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MarketScreener Homepage  >  Equities  >  Nyse  >  Parker Hannifin    PH

PARKER HANNIFIN

(PH)
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PARKER HANNIFIN : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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08/23/2019 | 08:57am EDT
Forward-Looking Statements
Forward-looking statements contained in this and other written and oral reports
are made based on known events and circumstances at the time of release, and as
such, are subject in the future to unforeseen uncertainties and risks. All
statements regarding future performance, earnings projections, events or
developments are forward-looking statements. It is possible that the future
performance and earnings projections of the Company, including its individual
segments, may differ materially from current expectations, depending on economic
conditions within its mobile, industrial and aerospace markets, and the
Company's ability to maintain and achieve anticipated benefits associated with
announced realignment activities, strategic initiatives to improve operating
margins, actions taken to combat the effects of the current economic
environment, and growth, innovation and global diversification initiatives.
Additionally, the actual impact of changes in tax laws in the United States and
foreign jurisdictions and any judicial or regulatory interpretations thereof on
future performance and earnings projections may impact the Company's tax
calculations. A change in the economic conditions in individual markets may have
a particularly volatile effect on segment performance.
Among other factors which may affect future performance are:
•      global economic and political factors, including manufacturing activity,

air travel trends, currency exchange rates and monetary policy, trade

policy and tariffs, difficulties entering new markets and general economic

       conditions such as inflation, deflation, interest rates and credit
       availability;


•      our ability to identify acceptable strategic acquisition targets;

uncertainties surrounding timing, successful completion or integration of

acquisitions and similar transactions, including the integration of

CLARCOR Inc. ("Clarcor") and the proposed acquisitions of LORD Corporation

("Lord") and EMFCO Holdings Incorporated, parent company of Exotic Metals

Forming Company LLC ("Exotic"); ability to successfully divest businesses

       planned for divestiture and realize the anticipated benefits of such
       divestitures;

• our ability to effectively manage expanded operations from the acquisition

       of Clarcor or the proposed acquisitions of Lord and Exotic;


•      the determination to undertake business realignment activities and the
       expected costs thereof and, if undertaken, the ability to complete such

activities and realize the anticipated cost savings from such activities;

• increased cybersecurity threats and sophisticated computer crime;

• business relationships with and purchases by or from major customers,

suppliers or distributors, including delays or cancellations in shipments;

• the development of new products and technologies requiring substantial

investment;

• availability, limitations or cost increases of raw materials, component

products and/or commodities that cannot be recovered in product pricing;

• disputes regarding contract terms or significant changes in financial

       condition, changes in contract cost and revenue estimates for new
       development programs, and changes in product mix;

• uncertainties surrounding the ultimate resolution of outstanding legal and

regulatory proceedings, including the outcome of any appeals;

• additional liabilities relating to changes in tax rates or exposure to

additional income tax liabilities;

• potential product liability risks;

• our ability to enter into, own, renew and maintain intellectual property

and know-how;

• our leverage and future debt service obligations;

• potential impairment of goodwill;

• compliance costs associated with environmental laws and climate change

regulations;

• our ability to manage costs related to insurance and employee retirement

and health care benefits;

• compliance with federal rules, regulations, audits and investigations

       associated with being a provider of products to the United States
       government; and

• our ability to implement successfully the Company's capital allocation

initiatives, including timing, price and execution of share repurchases.

The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended June 30, 2019, and undertakes no obligation to update them unless otherwise required by law.

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Overview

The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.


Our order rates provide a near-term perspective of the Company's outlook
particularly when viewed in the context of prior and future order rates. The
Company publishes its order rates on a quarterly basis. The lead time between
the time an order is received and revenue is realized generally ranges from one
day to 12 weeks for mobile and industrial orders and from one day to 18 months
for aerospace orders. We believe the leading economic indicators of these
markets that have a 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, 2019    March 31, 2019    June 30, 2018
United States               50.6              55.3             60.2
Eurozone countries          47.6              47.5             54.9
China                       49.4              50.8             51.0
Brazil                      51.0              52.8             49.8



Global aircraft miles flown increased by approximately four percent and global
revenue passenger miles increased approximately five percent from their
comparable 2018 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 2019 will increase by approximately four percent
from its fiscal 2018 level.

