Item 8. . Financial Statements and Supplementary Data.

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Item 8. . Financial Statements and Supplementary Data.



		Page Number in Form 10-K
Financial Statements
	Consolidated Statement of Income	32
	Consolidated Statement of Comprehensive Income	33
	Business Segment Information	34
	Consolidated Balance Sheet	36
	Consolidated Statement of Cash Flows	37
	Consolidated Statement of Equity	38
	Notes to Consolidated Financial Statements	39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Parker-Hannifin Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Parker-Hannifin Corporation and subsidiaries (the "Company") as of June 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended June 30, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at two entities which were acquired within the fiscal year, and whose financial statements constitute approximately 28% of total assets and 7% of net sales for the year ended June 30, 2020. Accordingly, our audit did not include the internal control over financial reporting over these acquired entities.

Basis for Opinions

The Company’s management is responsible for these financial statements, 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 an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Acquisitions - Valuation of intangible assets acquired via the acquisition of Exotic Metals Forming Co. & LORD Corporation - Refer to Note 3 to the financial statements

Critical Audit Matter Description

The Company completed the acquisitions of Exotic Metals Forming Company for $1.706 billion on September 16, 2019 and LORD Corporation for $3.455 billion on October 29, 2019. The Company accounted for the acquisitions under the acquisition method of accounting for business combinations. Accordingly, the purchase price was primarily allocated to the assets acquired and liabilities assumed based on their respective fair values, including customer-related and technology intangible assets. Management estimated the fair value of these intangible assets utilizing an income approach. The fair value determination of the customer-related and technology intangible assets required management to make significant assumptions related to the forecasted revenue growth rates and the selection of the discount rates.

We identified the customer-related and technology intangible assets for the Exotic and LORD acquisitions as a critical audit matter because of the significant assumptions management makes to fair value these assets. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s assumptions related to the revenue growth rates and the selection of the discount rates utilized to value these intangible assets.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the revenue growth rates and the selection of the assumptions for the intangible assets acquired included the following, among others:


•	We tested the effectiveness of controls over the valuation of the intangible assets acquired, including management’s controls over the revenue growth rates and selection of the discount rates.


•	We assessed the reasonableness of the revenue growth rates by comparing the assumptions used in the projections to external market sources, historical data, and results from other areas of the audit.


•	We performed qualitative and quantitative analyses to identify the assumptions that would significantly impact the overall valuation of the intangible assets acquired. The assumptions identified included (1) revenue growth rate and (2) discount rate.


•	With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rates by:


–	Testing the source information underlying the determination of the discount rates and testing the mathematical accuracy of the calculation.


–	Developing a range of independent estimates and comparing those to the discount rates selected by management.


•	We assessed the reasonableness of the revenue growth rates by comparing the assumptions used in the projections to external market sources, historical data, and results from other areas of the audit.

/s/ DELOITTE & TOUCHE, LLP

Cleveland, Ohio

August 26, 2020

We have served as the Company's auditor since 2008.

CONSOLIDATED STATEMENT OF INCOME



	For the years ended June 30,
(Dollars in thousands, except per share amounts)	2020			2019			2018
Net Sales	$	13,695,520		$	14,320,324		$	14,302,392
Cost of sales	10,286,518			10,703,484			10,737,745
Selling, general and administrative expenses	1,656,553			1,543,939			1,639,989
Interest expense	308,161			190,138			213,873
Other (income) expense, net	(67,112		)	(61,247		)	12,991
(Gain) loss on disposal of assets (Note 3)	(1,227		)	10,585			(4,483		)
Income before income taxes	1,512,627			1,933,425			1,702,277
Income taxes (Note 5)	305,924			420,494			640,962
Net Income	1,206,703			1,512,931			1,061,315
Less: Noncontrolling interest in subsidiaries' earnings	362			567			514
Net Income Attributable to Common Shareholders	$	1,206,341		$	1,512,364		$	1,060,801

Earnings per Share Attributable to Common Shareholders (Note 6)
Basic earnings per share	$	9.39		$	11.63		$	7.98
Diluted earnings per share	$	9.29		$	11.48		$	7.83

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



	For the years ended June 30,
(Dollars in thousands)	2020			2019			2018
Net Income	$	1,206,703		$	1,512,931		$	1,061,315
Less: Noncontrolling interests in subsidiaries' earnings	362			567			514
Net income attributable to common shareholders	1,206,341			1,512,364			1,060,801

Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment and other (net of tax of $4,820, $709 and $16,964 in 2020, 2019 and 2018)	(182,957		)	(66,392		)	(18,575		)
Retirement benefits plan activity (net of tax of $97,477, $71,821 and $(82,506) in 2020, 2019 and 2018)	(317,546		)	(227,783		)	179,253
Other comprehensive (loss) income	(500,503		)	(294,175		)	160,678
Less: Other comprehensive (loss) income for noncontrolling interests	(676		)	53			(440		)
Other comprehensive (loss) income attributable to common shareholders	(499,827		)	(294,228		)	161,118
Total Comprehensive Income Attributable to Common Shareholders	$	706,514		$	1,218,136		$	1,221,919

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

BUSINESS SEGMENT INFORMATION



(Dollars in thousands)	2020		2019		2018
Net Sales:
Diversified Industrial:
North America	$	6,456,298	$	6,808,948	$	6,726,900
International	4,504,587		5,000,599		5,259,793
Aerospace Systems	2,734,635		2,510,777		2,315,699
	$	13,695,520	$	14,320,324	$	14,302,392
Segment Operating Income:
Diversified Industrial:
North America	$	985,944	$	1,138,586	$	1,076,021
International	674,763		804,890		765,188
Aerospace Systems	476,900		487,757		397,970
Total segment operating income	2,137,607		2,431,233		2,239,179
Corporate administration	170,903		194,994		200,901
Income before interest expense and other expense	1,966,704		2,236,239		2,038,278
Interest expense	308,161		190,138		213,873
Other expense	145,916		112,676		122,128
Income before income taxes	$	1,512,627	$	1,933,425	$	1,702,277

Assets:
Diversified Industrial	$	15,973,576	$	13,189,204	$	13,368,619
Aerospace Systems(a)	3,251,522		1,546,053		1,446,745
Corporate	513,091		2,841,433		504,723
	$	19,738,189	$	17,576,690	$	15,320,087

Property Additions:
Diversified Industrial	$	183,981	$	172,348	$	196,469
Aerospace Systems	44,546		20,748		15,225
Corporate	4,064		1,993		35,973
	$	232,591	$	195,089	$	247,667

Depreciation:
Diversified Industrial	$	218,092	$	203,144	$	211,648
Aerospace Systems	27,749		16,268		16,737
Corporate	7,058		6,263		9,421
	$	252,899	$	225,675	$	237,806

Amortization:
Diversified Industrial	$	243,714	$	196,680	$	212,742
Aerospace Systems	40,918		3,072		2,939
	$	284,632	$	199,752	$	215,681



(Dollars in thousands)	2020		2019		2018
By Geographic Area(b)
Net Sales:
North America	$	9,166,773	$	9,318,195	$	8,978,490
International	4,528,747		5,002,129		5,323,902
	$	13,695,520	$	14,320,324	$	14,302,392
Long-Lived Assets:
North America	$	1,494,858	$	1,052,263	$	1,103,308
International	797,877		716,024		752,929
	$	2,292,735	$	1,768,287	$	1,856,237

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 (2020 - $237,911; 2019 - $234,703; 2018 - $235,665).

(b) 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.

