss (gain)
 
8,060

 
22,750

 
(77,784
)
Loss on sale of plant and equipment
 
1,494

 
414

 
14,953

(Gain) on sale of businesses
 
(41,285
)
 
(10,666
)
 
(6,420
)
(Gain) loss on sale of marketable securities
 
(1,032
)
 
(723
)
 
3,817

Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
 
 
 
Accounts receivable
 
(95,347
)
 
17,549

 
143,179

Inventories
 
(73,673
)
 
120,243

 
(70,377
)
Prepaid expenses
 
2,410

 
136,034

 
(116,561
)
Other assets
 
(3,887
)
 
(5,033
)
 
20,976

Accounts payable, trade
 
174,761

 
(52,378
)
 
(86,750
)
Accrued payrolls and other compensation
 
5,922

 
(22,865
)
 
(12,657
)
Accrued domestic and foreign taxes
 
18,165

 
(6,285
)
 
(43,441
)
Other accrued liabilities
 
(59,738
)
 
(31,633
)
 
(8,770
)
Pensions and other postretirement benefits
 
(103,866
)
 
(45,796
)
 
156,859

Other liabilities
 
14,051

 
(30,499
)
 
1,207

Net cash provided by operating activities
 
1,302,471

 
1,210,778

 
1,363,233

Cash Flows From Investing Activities
 
 
 
 
 
 
Acquisitions (less cash acquired of $157,426 in 2017, $3,814 in 2016 and $8,332 in 2015)
 
(4,069,197
)
 
(67,552
)
 
(18,618
)
Capital expenditures
 
(203,748
)
 
(149,407
)
 
(215,527
)
Proceeds from sale of plant and equipment
 
14,648

 
18,821

 
19,655

Proceeds from sale of businesses
 
85,610

 
24,325

 
37,265

Purchase of marketable securities and other investments
 
(465,666
)
 
(1,351,464
)
 
(1,747,333
)
Maturities and sales of marketable securities and other investments
 
1,279,318

 
1,300,633

 
1,391,396

Other
 
(6,113
)
 
(39,995
)
 
(46,001
)
Net cash (used in) investing activities
 
(3,365,148
)
 
(264,639
)
 
(579,163
)
Cash Flows From Financing Activities
 
 
 
 
 
 
Proceeds from exercise of stock options
 
2,202

 
126

 
3,355

Payments for common shares
 
(338,078
)
 
(587,365
)
 
(1,436,309
)
Proceeds from (payments for) notes payable, net
 
230,499

 
303,624

 
(815,171
)
Proceeds from long-term borrowings
 
2,614,463

 
2,287

 
1,483,015

Payments for long-term borrowings
 
(381,078
)
 
(220,068
)
 
(537
)
Dividends paid
 
(345,380
)
 
(341,962
)
 
(340,389
)
Net cash provided by (used in) financing activities
 
1,782,628

 
(843,358
)
 
(1,106,036
)
Effect of exchange rate changes on cash
 
(56,718
)
 
(61,712
)
 
(111,005
)
Net (decrease) increase in cash and cash equivalents
 
(336,767
)
 
41,069