Housing starts in June 2019 were 10 percent higher than housing starts in March 2019 and six percent higher than housing starts in June 2018.


We believe many opportunities for profitable growth are available. The Company
intends to focus primarily on business opportunities in the areas of energy,
water, food, environment, defense, life sciences, infrastructure and
transportation.

We believe we can meet our strategic objectives by: • Serving the customer and continuously enhancing its experience with the

Company;

• Successfully executing The Win Strategy initiatives relating to engaged

people, premier customer experience, profitable growth and financial

performance;

• Maintaining a decentralized division and sales company structure;

• Fostering a safety first and entrepreneurial culture;

• Engineering innovative systems and products to provide superior customer

value through improved service, efficiency and productivity;

• Delivering products, systems and services that have demonstrable savings

to customers and are priced by the value they deliver;

• Acquiring strategic businesses;

• Organizing around targeted regions, technologies and markets;

• Driving efficiency by implementing lean enterprise principles; and


•      Creating a culture of empowerment through our values, inclusion and
       diversity, accountability and teamwork.



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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. In addition, we will continue to assess our 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 the 2017 financial statements is included in Part II, Item 7
of the Company's 2018 Annual Report on Form 10-K.


CONSOLIDATED STATEMENT OF INCOME

The Consolidated Statement of Income summarizes the Company's operating performance over the last three years. The discussion below compares the operating performance in 2019 and 2018.

(dollars in millions)                                             2019           2018
Net sales                                                   $   14,320$   14,302
Gross profit margin                                               25.3 %         24.9 %
Selling, general and administrative expenses                $    1,544$    1,640
Selling, general and administrative expenses, as a
percent of sales                                                  10.8 %         11.5 %
Interest expense                                            $      190$      214
Other (income) expense, net                                        (61 )           13
Loss (gain) on disposal of assets                                   11             (4 )
Effective tax rate                                                21.7 %         37.7 %
Net income attributable to common shareholders              $    1,512

$ 1,061




Net sales in 2019 increased slightly from the 2018 amount. This change was a
result of an increase in volume, primarily in the Aerospace Systems Segment,
partially offset by the effect of currency rate changes. The effect of currency
rate changes decreased net sales in 2019 by approximately $305 million, of which
$285 million was attributable to the Diversified Industrial International
operations.

Gross profit margin (calculated as net sales less cost of sales, divided by net
sales) increased in 2019 primarily due to higher margins in the Aerospace
Systems Segment driven by increased aftermarket and original equipment
manufacturer ("OEM") volume and profitability and lower engineering development
costs. Lower operating costs in the Diversified Industrial Segment resulting
from prior-year business realignment and acquisition integration activities and
the Company's simplification initiative also contributed to higher margins in
2019. Foreign currency transaction loss included in cost of sales for 2019 and
2018 was $5.9 million and $7.3 million, respectively. Included in cost of sales
in 2019 and 2018 were business realignment charges of $14.7 million and $44.9
million, respectively.

Selling, general and administrative expenses decreased 5.9 percent in 2019
primarily due to the benefits from prior-year business realignment and
acquisition integration activities and the Company's simplification initiative,
lower amortization expense and lower incentive compensation. These benefits were
partially offset by an increase in acquisition-related expenses and higher net
expense associated with the Company's deferred compensation program and related
investments. Included in selling, general and administrative expenses in 2019
and 2018 were business realignment charges of $13.2 million and $36.8 million,
respectively.

Interest expense in 2019 decreased primarily due to lower weighted-average interest rates, partially offset by higher weighted-average borrowings.

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Other (income) expense, net included the following: (dollars in millions) Expense (income)

                                     2019      2018

Income related to equity method investments $ (93 )$ (50 ) Non-service components of retirement benefit cost 40 42 Sale and writedown of investments

                       -        41
Interest income                                       (18 )     (15 )
Other items, net                                       10        (5 )
                                                    $ (61 )$  13

Loss (gain) on disposal of assets in 2018 includes a loss of $20 million on the sale of a business and a gain of $28 million on the sale of real estate.