CONSOLIDATED BALANCE SHEET



(Dollars in thousands)
June 30,	2020			2019
Assets
Current Assets
Cash and cash equivalents (Note 1)	$	685,514		$	3,219,767
Marketable securities and other investments (Note 1)	70,805			150,931
Trade accounts receivable, net (Note 1)	1,854,398			2,131,054
Non-trade and notes receivable (Note 1)	244,870			310,708
Inventories (Note 7)	1,814,631			1,678,132
Prepaid expenses and other	214,986			182,494
Total Current Assets	4,885,204			7,673,086
Plant and equipment (Note 1)	5,810,681			5,186,730
Less: Accumulated depreciation	3,517,946			3,418,443
Plant and equipment, net	2,292,735			1,768,287
Deferred income taxes (Notes 1 and 5)	126,839			150,462
Investments and other assets (Note 1)	764,563			747,773
Intangible assets, net (Notes 1 and 8)	3,798,913			1,783,277
Goodwill (Notes 1 and 8)	7,869,935			5,453,805
Total Assets	$	19,738,189		$	17,576,690

Liabilities and Equity
Current Liabilities
Notes payable and long-term debt payable within one year (Notes 9 and 10)	$	809,529		$	587,014
Accounts payable, trade	1,111,759			1,413,155
Accrued payrolls and other compensation	424,231			426,285
Accrued domestic and foreign taxes	195,314			167,312
Other accrued liabilities	607,540			558,007
Total Current Liabilities	3,148,373			3,151,773
Long-term debt (Note 10)	7,652,256			6,520,831
Pensions and other postretirement benefits (Note 12)	1,887,414			1,304,379
Deferred income taxes (Notes 1 and 5)	382,528			193,066
Other liabilities	539,089			438,489
Total Liabilities	13,609,660			11,608,538
Equity (Note 13)
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 2020 and 2019	90,523			90,523
Additional capital	416,585			462,086
Retained earnings	13,530,666			12,777,538
Accumulated other comprehensive (loss)	(2,558,875		)	(2,059,048		)
Treasury shares at cost: 52,490,165 in 2020 and 52,566,086 in 2019	(5,364,916		)	(5,309,130		)
Total Shareholders' Equity	6,113,983			5,961,969
Noncontrolling interests	14,546			6,183
Total Equity	6,128,529			5,968,152
Total Liabilities and Equity	$	19,738,189		$	17,576,690

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

CONSOLIDATED STATEMENT OF CASH FLOWS



	For the years ended June 30,
(Dollars in thousands)	2020			2019			2018
Cash Flows From Operating Activities
Net income	$	1,206,703		$	1,512,931		$	1,061,315
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	252,899			225,675			237,806
Amortization	284,632			210,514			228,279
Stock incentive plan compensation	111,375			104,078			118,831
Deferred income taxes	13,692			32,537			(41,412		)
Foreign currency transaction (gain) loss	(10,018		)	5,888			7,284
(Gain) loss on sale of plant and equipment	(1,850		)	5,091			(24,422		)
Loss on sale of businesses	—			5,854			19,666
(Gain) loss on sale and impairment of investments	(2,084		)	(16,749		)	41,219
(Gain) loss on sale of marketable securities	(587		)	7,563			(2		)
Other	17,984			—			—
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable	578,853			2,452			(301,978		)
Inventories	201,164			(51,817		)	(92,209		)
Prepaid expenses	(9,312		)	(33,335		)	(16,206		)
Other assets	(23,547		)	2,677			(16,880		)
Accounts payable, trade	(370,765		)	(12,397		)	125,907
Accrued payrolls and other compensation	(62,715		)	2,088			(4,614		)
Accrued domestic and foreign taxes	30,918			(30,593		)	44,019
Other accrued liabilities	(148,531		)	16,698			(5,567		)
Pensions and other postretirement benefits	55,522			(168,368		)	31,239
Other liabilities	(53,384		)	(90,647		)	184,425
Net cash provided by operating activities	2,070,949			1,730,140			1,596,700
Cash Flows From Investing Activities
Acquisitions (net of cash acquired of $82,192 in 2020 and $690 in 2019)	(5,076,064		)	(2,042		)	—
Capital expenditures	(232,591		)	(195,089		)	(247,667		)
Proceeds from sale of plant and equipment	26,345			46,592			81,881
Proceeds from sale of businesses	—			19,678			177,741
Purchase of marketable securities and other investments	(194,742		)	(181,780		)	(80,607		)
Maturities and sales of marketable securities and other investments	275,483			74,908			83,905
Other	177,576			19,223			8,424
Net cash (used in) provided by investing activities	(5,023,993		)	(218,510		)	23,677
Cash Flows From Financing Activities
Proceeds from exercise of stock options	2,623			2,475			3,682
Payments for common shares	(216,049		)	(860,052		)	(381,041		)
Acquisition of noncontrolling interests	(1,200		)	—			—
Proceeds from notes payable, net	136,744			48,828			4,115
Proceeds from long-term borrowings	1,721,211			2,336,749			1,189
Payments for long-term borrowings	(740,181		)	(213,226		)	(944,629		)
Dividends paid	(453,838		)	(412,468		)	(365,288		)
Net cash provided by (used in) financing activities	449,310			902,306			(1,681,972		)
Effect of exchange rate changes on cash	(30,519		)	(16,306		)	(1,154		)
Net (decrease) increase in cash and cash equivalents	(2,534,253		)	2,397,630			(62,749		)
Cash and cash equivalents at beginning of year	3,219,767			822,137			884,886
Cash and cash equivalents at end of year	$	685,514		$	3,219,767		$	822,137
Supplemental Data:
Cash paid during the year for:
Interest	$	308,199		$	169,378		$	200,860
Income taxes	307,959			454,699			408,765

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

CONSOLIDATED STATEMENT OF EQUITY



(Dollars in thousands)	Common Stock		Additional Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)			Treasury Shares			Noncontrolling Interests			Total
Balance June 30, 2017	$	90,523	$	543,879		$	10,930,348		$	(1,924,204	)	$	(4,378,897	)	$	5,697		$	5,267,346
Net income						1,060,801									514			1,061,315
Other comprehensive income (loss)									161,118						(440		)	160,678
Dividends paid ($2.74 per share)						(365,174		)							(114		)	(365,288		)
Stock incentive plan activity			(47,287		)							88,759						41,472
Acquisition activity															(30		)	(30		)
Shares purchased at cost												(300,000		)				(300,000		)
Balance June 30, 2018	$	90,523	$	496,592		$	11,625,975		$	(1,763,086	)	$	(4,590,138	)	$	5,627		$	5,865,493
Impact of adoption of accounting standards						51,603			(1,734		)							49,869
Net income						1,512,364									567			1,512,931
Other comprehensive (loss) income									(294,228		)				53			(294,175		)
Dividends paid ($3.16 per share)						(412,404		)							(64		)	(412,468		)
Stock incentive plan activity			(34,506		)							81,007						46,501
Shares purchased at cost												(799,999		)				(799,999		)
Balance June 30, 2019	$	90,523	$	462,086		$	12,777,538		$	(2,059,048	)	$	(5,309,130	)	$	6,183		$	5,968,152
Net income						1,206,341									362			1,206,703
Other comprehensive (loss)									(499,827		)				(676		)	(500,503		)
Dividends paid ($3.52 per share)						(453,213		)							(625		)	(453,838		)
Stock incentive plan activity			(46,265		)							90,981						44,716
Acquisition activity			764												9,302			10,066
Shares purchased at cost												(146,767		)				(146,767		)
Balance June 30, 2020	$	90,523	$	416,585		$	13,530,666		$	(2,558,875	)	$	(5,364,916	)	$	14,546		$	6,128,529

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts or as otherwise noted)

The term "year" and references to specific years refer to the applicable fiscal years.


1.	Significant Accounting Policies

The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are summarized below.

Nature of Operations - The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. We evaluate performance based on segment operating income before corporate administrative expenses, interest expense and income taxes.

The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Diversified Industrial Segment products are marketed primarily through field sales employees and independent distributors. The Diversified Industrial North American operations have manufacturing plants and distribution networks throughout the United States, Canada and Mexico and primarily service North America. The Diversified Industrial International operations provide Parker products and services to 46 countries throughout Europe, Asia Pacific, Latin America, the Middle East and Africa.

There are no individual customers to whom sales are more than three percent of the Company's consolidated sales. Due to our diverse group of customers throughout the world, we do not consider ourself exposed to any concentration of credit risks.

The Company manufactures and markets its products throughout the world. Although certain risks and uncertainties exist, the diversity and breadth of our products and geographic operations mitigate the risk that adverse changes with respect to any particular product and geographic operation would materially affect our operating results.

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Basis of Consolidation - The consolidated financial statements include the accounts of all majority-owned domestic and foreign subsidiaries. All intercompany transactions and profits have been eliminated in the consolidated financial statements. The Company does not have off-balance sheet arrangements. Within the Business Segment Information, intersegment and interarea sales have been eliminated.

Revenue Recognition - 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. When revenue is recognized at a point in time, control generally transfers at time of shipment. 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 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, we use 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. We make adjustments to these estimates on a consistent basis and establish a contract reserve when the estimated costs to complete a contract exceed the expected contract revenues.

A contract’s transaction price is allocated to each distinct performance obligation. 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 of the same product or service. Revenue is recognized when control of the individual performance obligations is transferred to the customer.

We consider the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration primarily includes prompt pay discounts, rebates and volume discounts and 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 our best judgment at the time.

Payment terms vary by customer and the geographic location of the customer. The time between when revenue is recognized and payment is due is not significant. Our contracts with customers generally do not include significant financing components or noncash consideration.

Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales. The costs to obtain a contract where the amortization period for the related asset is one year or less are expensed as incurred.

There is generally no unilateral right to return products. The Company primarily offers an assurance-type standard warranty that the product will conform to certain specifications for a defined period of time or usage after delivery. This type of warranty does not represent a separate performance obligation.

Cash - Cash equivalents consist of short-term, highly liquid investments with a maturity of three months or less. These investments are carried at cost plus accrued interest and are readily convertible into cash.

Marketable Securities and Other Investments - Consist of short-term, highly liquid investments with stated maturities of greater than three months from the date of purchase, which are carried at cost plus accrued interest. Marketable securities and other investments also include investments in equity securities which are carried at fair value. Changes in fair value related to equity securities are recorded in net income. We have the ability to liquidate these investments after giving appropriate notice to the issuer.

Trade Accounts Receivable, Net - Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. Receivables are written off to bad debt primarily when, in the judgment of the Company, the receivable is deemed to be uncollectible due to the insolvency of the debtor. Allowance for doubtful accounts was $11,644 and $8,874 at June 30, 2020 and 2019, respectively.

Non-Trade and Notes Receivable - The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:



June 30,	2020		2019
Notes receivable	$	97,370	$	147,719
Accounts receivable, other	147,500		162,989
Total	$	244,870	$	310,708

Plant, Equipment and Depreciation - Plant and equipment are recorded at cost and are depreciated principally using the straight-line method for financial reporting purposes. Depreciation rates are based on estimated useful lives of the assets, generally 40 years for buildings, 15 years for land improvements and building equipment, seven to 10 years for machinery and equipment, and three to eight years for vehicles and office equipment. Improvements, which extend the useful life of property, are capitalized, and maintenance and repairs are expensed. We review plant and equipment for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When plant and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in current income.

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



June 30,	2020		2019
Land and land improvements	$	345,746	$	281,040
Buildings and building equipment	1,773,041		1,567,130
Machinery and equipment	3,515,842		3,223,585
Construction in progress	176,052		114,975
Total	$	5,810,681	$	5,186,730

Investments and Other Assets - Investments in joint-venture companies in which ownership is 50 percent or less and in which the Company does not have operating control are stated at cost plus the Company's equity in undistributed earnings and amounted to $317,975 and $316,728 at June 30, 2020 and 2019, respectively. A significant portion of the underlying net assets of the joint ventures are related to goodwill. The Company's share of earnings from investments in joint-venture companies were $74,517, $93,239 and $50,473 in 2020, 2019 and 2018, respectively.

Intangible Assets - Intangible assets primarily include patents and technology, trademarks and customer lists and contracts and are recorded at cost and amortized on a straight-line method. Patents and technology are amortized over the shorter of their remaining useful or legal life. Trademarks and customer contracts are amortized over the estimated time period over which an economic benefit is expected to be received. Customer lists are amortized over a period based on anticipated customer attrition rates. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable.

Goodwill - The Company conducts a formal impairment test of goodwill on an annual basis and between annual tests if an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value.

Income Taxes - Income taxes are provided based upon income for financial reporting purposes. Tax credits and similar tax incentives are applied to reduce the provision for income taxes in the year in which the credits arise. We recognize accrued interest related to unrecognized tax benefits in income tax expense. Penalties, if incurred, are recognized in income tax expense. Deferred income taxes arise from temporary differences in the recognition of income and expense for tax purposes. Income tax effects resulting from adjusting temporary differences recorded in accumulated other comprehensive (loss) are released when the circumstances on which they are based cease to exist.

Foreign Currency Translation - Assets and liabilities of foreign subsidiaries are translated at current exchange rates, and income and expenses are translated using weighted-average exchange rates. The effects of these translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in accumulated other comprehensive (loss). Such adjustments will affect net income only upon sale or liquidation of the underlying foreign investments. Exchange (gains) losses from transactions in a currency other than the local currency of the entity involved are included within the cost of sales caption in the Consolidated Statement of Income and were $(10,018), $5,888 and $7,284, in 2020, 2019 and 2018, respectively.

Subsequent Events - We evaluated subsequent events that have occurred through the date of filing of this Annual Report on Form 10-K for the year ended June 30, 2020. No subsequent events occurred that required adjustment to or disclosure in these financial statements.

Recent Accounting Pronouncements - In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. We adopted ASU 2016-13 on July 1, 2020. The adoption of this ASU will not materially impact the Company's financial statements or related disclosures.

In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires lessees to put most leases with terms greater than 12 months on their balance sheet by recognizing a liability to make lease payments and an asset representing their right to use the asset during the lease term. We adopted ASU 2016-02 on July 1, 2019 using the optional transition method and have not restated prior periods. We elected to use the package of practical expedients permitted under the transition guidance, which allows the carry forward of historical lease classification of existing leases. Upon adoption, we recorded a right-of-use asset and lease liability of approximately $126 million. The adoption of the ASU did not have a material impact on the Consolidated Statement of Income or Cash Flows.

2. Revenue recognition

Revenue is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. A majority of the Company’s revenues are recognized at a point in time. However, a portion of the Company’s revenues are recognized over time.

Disaggregation of revenue

Revenue from contracts with customers is disaggregated by technology platforms for the Diversified Industrial Segment, by product platforms for the Aerospace Systems Segment and by geographic location for the total Company.

The Diversified Industrial Segment is an aggregation of several business units, which manufacture motion-control and fluid power system components for builders and users of various types of manufacturing, packaging, processing, transportation, agricultural, construction, and military vehicles and equipment. Contracts consist of individual purchase orders for standard product, blanket purchase orders and production contracts. Blanket purchase orders are often associated with individual purchase orders and have terms and conditions which are subject to a master supply or distributor agreement. Individual production contracts, some of which may include multiple performance obligations, are typically for products manufactured to the customer's specifications. Revenue in the Diversified Industrial Segment is typically recognized at the time of product shipment, but a portion of revenue may be recognized over time for installation services or in situations where the product has no alternative use and we have an enforceable right to payment.

Diversified Industrial Segment revenues by technology platform:



	2020		2019
Motion Systems	$	2,996,645	$	3,485,068
Flow and Process Control	3,795,952		4,293,393
Filtration and Engineered Materials	4,168,288		4,031,086
Total	$	10,960,885	$	11,809,547

The Aerospace Systems Segment produces hydraulic, fuel, pneumatic and electro-mechanical systems and components, which are utilized on virtually every domestic commercial, military and general aviation aircraft. Aerospace Systems Segment products also perform a vital role in naval vessels and land-based weapon systems. Contracts generally consist of blanket purchase orders and individual long-term production contracts. Blanket purchase orders, which have terms and conditions subject to long-term supply agreements, are typically associated with individual purchase orders. Revenue in the Aerospace Systems Segment is typically recognized at the time of product shipment, but a portion of revenue may be recognized over time in situations where the customer controls the asset as it is produced or the product has no alternative use and we have an enforceable right to payment.

Aerospace Systems Segment revenues by product platform:



	2020		2019
Flight Control Actuation	$	711,017	$	750,311
Fuel and Inerting	592,543		634,658
Hydraulics	411,823		461,554
Engines	616,747		285,292
Fluid Conveyance	304,769		299,035
Other	97,736		79,927
Total	$	2,734,635	$	2,510,777

Total revenues by geographic region based on the Company's selling operation's location:



	2020		2019
North America	$	9,166,773	$	9,318,195
Europe	2,596,125		2,968,971
Asia Pacific	1,790,032		1,855,831
Latin America	142,590		177,327
Total	$	13,695,520	$	14,320,324

The majority of revenues from the Aerospace Systems Segment is generated from sales to customers within North America.

Contract balances

Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms established in the contract with the customer.

Total contract assets and contract liabilities are as follows:



	2020			2019
Contract assets, current (included within Prepaid expenses and other)	$	30,827		$	22,726
Contract assets, noncurrent (included within Investments and other assets)	1,497			1,301
Total contract assets	32,324			24,027
Contract liabilities, current (included within Other accrued liabilities)	(51,278		)	(64,668		)
Contract liabilities, noncurrent (included within Other liabilities)	(3,232		)	(421		)
Total contract liabilities	(54,510		)	(65,089		)
Net contract liabilities	$	(22,186	)	$	(41,062	)

At June 30, 2020, the change in net contract liabilities was primarily due to timing differences between when revenue was recognized and the receipt of advance payments. During 2020, approximately $33 million of revenue was recognized that was included in the contract liabilities at June 30, 2019.

Remaining performance obligations

Our backlog represents written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. We believe our backlog represents our unsatisfied or partially unsatisfied performance obligations. Backlog at June 30, 2020 was $5,138 million, of which approximately 85 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.