Effective tax rate in 2019 was lower than 2018 primarily due to the net impact
of one-time adjustments that were recorded in the prior year as a result of the
U.S. Tax Cuts and Jobs Act ("TCJ Act") and the reduced U.S. income tax rate in
the current year resulting from enactment of the TCJ Act.


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)                       2019        2018
Sales
North America                            $ 6,809$ 6,727
International                              5,001       5,260
Operating income
North America                              1,139       1,076
International                                805         765
Operating income as a percent of sales
North America                               16.7 %      16.0 %
International                               16.1 %      14.5 %
Backlog                                  $ 2,011$ 2,167




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The Diversified Industrial Segment operations experienced the following percentage changes in net sales:

2019

Diversified Industrial North America - as reported                          1.2  %
Divestitures                                                               (0.3 )%
Currency                                                                  

(0.3 )% Diversified Industrial North America - without divestitures and currency 1.8 %


Diversified Industrial International - as reported                         (4.9 )%
Divestitures                                                               (0.6 )%
Currency                                                                  

(5.4 )% Diversified Industrial International - without divestitures and currency 1.1 %


Total Diversified Industrial Segment - as reported                         (1.5 )%
Divestitures                                                               (0.5 )%
Currency                                                                  

(2.5 )% Total Diversified Industrial Segment - without divestitures and currency 1.5 %



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

Sales in 2019 for the Diversified Industrial North American operations increased
1.2 percent from 2018. Divestitures and the effect of currency exchange rates
decreased sales by approximately $21 million and $17 million, respectively.
Excluding divestitures and the effect of currency rate changes, sales in 2019
for the Diversified Industrial North American operations increased 1.8 percent
from prior-year levels reflecting higher demand from distributors and end users
in the heavy-duty truck, engine, and construction equipment markets, partially
offset by lower demand from end users in the oil and gas, marine, semiconductor
and power generation markets.

Sales in the Diversified Industrial International operations decreased 4.9
percent in 2019. Divestitures contributed approximately $31 million to the
decrease in sales in 2019. The effect of currency rate changes decreased sales
by $285 million, reflecting the strengthening of the U.S. dollar primarily
against currencies in the Eurozone countries, China and Brazil. Excluding
divestitures and the effect of currency rate changes, sales in 2019 for the
Diversified Industrial International operations increased 1.1 percent from 2018
levels due to slightly higher volume in the Asia Pacific and Latin America
regions, partially offset by a decrease in sales in Europe. Within the Asia
Pacific region, the increase in sales was primarily due to higher demand from
distributors as well as end users in the construction equipment, oil and gas and
engine markets, partially offset by lower end-user demand in the semiconductor,
cars and light truck and industrial machinery markets. In Europe, higher demand
from distributors and end users in the construction equipment, forestry and
heavy-duty truck markets was offset by lower end-user demand in the general
industrial machinery, cars and light truck, mills and foundries, machine tool
and oil and gas markets. Within Latin America, distributors and end users in the
farm and agricultural equipment and heavy-duty truck markets contributed to the
increase in sales, partially offset by lower end-user demand in the power
generation market.

Operating margins in 2019 increased in both the Diversified Industrial North
American and International operations primarily due to lower operating expenses
resulting from prior-year business realignment and acquisition integration
activities and the Company's simplification initiative, lower current-year
business realignment expenses and lower intangible amortization expense,
partially offset by higher warehouse and shipping costs. Higher manufacturing
and materials support costs also impacted the Diversified Industrial North
American operating margins.


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


(dollars in millions)                   2019     2018

Diversified Industrial North America$ 13$ 37Diversified Industrial International 15 41




The business realignment charges consist primarily of severance and plant
closure costs related to actions taken under the Company's simplification
initiative aimed at reducing organizational and process complexity, which is
being implemented by its operating units throughout the world. The majority of
the Diversified Industrial International business realignment charges were
incurred in Europe. The Company anticipates that cost savings realized from the
work force reduction measures taken during 2019 will increase 2020 operating
income by approximately two percent in both the Diversified Industrial North
American and Diversified Industrial International operations. In 2020, the
Company expects to continue to take actions necessary to structure appropriately
the operations of the Diversified Industrial Segment. These actions are expected
to result in approximately $20 million in charges in 2020.