3.	Acquisitions and Divestitures

Acquisitions - On October 29, 2019, we completed the acquisition of a 100 percent equity interest in LORD Corporation ("Lord") for approximately $3,455 million in cash, including the assumption of debt. On September 16, 2019, we completed the acquisition of a 100 percent equity interest in EMFCO Holdings Incorporated, parent company of Exotic Metals Forming Company LLC ("Exotic") for approximately $1,706 million in cash.

Lord is a diversified technology and manufacturing company developing highly reliable adhesives and coatings, as well as vibration and motion control technologies, that significantly reduce risk and improve product performance. Lord’s products are used in mission-critical applications in the aerospace, automotive and industrial markets. Lord had annual sales of approximately $1,025 million for its fiscal 2018. For segment reporting purposes, approximately 95 percent of Lord's sales are included in the Diversified Industrial Segment, while the remaining five percent are included in the Aerospace Systems Segment. Lord’s unique and proprietary products, solutions and technologies for mission-critical applications are expected to increase the Company's overall engineered materials product and solutions offerings to enable a stronger value proposition for customers.

Exotic designs and manufactures innovative and technically demanding, high temperature, high pressure air and exhaust management solutions for aircraft and engines. Exotic had annual sales of approximately $409 million for its fiscal 2019.

For segment reporting purposes, Exotic is included in the Aerospace Systems Segment. We believe Exotic's products and proprietary manufacturing capabilities are complementary to our portfolio of flight control, fuel and inerting, hydraulics, fluid conveyance and engine components.

Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The following presents the preliminary estimated fair values of Lord's and Exotic's assets acquired and liabilities assumed on the respective acquisition dates. These preliminary estimates are based on available information and will be revised during the measurement period, not to exceed 12 months from the acquisition date, as third-party valuations are finalized, additional information becomes available and as additional analysis is performed. Such revisions may have a material impact on our results of operations and financial position within the measurement period. During 2020, these revisions, which primarily impacted intangible assets, goodwill, deferred income taxes, other liabilities, and plant and equipment, did not have a material impact on our financial statements.

The purchase price allocation for acquisitions in 2020 is as follows:



	Lord		Exotic
	October 29, 2019		September 16, 2019
Assets:
Cash and cash equivalents	$	74,013	$	8,179
Accounts receivable	153,765		81,336
Inventories	248,600		114,661
Prepaid expenses	24,131		1,343
Plant and equipment	409,163		178,393
Deferred income taxes	—		2,057
Other assets	42,220		1,226
Intangible assets	1,446,660		874,470
Goodwill	1,966,865		503,725
Total assets acquired	4,365,417		1,765,390
Liabilities:
Notes payable and long-term debt payable within one year	404		—
Accounts payable, trade	56,186		23,176
Accrued payrolls and other compensation	57,571		8,863
Accrued domestic and foreign taxes	2,898		2,123
Other accrued liabilities	87,810		25,662
Long-term debt	221,161		—
Pensions and other postretirement benefits	115,265		—
Deferred income taxes	303,958		—
Other liabilities	53,455		—
Noncontrolling interests	11,266		—
Total liabilities and noncontrolling interests assumed	909,974		59,824
Net assets acquired	$	3,455,443	$	1,705,566

Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the Lord and Exotic acquisitions, goodwill represents cost synergies and enhancements to our existing technologies. For tax purposes, Lord's goodwill is not deductible, and Exotic's goodwill is deductible. Based upon a preliminary acquisition valuation, intangibles acquired as part of the Exotic acquisition include $502,470 of customer-related intangible assets, $281,400 of patents and technology and $90,600 of trademarks, with weighted average estimated useful lives of 18, 20 and 20 years, respectively. Similarly, the Lord acquisition includes $869,190 of customer-related intangible assets, $458,030 of patents and technology and $119,440 of trademarks, with weighted average estimated useful lives of 13, 21 and 20 years, respectively. These intangible assets were valued using the income approach, which includes significant assumptions around future revenue growth and discount rates. Such assumptions are classified as level 3 inputs within the fair value hierarchy.

Our consolidated financial statements include the results of operations of Lord and Exotic from their respective acquisition dates through June 30, 2020. Net sales attributable to these acquisitions during this period and included in our consolidated financial statements totaled $949,066. Segment operating income attributable to these acquisitions during this period and included in our consolidated financial statements totaled $22,330.

Acquisition-related transaction and integration costs totaled $119,214 in 2020. These costs are included in selling, general, and administrative expenses in the Consolidated Statement of Income.

Divestitures - During 2018, the Company divested its global Facet filtration business, which was part of the Diversified Industrial Segment. The operating results and net assets of the global Facet filtration business were immaterial to the Company's consolidated results of operations and financial position. The Company recorded a pre-tax loss in 2018 of approximately $20 million and tax expense of approximately $29 million resulting from a tax gain related to the divestiture. The pre-tax loss is reflected in the (gain) loss on disposal of assets caption in the Consolidated Statement of Income and the other expense caption in the Business Segment Information.


4.	Charges Related to Business Realignment and Acquisition Integration

The Company incurred business realignment and acquisition integration charges in 2020, 2019 and 2018. The business realignment charges primarily consist of severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity as well as plant closures. During 2020, business realignment charges also include actions taken to address the impact of COVID-19 on our business, especially within the Aerospace Systems Segment. The 2019 and 2018 acquisition integration charges relate to the 2017 acquisition of CLARCOR, Inc. ("Clarcor") and primarily consist of severance costs and expenses related to plant closures and relocations. A majority of the business realignment charges were incurred in North America and Europe. We believe the realignment actions will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital.

Business realignment and Clarcor acquisition integration charges presented in the Business Segment Information are as follows:



	2020		2019		2018
Diversified Industrial	$	52,288	$	27,830	$	78,558
Aerospace Systems	22,101		—		3,428
Corporate administration	1,175		—		—
Other expense	50		305		1,009

Workforce reductions in connection with such business realignment and Clarcor acquisition integration charges in the Business Segment Information are as follows:



	2020	2019	2018
Diversified Industrial	2,394	598	1,757
Aerospace Systems	1,254	—	265
Corporate administration	31	—	—

The business realignment and Clarcor acquisition integration charges are presented in the Consolidated Statement of Income as follows:



	2020		2019		2018
Cost of sales	$	58,791	$	14,650	$	44,949
Selling, general and administrative expenses	16,773		13,180		36,813
(Gain) loss on disposal of assets	50		305		1,233

As of June 30, 2020, approximately $63 million in severance payments were made relating to business realignment and Clarcor acquisition integration charges. Remaining payments related to current-year and prior-year business realignment and Clarcor acquisition integration actions of $23 million, a majority of which are expected to be paid by June 30, 2021, are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the business realignment and acquisition integration actions described above, the timing and amount of which are not known at this time.

We also incurred the following acquisition integration charges related to the Lord and Exotic acquisitions:



	2020
Diversified Industrial	$	20,669
Aerospace Systems	1,908

These charges are primarily included in selling, general and administrative expenses within the Consolidated Statement of Income.


5.	Income Taxes

Income before income taxes was derived from the following sources:



	2020		2019		2018
United States	$	833,933	$	1,124,933	$	963,843
Foreign	678,694		808,492		738,434
	$	1,512,627	$	1,933,425	$	1,702,277

Income taxes include the following:



	2020			2019		2018
Federal
Current	$	105,796		$	160,858	$	453,821
Deferred	26,067			14,903		(23,876		)
Foreign
Current	167,680			206,167		210,385
Deferred	(14,247		)	3,202		(17,454		)
State and local
Current	18,756			20,932		18,168
Deferred	1,872			14,432		(82		)
	$	305,924		$	420,494	$	640,962

A reconciliation of the effective income tax rate to the statutory federal rate follows:



	2020		2019		2018
Statutory federal income tax rate	21.0	%	21.0	%	28.1	%
State and local income taxes	1.4		1.7		1.2
Tax related to international activities	1.8		2.9		(1.0	)
Transition tax related to the TCJ Act	(0.7	)	0.8		17.5
Remeasurement of deferred tax assets and liabilities related to the TCJ Act	—		(0.9	)	(4.8	)
Cash surrender value of life insurance	(0.3	)	(0.1	)	(0.4	)
Federal manufacturing deduction	—		0.1		(1.0	)
Foreign derived intangible income deduction	(1.5	)	(1.0	)	—
Research tax credit	(0.6	)	(0.5	)	(0.7	)
Share-based compensation	(1.5	)	(1.7	)	(2.2	)
Other	0.6		(0.6	)	1.0
Effective income tax rate	20.2	%	21.7	%	37.7	%

We made the accounting policy election to treat taxes related to Global Intangible Low-Taxed Income ("GILTI") as a current period expense when incurred. The tax rate impact of GILTI is included with tax related to international activities in the table above.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, a significant tax-and-spending package intended to provide economic stimulus to address the impact of the COVID-19 pandemic. We continue to monitor the impact from the CARES Act; however, no income tax effects have been recorded in the current year, and we do not expect it to materially impact the Company.

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



	2020			2019
Retirement benefits	$	504,747		$	368,269
Other liabilities and reserves	139,872			90,936
Long-term contracts	7,392			22,241
Stock-based compensation	35,483			38,730
Loss carryforwards	754,655			792,914
Unrealized currency exchange gains and losses	39,256			27,034
Inventory	5,242			5,540
Tax credit carryforwards	33,176			15,640
Undistributed foreign earnings	(15,196		)	(16,762		)
Depreciation and amortization	(988,886		)	(589,454		)
Valuation allowance	(771,430		)	(797,692		)
Net deferred tax (liability)	$	(255,689	)	$	(42,604	)

Change in net deferred tax (liability):
Provision for deferred tax	$	(13,692	)	$	(32,537	)
Items of other comprehensive income	102,297			72,530
Acquisitions and other	(301,690		)	94,638
Total change in net deferred tax	$	(213,085	)	$	134,631

As of June 30, 2020, we recorded deferred tax assets of $754,655 resulting from $3,048,453 in loss carryforwards. A valuation allowance of $741,171 related to the loss carryforwards has been established due to the uncertainty of their realization. Of this valuation allowance, $710,439 relates to non-operating entities whose loss carryforward utilization is considered to be remote. Some of the loss carryforwards can be carried forward indefinitely; others can be carried forward from three to 20 years. In addition, a valuation allowance of $30,259 related to future deductible items has been established due to the uncertainty of their realization. These future deductible items are recorded in the other liabilities and reserves and tax credit carryforward lines in the table above.

Although future distributions of foreign earnings to the U.S. should not be subject to U.S. federal income taxes, other U.S. or foreign taxes may be imposed on such earnings. We have analyzed existing factors and determined we will no longer permanently reinvest certain foreign earnings. On these undistributed foreign earnings of approximately $717 million that are no longer permanently reinvested outside of the U.S., we have recorded a deferred tax liability of $10 million. The remaining undistributed foreign earnings of approximately $2,122 million remain permanently reinvested outside the U.S. at June 30, 2020. Of these undistributed earnings, we have recorded a deferred tax liability of $5 million where certain foreign holding companies are not permanently reinvested in their subsidiaries. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the potential distribution of such permanently reinvested foreign earnings.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2020			2019			2018
Balance July 1	$	140,662		$	153,091		$	147,506
Additions for tax positions related to current year	4,955			2,272			4,195
Additions for tax positions of prior years	798			45			8,333
Additions for acquisitions	43,532			—			—
Reductions for tax positions of prior years	(41,726		)	(927		)	(3,790		)
Reductions for settlements	(53,520		)	(832		)	(315		)
Reductions for expiration of statute of limitations	(3,820		)	(9,388		)	(4,480		)
Effect of foreign currency translation	(4,604		)	(3,599		)	1,642
Balance June 30	$	86,277		$	140,662		$	153,091

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $86,277, $140,662 and $153,091 as of June 30, 2020, 2019 and 2018, respectively. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was $14,247, $25,214 and $21,737 as of June 30, 2020, 2019 and 2018, respectively. In the current year, we recorded the resolution of an examination with a foreign jurisdiction that resulted in a significant decrease to the unrecognized tax benefit recorded on our balance sheet. This is included in reductions for tax positions of prior years and reductions for settlements in the table above.

It is reasonably possible that, within the next 12 months, the amount of gross unrecognized tax benefits could be reduced by up to approximately $40,000 as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of unrecognized tax benefits within the next 12 months is expected to be insignificant.

We file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world. We are open to assessment of our U.S. federal income tax returns by the Internal Revenue Service for years after 2013, and our state and local income tax returns for years after 2013. We are open to assessment for significant foreign jurisdictions for years after 2008.


6.	Earnings Per Share

Basic earnings per share are computed using the weighted-average number of common shares outstanding during the year. Diluted earnings per share are computed using the weighted-average number of common shares and common share equivalents outstanding during the year. Common share equivalents represent the dilutive effect of outstanding equity-based awards. The reconciliation of the numerator and denominator of basic and diluted earnings per share was as follows:



	2020		2019		2018
Numerator:
Net income attributable to common shareholders	$	1,206,341	$	1,512,364	$	1,060,801
Denominator:
Basic - weighted-average common shares	128,418,495		129,997,640		133,004,613
Increase in weighted-average common shares from dilutive effect of equity-based awards	1,386,539		1,783,977		2,422,221
Diluted - weighted-average common shares, assuming exercise of equity-based awards	129,805,034		131,781,617		135,426,834
Basic earnings per share	$	9.39	$	11.63	$	7.98
Diluted earnings per share	$	9.29	$	11.48	$	7.83

For 2020, 2019 and 2018, 0.6 million, 0.9 million and 0.5 million common shares, respectively, subject to equity-based awards were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

7. Inventories

The majority of domestic inventories are valued by the last-in, first-out ("LIFO") cost method and the balance of the Company's inventories are valued by the first-in, first-out ("FIFO") cost method. Inventories valued by the FIFO cost method are stated at the lower of cost or net realizable value. Inventories valued by the LIFO cost method are stated at lower of cost or market.

Inventories valued on the LIFO cost method were approximately 33 percent of total inventories in 2020 and 41 percent in 2019. The current cost of these inventories exceeds their valuation determined on the LIFO basis by $219,854 and $222,715 in 2020 and 2019, respectively.

The inventories caption in the Consolidated Balance Sheet is comprised of the following components:



June 30,	2020		2019
Finished products	$	694,577	$	663,068
Work in process	881,104		850,778
Raw materials	238,950		164,286
Total	$	1,814,631	$	1,678,132


8.	Goodwill and Intangible Assets

The changes in the carrying amount of goodwill are as follows:



	Diversified Industrial Segment			Aerospace Systems Segment			Total
Balance June 30, 2018	$	5,405,771		$	98,649		$	5,504,420
Acquisitions	2,940			—			2,940
Foreign currency translation and other	(53,546		)	(9		)	(53,555		)
Balance June 30, 2019	$	5,355,165		$	98,640		$	5,453,805
Acquisitions	1,966,865			503,725			2,470,590
Foreign currency translation and other	(54,457		)	(3		)	(54,460		)
Balance June 30, 2020	$	7,267,573		$	602,362		$	7,869,935

Acquisitions represent the goodwill allocation during the measurement period subsequent to the applicable acquisition dates. Refer to Note 3 for further discussion.

We test goodwill 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. Our annual impairment tests performed in 2020, 2019 and 2018 resulted in no impairment loss being recognized. We did not identify any events or circumstances during 2020 that required performance of an interim impairment test. However, the effects of COVID-19 on the global economy, including further market disruption, lack of economic recovery or lower than anticipated customer demand, may require the performance of additional impairment tests in future periods.

Intangible assets are amortized on a straight-line method over their legal or estimated useful lives. The gross carrying value and accumulated amortization for each major category of intangible asset at June 30 are as follows:



	2020				2019
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents and technology	$	991,596	$	162,528	$	265,644	$	130,233
Trademarks	748,326		285,197		542,573		252,388
Customer lists and other	3,791,505		1,284,789		2,435,461		1,077,780
Total	$	5,531,427	$	1,732,514	$	3,243,678	$	1,460,401

Total intangible asset amortization expense in 2020, 2019 and 2018 was $284,632, $205,164 and $221,494, respectively. Estimated intangible asset amortization expense for the five years ending June 30, 2021 through 2025 is $321,200, $303,504, $293,603, $284,418 and $270,409, respectively.

Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No material intangible asset impairments occurred in 2020, 2019 or 2018.


9.	Financing Arrangements

During 2020, the Company amended and extended its existing multi-currency credit agreement, increasing its capacity to $2,500,000. As of June 30, 2020, $1,776,500 was available for borrowing under the credit agreement. The credit agreement expires in September 2024; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which may increase in the event our credit ratings are lowered. Although a lowering of our credit ratings would likely increase the cost of future debt, it would not limit our ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.

The Company is currently authorized to sell up to $2,500,000 of short-term commercial paper notes. Commercial paper notes outstanding at June 30, 2020 and 2019 were $723,500 and $586,000, respectively. The Company had no outstanding borrowings from foreign banks at June 30, 2020 and had borrowings of $786 at June 30, 2019. The weighted-average interest rate on notes payable during 2020 and 2019 was 2.2 percent and 2.8 percent, respectively.