The Company anticipates Diversified Industrial North American sales for 2020
will range between a decrease of 2.8 percent and an increase of 0.2 percent from
the 2019 level and Diversified Industrial International sales for 2020 will
decrease between 6.2 percent and 3.2 percent from the 2019 level. Diversified
Industrial North American operating margins in 2020 are expected to range from
16.8 percent to 17.2 percent and Diversified Industrial International margins
are expected to range from 15.4 percent to 15.9 percent.

The decrease in total Diversified Industrial Segment backlog in 2019 was
primarily due to shipments exceeding orders in both the North American and
International businesses, with each business accounting for 50 percent of the
change. Within the Diversified Industrial International business, the decrease
in backlog was split evenly between Europe and the Asia Pacific region. Backlog
consists of written firm orders from a customer to deliver products and, in the
case of blanket purchase orders, only includes the portion of the order for
which a schedule or release date has been agreed to with the customer. The
dollar value of backlog is equal to the amount that is expected to be billed to
the customer and reported as a sale.

Aerospace Systems Segment

(dollars in millions)                       2019        2018
Sales                                    $ 2,511$ 2,316
Operating income                             488         398

Operating income as a percent of sales 19.4 % 17.2 % Backlog

                                  $ 2,209$ 1,954



Sales in 2019 were higher than the 2018 level primarily due to higher volume in
the commercial and military aftermarket businesses as well as in the commercial
and military original equipment manufacturer (OEM) businesses.

The higher margin in 2019 was primarily due to a favorable product mix resulting
from higher aftermarket and OEM volume and profitability, higher joint venture
earnings, lower engineering development and the absence of business realignment
expenses in the current year.

The increase in backlog in 2019 was primarily due to orders exceeding shipments
in the military OEM and aftermarket businesses and in the commercial aftermarket
business, 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 2020, sales are expected to increase between 3.0 percent and 5.6 percent
from the 2019 level and operating margins are expected to range from 20.4
percent to 21.0 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.


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Corporate general and administrative expenses were $195 million in 2019 compared
to $201 million in 2018. As a percent of sales, corporate general and
administrative expenses in both 2019 and 2018 were 1.4 percent. The lower
expense in 2019 is primarily due to lower incentive compensation, partially
offset by higher net expense associated with the Company's deferred compensation
program and related investments.

Other expense (in the Business Segment Information) (dollars in millions) Expense (income)

                                  2019     2018
Foreign currency transaction                     $   6$   7
Stock-based compensation                            52       51
Pensions                                            20       26

Divestitures and asset sales and writedowns, net 11 (4 ) Sale and writedown of investments

                    -       41
Acquisition expenses                                17        5
Other items, net                                     7       (4 )
                                                 $ 113$ 122


Foreign currency transaction primarily relates to the impact of changes in
foreign exchange rates on cash, marketable securities and other investments and
intercompany transactions. Divestitures and asset sales and writedowns in 2018
includes a net gain on the sale of assets, partially offset by a loss on the
sale of the global Facet filtration business. The acquisition expenses incurred
in 2019 primarily relate to the proposed acquisition of Lord.


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)               2019       2018
Cash                             $ 3,371$   855
Trade accounts receivable, net     2,131      2,146
Inventories                        1,678      1,621
Long-term debt                     6,521      4,319
Shareholders' equity               5,962      5,860
Working capital                  $ 4,521$ 1,888
Current ratio                        2.4        1.6


Cash (comprised of cash and cash equivalents and marketable securities and other
investments) includes $975 million and $836 million held by the Company's
foreign subsidiaries at June 30, 2019 and 2018, respectively. As a result of the
TCJ Act, the prior worldwide tax system was replaced by a territorial tax
system, which generally allows companies to repatriate future foreign source
earnings without incurring additional U.S. federal taxes. However, other U.S. or
foreign taxes may be incurred should cash be distributed between the Company's
subsidiaries. The Company has determined it will no longer permanently reinvest
certain foreign earnings. All other undistributed foreign earnings remain
permanently reinvested. Refer to Note 5 to the Consolidated Financial Statements
in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Trade accounts receivable, net are receivables due from customers for sales of
product. Days sales outstanding relating to trade receivables for the Company
was 53 days in 2019 and 51 days in 2018. The Company believes that its
receivables are collectible and appropriate allowances for doubtful accounts
have been recorded.