In the ordinary course of business, our foreign locations may enter into financial guarantees through financial institutions which enable customers to be reimbursed in the event of nonperformance by the Company.

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. Based on our rating level at June 30, 2020, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. As of June 30, 2020, our debt to debt-shareholders' equity ratio was 0.58 to 1.0. We are in compliance with all covenants.


10.	Debt



June 30,	2020			2019
Domestic:
Fixed rate medium-term notes, 3.30% to 6.25%, due 2023 - 2045	$	2,125,000		$	2,125,000
Senior Notes, 2.70% to 4.10%, due 2024 - 2049	3,675,000			3,675,000
Term loans, Libor plus 112.5 bps, due 2023 - 2024	1,210,313			—
Foreign:
Euro Senior Notes, 1.125%, due 2025	786,520			796,040
Other long-term debt	12,708			340
Deferred debt issuance costs	(71,256		)	(75,321		)
Total long-term debt	7,738,285			6,521,059
Less: Long-term debt payable within one year	86,029			228
Long-term debt, net	$	7,652,256		$	6,520,831

During 2020, the Company entered into and drew against a term loan with an aggregate principal amount of $925,000, which will mature in its entirety in September 2023. We used the proceeds to finance a portion of the purchase of the Exotic acquisition. In addition, we drew against the $800,000 term loan, which will mature in its entirety in October 2022. We used the proceeds to finance a portion of the purchase of the Lord acquisition. Interest payments were made quarterly in 2020. The agreements permit interest rate re-set periods ranging from one to six months at our election, and interest is due at the conclusion of the re-set period chosen.

Principal amounts of long-term debt payable in the five years ending June 30, 2021 through 2025 are $87,218, $87,998, $587,458, $1,327,376 and $1,287,303, respectively. The principal amounts of long-term debt payable exclude the amortization of debt issuance costs.

11. Leases

We primarily enter into lease agreements for office space, distribution centers, certain manufacturing facilities and equipment. The majority of our leases are operating leases. Finance leases are immaterial to our financial statements. In addition, leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheet. Certain leases contain options that provide us with the ability to extend the lease term. Such options are included in the lease term when it is reasonably certain that the option will be exercised. When accounting for leases, we combine payments for leased assets, related services and other components of a lease. Payments within certain lease agreements are adjusted periodically for changes in an index or rate.

The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate. The incremental borrowing rate for our leases is determined based on lease term and the currency in which lease payments are made.

The components of lease expense are as follows:



	2020
Operating lease expense	$	50,267
Short-term lease cost	8,566
Variable lease cost	5,108
Total lease cost	$	63,941

Supplemental cash flow information related to operating leases are as follows:



	2020
Cash paid for amounts included in the measurement of operating lease liabilities	$	48,562
Right-of-use assets obtained in exchange for operating lease obligations	41,069

Supplemental balance sheet information related to operating leases is as follows:



	2020
Operating lease right-of-use assets (included within Investments and other assets)	$	138,601

Current operating lease liabilities (included within Other accrued liabilities)	$	43,327
Long-term operating lease liabilities (included within Other liabilities)	96,446
Total operating lease liabilities	$	139,773

Weighted average remaining lease term	5.2 years
Weighted average discount rate	2.1		%

Maturities of lease liabilities at June 30, 2020 are as follows:



	Operating Leases
2021	$	45,694
2022	33,212
2023	21,593
2024	13,749
2025	10,227
Thereafter	23,775
Total operating lease payments	$	148,250
Less imputed interest	8,477
Total operating lease liabilities	$	139,773

Future minimum rental commitments as of June 30, 2019, under non-cancelable operating leases, which expire at various dates, are as follows: 2020-$45,920; 2021-$31,115; 2022-$21,625; 2023-$13,228; 2024-$7,591 and after 2024-$22,723.

Rental expense in 2019 and 2018 was $126,752 and $126,940, respectively.

12. Retirement Benefits

Pensions - The Company has noncontributory defined benefit pension plans covering eligible employees, including certain employees in foreign countries. Plans for most salaried employees provide pay-related benefits based on years of service. Plans for hourly employees generally provide benefits based on flat-dollar amounts and years of service. We also have arrangements for certain key employees, which provide for supplemental retirement benefits. In general, the Company's policy is to fund these plans based on legal requirements, tax considerations, local practices and investment opportunities. We also sponsor defined contribution plans and participate in government-sponsored programs in certain foreign countries.

A summary of the Company's defined benefit pension plans follows:



	2020			2019			2018
Benefit cost
Service cost	$	82,743		$	76,647		$	82,993
Interest cost	142,479			160,542			144,339
Expected return on plan assets	(266,674		)	(251,072		)	(258,490		)
Amortization of prior service cost	5,633			6,655			6,570
Amortization of unrecognized actuarial loss	165,815			121,823			147,387
Amortization of transition obligation	18			18			18
Net periodic benefit cost	$	130,014		$	114,613		$	122,817

Components of net pension benefit cost, other than service cost, are included in other (income) expense, net in the Consolidated Statement of Income.



	2020			2019
Change in benefit obligation
Benefit obligation at beginning of year	$	5,487,574		$	5,033,997
Service cost	82,743			76,647
Interest cost	142,479			160,542
Acquisition	380,237			—
Plan amendments	3,286			7,719
Actuarial loss	569,306			491,792
Benefits paid	(232,048		)	(237,080		)
Foreign currency translation and other	(27,954		)	(46,043		)
Benefit obligation at end of year	$	6,405,623		$	5,487,574

Change in plan assets
Fair value of plan assets at beginning of year	$	4,244,969		$	3,915,889
Actual gain on plan assets	253,684			318,809
Acquisition	280,103			—
Employer contributions	72,753			284,965
Benefits paid	(232,048		)	(237,080		)
Foreign currency translation and other	(25,355		)	(37,614		)
Fair value of plan assets at end of year	$	4,594,106		$	4,244,969
Funded status	$	(1,811,517	)	$	(1,242,605	)



Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities	$	(1,423	)	$	(8,396	)
Pensions and other postretirement benefits	(1,810,094		)	(1,234,209		)
Net amount recognized	$	(1,811,517	)	$	(1,242,605	)

Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss	$	1,921,389		$	1,510,901
Prior service cost	17,184			19,602
Transition obligation	26			44
Net amount recognized	$	1,938,599		$	1,530,547

The presentation of the amounts recognized on the Consolidated Balance Sheet and in accumulated other comprehensive (loss) is on a debit (credit) basis and excludes the effect of income taxes.

The benefit obligation increased in 2020 upon acquisition of the Lord pension plans. Significant reductions in the discount rates also contributed to the increase in the benefit obligation, which was partially offset by a reduced salary scale and updated mortality assumptions for the domestic qualified defined benefit plan.

The increase in the benefit obligation in 2019, largely reflected in the net actuarial loss component, is primarily due to the decrease in the discount rate used to measure the obligation across all pension plans. Additionally, the benefit obligation increased slightly as a result of updated census data for the domestic qualified defined benefit plan due to delayed retirements and higher than anticipated compensation increases.

The increase in the plan assets' fair value in 2020 is attributable the acquisition of the Lord pension plans and investment gains. The increase in the plan assets' fair value in 2019 is attributable to a $200 million discretionary contribution to the domestic qualified defined benefit plan and investment gains.

The accumulated benefit obligation for all defined benefit plans was $6,102,038 and $5,184,637 at June 30, 2020 and 2019, respectively.

Information for pension plans with accumulated benefit obligations in excess of plan assets:



	2020		2019
Accumulated benefit obligation	$	6,028,952	$	5,094,129
Fair value of plan assets	4,503,316		4,140,395

Information for pension plans with projected benefit obligations in excess of plan assets:



	2020		2019
Projected benefit obligation	$	6,348,500	$	5,427,084
Fair value of plan assets	4,523,545		4,175,871

We expect to make cash contributions of approximately $71 million to our defined benefit pension plans in 2021, the majority of which relates to our unfunded non-U.S. plans. Estimated future benefit payments in the five years ending June 30, 2021 through 2025 are $266,011, $326,214, $284,379, $290,707 and $302,169, respectively, and $1,606,648 in the aggregate for the five years ending June 30, 2026 through June 30, 2030.