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Inventories increased $57 million from 2018 primarily due to a $59 million
increase in inventories in the Aerospace Systems Segment and an increase of $12
million in the Diversified Industrial Segment, partially offset by a decrease of
$15 million related to the effect of foreign currency translation. Within the
Diversified Industrial Segment, an increase in inventories in the North American
operations was partially offset by a decrease in the International operations.
Days supply of inventory on hand was 69 days in 2019 and 64 days in 2018.

Long-term debt increased $2,202 million from 2018 primarily due to issuance of
new debt related to the proposed acquisition of Lord. Refer to Note 10 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 2019 included a decrease of $800 million
related to share repurchases, a decrease of $228 million related to pensions and
postretirement benefits resulting from net actuarial losses due to a decrease in
discount rates and a decrease of $66 million related to foreign currency
translation adjustments.


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)                                     2019        2018
Cash provided by (used in):
Operating activities                                   $ 1,730$ 1,597
Investing activities                                      (219 )        24
Financing activities                                       902      (1,682 )
Effect of exchange rates                                   (16 )        (1 )

Net increase (decrease) in cash and cash equivalents $ 2,397$ (62 )




Cash flows from operating activities in 2019 reflects an increase in net income
of $452 million and an increase of $144 million from cash provided by working
capital items. The Company also made a discretionary cash contribution to the
Company's domestic qualified defined benefit plan of $200 million in 2019.

Cash flows from investing activities includes net (purchases) maturities of
marketable securities and other investments of $(107) million and $3 million in
2019 and 2018, respectively. It also includes $195 million and $248 million of
capital expenditures in 2019 and 2018, respectively. During 2018 cash flows from
investing activities benefited from proceeds related to the sale of the global
Facet filtration business.

Cash flows from financing activities includes issuance of long-term debt of
$2,337 million in 2019 primarily related to the proposed acquisition of Lord.
Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of
this Annual Report on Form 10-K for further discussion. Cash flows from
financing activities during 2018 included the repayment of long-term debt of
approximately $945 million. The Company repurchased 4.8 million common shares
for $800 million during 2019 compared to the repurchase of 1.7 million common
shares for $300 million in 2018.

Dividends have been paid for 276 consecutive quarters, including a yearly
increase in dividends for the last 63 years. The current annual dividend rate is
$3.52 per common share.
The Company's goal is to maintain a strong investment-grade credit profile. At
June 30, 2019, 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




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The rating agencies periodically update the Company's credit ratings as events occur. On July 29, 2019, Standard & Poor's downgraded the Company's credit rating to A- reflecting the additional debt that will be used to fund the recently announced acquisitions.


As of June 30, 2019, the Company had a line of credit totaling $2,000 million
through a multi-currency revolving credit agreement with a group of banks, of
which $1,414 million was available at June 30, 2019. Refer to Note 9 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 $586 million outstanding commercial paper
notes as of June 30, 2019, and the largest amount of commercial paper notes
outstanding during the last quarter of 2019 was $1,000 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.

During 2019, the Company entered into a definitive agreement under which it
expects to acquire Lord for approximately $3,675 million in cash. The Company
intends to finance the purchase price for the Lord acquisition with the net
proceeds from the Senior Notes due 2024, 2029 and 2049, the delayed-draw term
loan and certain commercial paper proceeds. Refer to Note 10 to the Consolidated
Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for
further discussion. On July 29, 2019, the Company announced that it had entered
into a definitive agreement to acquire Exotic for approximately $1,725 million
in cash and intends to finance the purchase price for this acquisition with new
debt. These acquisitions remain subject to certain closing conditions.

Contractual Obligations - The total amount of gross unrecognized tax benefits,
including interest, for uncertain tax positions was $166 million at June 30,
2019. 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
                                                                                                      More than 5
Contractual obligations               Total      Less than 1 year       1-3 years       3-5 years           years
Transition tax payments related
to TCJ Act (Note 5)               $     187     $               -     $         -     $        59$       128
Long-term debt (Note 10)              6,596                     -               -             875           5,721
Interest on long-term debt            3,681                   227             454             436           2,564
Operating leases (Note 10)              143                    46              53              21              23
Retirement benefits (Note 11)           119                    82              10               9              18
Total                             $  10,726     $             355     $       517$     1,400$     8,454

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES


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




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Revenue Recognition - Revenues are recognized when control of performance
obligations, which are distinct goods or services within the contract, is
transferred to the customer. Control is transferred when the customer has the
ability to direct the use of and obtain the benefits from the goods or services.
A majority of the Company's revenues are recognized at a point in time when
control is transferred to the customer, which is generally at the time of
shipment. However, a portion of the Company's revenues are recognized over time
if the customer simultaneously receives control as the Company performs work
under a contract, if the customer controls the asset as it is being produced, or
if the product being produced for the customer has no alternative use and the
Company has a contractual right to payment.

For contracts where revenue is recognized over time, the Company uses the
cost-to-cost, efforts expended or units of delivery method depending on the
nature of the contract, including length of production time. The estimation of
these costs and efforts expended 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 these 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.

When there are multiple performance obligations within a contract, the
transaction price is allocated to each performance obligation based on its
standalone selling price. The primary method used to estimate a standalone
selling price is the price observed in standalone sales to customers for the
same product or service. Revenue is recognized when control of the individual
performance obligations is transferred to the customer.

The Company considers the contractual consideration payable by the customer and
assesses variable consideration that may affect the total transaction price.
Variable consideration is included in the estimated transaction price when there
is a basis to reasonably estimate the amount, including whether the estimate
should be constrained in order to avoid a significant reversal of revenue in a
future period. These estimates are based on historical experience, anticipated
performance under the terms of the contract and the Company's best judgment at
the time.

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, reporting units are
equivalent to its operating segments. As quoted market prices are not available
for the reporting units, determining whether an impairment has occurred requires
the valuation of the respective reporting unit, which was estimated using both
income-based and market-based valuation methods. The income-based valuation
method utilized a discounted cash flow model, which required 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 in the discounted cash flow analysis. Within the
discounted cash flow models, the Company also used a discount rate, commensurate
with its cost of capital, but adjusted for inherent business risks, and an
appropriate terminal growth factor. The market-based valuation method included
an analysis, for each reporting unit, consisting of market-adjusted multiples
based on key data points for guideline public companies. The Company also
reconciled the estimated aggregate fair value of its reporting units resulting
from these procedures to its overall market capitalization.

The results of the Company's 2019 annual goodwill impairment test performed as
of December 31, 2018 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, it
is possible that the Company may need to conduct additional goodwill impairment
tests, and the estimated fair value of certain reporting units could fall below
their carrying value.

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 2019, the Company did not record any material impairment
related to long-lived assets.






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Table of Contents


Pensions - The annual net periodic expense and benefit obligations related to
the Company's defined benefit plans are determined on an actuarial basis. This
determination requires critical assumptions regarding the discount rate,
long-term rate of return on plan assets, increases in compensation levels and
amortization periods for actuarial gains and losses. Assumptions are determined
based on Company data and appropriate market indicators, and are evaluated each
year as of the plans' measurement date. Changes in the assumptions to reflect
actual experience as well as the amortization of actuarial gains and losses
could result in a material change in the annual net periodic expense and benefit
obligations reported in the financial statements.

For the Company's domestic qualified defined benefit plan, a 50 basis point
change in the assumed long-term rate of return on plan assets is estimated to
have a $15 million effect on annual pension expense and a 50 basis point
decrease in the discount rate is estimated to increase annual pension expense by
$23 million. As of June 30, 2019, $1,064 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. Any actuarial gains experienced in future years will help reduce the
effect of the net actuarial loss amortization. Further information on pensions
is provided in Note 11 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 5 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.

© Edgar Online, source Glimpses

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