The assumptions used to measure net periodic benefit cost for the Company's significant defined benefit plans are:



	2020		2019		2018
U.S. defined benefit plan
Discount rate	3.28	%	4.01	%	3.64	%
Average increase in compensation	3.60	%	3.65	%	3.89	%
Expected return on plan assets	7.00	%	7.00	%	7.50	%
Non-U.S. defined benefit plans
Discount rate	0.2 to 2.96%		0.3 to 3.37%		0.3 to 7.57%
Average increase in compensation	1.75 to 3.90%		1.75 to 5.50%		2.0 to 5.50%
Expected return on plan assets	1.0 to 5.75%		1.0 to 5.75%		1.0 to 5.75%

The assumptions used to measure the benefit obligation for the Company's significant defined benefit plans are:



	2020		2019
U.S. defined benefit plan
Discount rate	2.36	%	3.28	%
Average increase in compensation	2.98	%	3.60	%
Non-U.S. defined benefit plans
Discount rate	0.2 to 3.03%		0.2 to 2.96%
Average increase in compensation	1.75 to 4.50%		1.75 to 3.90%

The discount rate assumption is based on current rates of high-quality, long-term corporate bonds over the same estimated time period that benefit payments will be required to be made. The expected return on plan assets assumption is based on the weighted-average expected return of the various asset classes in the plans' portfolio. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.

The weighted-average allocation of the majority of the assets related to defined benefit plans is as follows:



	2020		2019
Equity securities	41	%	43	%
Debt securities	49	%	54	%
Other investments	10	%	3	%
	100	%	100	%

The weighted-average target asset allocation as of June 30, 2020 is 39 percent equity securities, 43 percent debt securities and 18 percent other investments. The investment strategy for the Company's worldwide defined benefit pension plan assets focuses on achieving prudent actuarial funding ratios while maintaining acceptable levels of risk in order to provide adequate liquidity to meet immediate and future benefit requirements. This strategy requires investment portfolios that are broadly diversified across various asset classes and external investment managers. Assets held in the U.S. defined benefit plan account for approximately 75 percent of our total defined benefit plan assets. The overall investment strategy with respect to our U.S. defined benefit plan is to use a funding strategy more heavily weighted toward liability-hedging assets as the funded status improves. Over time, we will continue to add long duration fixed income investments to the portfolio. These securities are highly correlated with our pension liabilities and will be managed in a liability framework.

The fair values of pension plan assets at June 30, 2020 and at June 30, 2019, by asset class, are as follows:



	June 30, 2020			Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	97,112		$	96,004	$	1,108		$	—
Equity securities
U.S. based companies	243,656			243,656		—			—
Non-U.S. based companies	9,152			9,152		—			—
Fixed income securities
Corporate debt securities	616,582			1,477		615,105			—
Government issued securities	471,059			379,128		91,931			—
Mutual funds
Equity funds	111,466			111,466		—			—
Fixed income funds	12,912			12,912		—			—
Mutual funds measured at net asset value	259,776
Common/Collective trusts measured at net asset value	2,711,736
Limited Partnerships measured at net asset value	104,760
Miscellaneous	(44,105		)	—		(44,105		)	—
Total at June 30, 2020	$	4,594,106		$	853,795	$	664,039		$	—



	June 30, 2019			Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	111,520		$	117,823	$	(6,303	)	$	—
Equity securities
U.S. based companies	226,027			226,027		—			—
Non-U.S. based companies	16,385			16,385		—			—
Fixed income securities
Corporate debt securities	701,842			137,227		564,615			—
Government issued securities	528,394			367,518		160,876			—
Mutual funds
Equity funds	266,240			266,240		—			—
Fixed income funds	183,732			183,732		—			—
Mutual funds measured at net asset value	304,504
Common/Collective trusts
Equity funds	84,790			84,790		—			—
Common/Collective trusts measured at net asset value	1,872,473
Limited Partnerships measured at net asset value	240,803
Miscellaneous	(291,741		)	—		(291,741		)	—
Total at June 30, 2019	$	4,244,969		$	1,399,742	$	427,447		$	—

Cash and cash equivalents, including short-term investments, are valued at cost, which approximates fair value.

Equity securities are valued at the closing price reported on the active market on which the individual securities are traded. U.S. based companies include Parker stock with a fair value of $243,656 and $226,027 as of June 30, 2020 and 2019, respectively.

Fixed income securities are valued using both market observable inputs for similar assets that are traded on an active market and the closing price on the active market on which the individual securities are traded.

Mutual funds are valued using the closing market price reported on the active market on which the fund is traded or at net asset value per share and primarily consist of equity and fixed income funds. The equity funds primarily provide exposure to U.S. and international equities, real estate and commodities. The fixed income funds primarily provide exposure to high-yield securities and emerging market fixed income instruments. Mutual funds measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are presented in the tables above to permit reconciliation of the fair value hierarchy to total pension plan assets.

Common/Collective trusts primarily consist of equity, fixed income and real estate funds and are valued using the closing market price reported on the active market on which the fund is traded or at net asset value per share. Common/Collective trust investments can be redeemed without restriction after giving appropriate notice to the issuer. Generally, redemption of the entire investment balance of all common/collective trusts requires no more than a 90-day notice period. However, a certain real estate common/collective trust has a lock-up period expiring December 2020. The equity funds provide exposure to large, mid and small cap U.S. equities, international large and small cap equities and emerging market equities. The fixed income funds provide exposure to U.S., international and emerging market debt securities. Common/Collective trusts measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are presented in the tables above to permit reconciliation of the fair value hierarchy to total pension plan assets.

Limited Partnerships' interest in venture capital investments are measured at fair value based on net asset value as determined by the respective fund investment. Hedge funds are also included in this category. The hedge funds provide exposure to a variety of hedging strategies, including long/short equity, relative value, event driven and global macro and are also measured at fair value using the net asset value per share. As of June 30, 2020, the only limited partnership investment, subject to a lock-up period of two years, is restricted to a maximum redemption of 20 percent of its account balance every six months upon a 90-day notification period. Hedge fund investments can be redeemed either monthly or quarterly and without restriction after giving appropriate notice to the issuer. Redemption of the entire hedge fund investment balance generally requires no more than a 95-day notice period. Limited Partnerships measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are presented in the tables above to permit reconciliation of the fair value hierarchy to total pension plan assets.

Miscellaneous primarily includes insurance contracts held in the asset portfolio of the Company's non-U.S. defined benefit pension plans and net payables for securities purchased but not settled in the asset portfolio of the Company's U.S. defined benefit pension plan. Insurance contracts are valued at the present value of future cash flows promised under the terms of the insurance contracts.

The primary investment objective of equity securities and equity funds, within both the mutual fund and common/collective trust asset class, is to obtain capital appreciation in an amount that at least equals various market-based benchmarks. The primary investment objective of fixed income securities and fixed income funds, within both the mutual fund and common/collective trust asset class, is to provide for a constant stream of income while preserving capital. The primary investment objective of limited partnerships is to achieve capital appreciation through an investment program focused on specialized investment strategies. The primary investment objective of the investments in the miscellaneous category is to provide a stable rate of return over a specified period of time.

Employee Savings Plan - We sponsor an employee stock ownership plan ("ESOP") as part of our legacy savings and investment 401(k) plan. The ESOP is available to eligible domestic employees. Company matching contributions, up to a maximum of four percent of an employee's annual compensation, are recorded as compensation expense. Participants may direct company matching contributions to any investment option within the savings and investment 401(k) plan.



	2020		2019		2018
Shares held by ESOP	5,306,643		6,134,280		6,476,154
Company matching contributions	$	69,434	$	72,032	$	65,262

In addition to shares within the ESOP, as of June 30, 2020, employees have elected to invest in 1,573,247 shares of common stock within a company stock fund of the savings and investment 401(k) plan.

The Company has a retirement income account ("RIA") within our legacy savings and investment 401(k) plan. We make a cash contribution to the participant's RIA each year, the amount of which is based on the participant's age and years of service. Participants do not contribute to the RIA. The Company recognized $38,387, $30,603 and $29,023 in expense related to the RIA in 2020, 2019 and 2018, respectively.

During 2020, we acquired several defined contribution plans comprising similar company matching contributions and RIA features as our legacy plan. We recorded additional expense of $4,190 and $7,439 for company matching contributions and RIA, respectively, for these acquired plans in 2020. These acquired plans will be merged into our legacy savings and investment 401(k) plan as soon as administratively possible. We recorded additional expense of $4,481 for company matching contributions related to the acquired Clarcor defined contribution plans in 2018. The former employees of Clarcor became eligible to participate in our legacy savings and investment 401(k) plan during 2018.

Other Postretirement Benefits - The Company provides postretirement medical and life insurance benefits to certain retirees and eligible dependents. Most plans are contributory, with retiree contributions adjusted annually. The plans are unfunded and pay stated percentages of covered medically necessary expenses incurred by retirees after subtracting payments by Medicare or other providers and after stated deductibles have been met. For most plans, the Company has established cost maximums to more effectively control future medical costs. We have reserved the right to change these benefit plans.

The Company recognized $1,551, $1,838 and $2,755 in expense related to other postretirement benefits in 2020, 2019 and 2018, respectively. Components of net other postretirement benefit cost, other than service cost, are included in other (income) expense, net in the Consolidated Statement of Income.



	2020			2019
Change in benefit obligation
Benefit obligation at beginning of year	$	60,998		$	66,521
Service cost	250			205
Interest cost	1,686			2,043
Acquisition	12,638			—
Actuarial loss (gain)	1,276			(3,235		)
Benefits paid	(4,718		)	(4,536		)
Benefit obligation at end of year	$	72,130		$	60,998
Funded status	$	(72,130	)	$	(60,998	)



Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities	$	(6,374	)	$	(5,308	)
Pensions and other postretirement benefits	(65,756		)	(55,690		)
Net amount recognized	$	(72,130	)	$	(60,998	)

Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial gain	$	(173	)	$	(1,713	)
Prior service credit	(73		)	(194		)
Net amount recognized	$	(246	)	$	(1,907	)

The presentation of the amounts recognized on the Consolidated Balance Sheet and in accumulated other comprehensive (loss) is on a debit (credit) basis and is before the effect of income taxes.

The benefit obligation increased in 2020, primarily reflected in the acquisition component, is a result of assuming the Lord postretirement plans. The decrease in the benefit obligation in 2019, largely reflected in the net actuarial gain component, is primarily due to updated census data resulting from a different mix of benefit selections and actuarial assumptions reflecting lower benefit claims offset by decreases in the discount rates.

The assumptions used to measure the net periodic benefit cost for postretirement benefit obligations are:



	2020		2019		2018
Discount rate	3.15	%	3.92	%	3.46	%
Current medical cost trend rate (Pre-65 participants)	7.09	%	7.47	%	8.19	%
Current medical cost trend rate (Post-65 participants)	7.43	%	7.87	%	9.79	%
Ultimate medical cost trend rate	4.50	%	4.50	%	4.50	%
Medical cost trend rate decreases to ultimate in year	2028		2026		2025

The discount rate assumption used to measure the benefit obligation was 2.14 percent in 2020 and 3.15 percent in 2019.

Estimated future benefit payments for other postretirement benefits in the five years ending June 30, 2021 through 2025 are $6,373, $5,772, $5,256, $4,938 and $4,622, respectively, and $20,172 in the aggregate for the five years ending June 30, 2026 through June 30, 2030.

Other - The Company has established nonqualified deferred compensation programs, which permit officers, directors and certain management employees to annually elect to defer a portion of their compensation, on a pre-tax basis, until their retirement. The retirement benefit to be provided is based on the amount of compensation deferred, company matching contributions and earnings on the deferrals. In addition, we maintain a defined contribution nonqualified supplemental executive pension plan in which the Company is the only contributor. During 2020, 2019 and 2018, we recorded expense relating to these programs of $5,863, $5,916 and $13,420, respectively.

The Company has invested in corporate-owned life insurance policies to assist in meeting the obligations under these programs. The policies are held in a rabbi trust and are recorded as assets of the Company.


13.	Equity

Changes in accumulated other comprehensive (loss) in shareholders' equity by component:



	Foreign Currency Translation Adjustment and Other			Retirement Benefit Plans			Total
Balance June 30, 2018	$	(943,477	)	$	(819,609	)	$	(1,763,086	)
Impact of adoption of ASU 2016-01	(1,734		)	—			(1,734		)
Other comprehensive (loss) before reclassifications	(70,023		)	(325,213		)	(395,236		)
Amounts reclassified from accumulated other comprehensive (loss)	3,578			97,430			101,008
Balance June 30, 2019	$	(1,011,656	)	$	(1,047,392	)	$	(2,059,048	)
Other comprehensive (loss) before reclassifications	(182,281		)	(447,161		)	(629,442		)
Amounts reclassified from accumulated other comprehensive (loss)	—			129,615			129,615
Balance June 30, 2020	$	(1,193,937	)	$	(1,364,938	)	$	(2,558,875	)

Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 2020:



Details about Accumulated Other Comprehensive (Loss) Components	Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)			Consolidated Statement of Income Classification
Retirement benefit plans
Amortization of prior service cost and initial net obligation	$	(5,531	)	Other (income) expense, net
Recognized actuarial loss	(165,550		)	Other (income) expense, net
Total before tax	(171,081		)
Tax benefit	41,466
Net of tax	$	(129,615	)

Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity during 2019:



Details about Accumulated Other Comprehensive (Loss) Components	Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)			Consolidated Statement of Income Classification
Retirement benefit plans
Amortization of prior service cost and initial net obligation	$	(6,552	)	Other (income) expense, net
Recognized actuarial loss	(121,534		)	Other (income) expense, net
Total before tax	(128,086		)
Tax benefit	30,656
Net of tax	$	(97,430	)

Share Repurchases - The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized to repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a year. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic.

The number of common shares repurchased at the average purchase price follows:



	2020		2019		2018
Shares repurchased	818,581		4,755,273		1,738,234
Average price per share including commissions	$	179.29	$	168.23	$	172.59


14.	Stock Incentive Plans

The Company's 2016 Omnibus Stock Incentive Plan ("2016 SIP") provides for the granting of share-based incentive awards in the form of nonqualified stock options, stock appreciation rights ("SARs"), restricted stock units ("RSUs") and restricted and unrestricted stock to officers and key employees of the Company. On October 23, 2019, our shareholders approved the Board of Directors' recommendation to increase the number of shares of common stock authorized for issuance under the 2016 SIP by 7.8 million shares. The amended aggregate number of shares of common stock authorized for total issuance under the 2016 SIP is 23.8 million. At June 30, 2020, 13.5 million common stock shares were available for future issuance.

We satisfy share-based incentive award obligations by issuing shares of common stock out of treasury, which have been repurchased pursuant to our share repurchase program described in Note 13, or through the issuance of previously unissued common stock.

SARs - Upon exercise, SARs entitle the participant to receive shares of common stock equal to the increase in value of the award between the grant date and the exercise date. SARs are exercisable from one to three years after the date of grant and expire no more than 10 years after grant.

The fair value of each SAR award granted in 2020, 2019 and 2018 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:



	2020			2019			2018
Risk-free interest rate	1.5		%	2.8		%	1.9		%
Expected life of award	5.1 years			5.1 years			5.2 years
Expected dividend yield of stock	2.0		%	1.9		%	2.0		%
Expected volatility of stock	25.9		%	24.2		%	23.4		%
Weighted-average fair value	$	31.68		$	35.09		$	29.71

The risk-free interest rate was based on U.S. Treasury yields with a term similar to the expected life of the award. The expected life of the award was derived by referring to actual exercise and post-vesting employment termination experience. The expected dividend yield was based on our historical dividend rate and stock price over a period similar to the expected life of the award. The expected volatility of stock was derived by referring to changes in our historical common stock prices over a time-frame similar to the expected life of the award.

SAR activity during 2020 is as follows (aggregate intrinsic value in millions):



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding June 30, 2019	5,749,455		$	119.29
Granted	815,035		$	158.90
Exercised	(1,341,539	)	$	91.37
Canceled	(38,981	)	$	161.10
Outstanding June 30, 2020	5,183,970		$	132.42	6.0 years	$	263.6
Exercisable June 30, 2020	3,644,468		$	120.28	5.0 years	$	229.6

A summary of the status and changes of shares subject to SAR awards and the related average price per share follows:



	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested June 30, 2019	1,661,198		$	31.58
Granted	815,035		$	31.68
Vested	(899,126	)	$	30.26
Canceled	(37,605	)	$	31.46
Nonvested June 30, 2020	1,539,502		$	32.41

During 2020, 2019 and 2018, we recognized stock-based compensation expense of $26,108, $26,568 and $27,422, respectively, relating to SAR awards. The Company derives a tax deduction measured by the excess of the market value over the grant price at the date stock-based awards are exercised. The related income tax benefit was credited to income tax expense.

At June 30, 2020, $10,364 of expense with respect to nonvested SAR awards has yet to be recognized and will be amortized into expense over a weighted-average period of approximately 14 months. The total fair value of shares vested during 2020, 2019 and 2018 was $27,209, $25,365 and $26,461, respectively.

Information related to SAR awards exercised during 2020, 2019 and 2018 is as follows:



	2020		2019		2018
Net cash proceeds	$	2,623	$	2,475	$	3,682
Intrinsic value	133,641		95,502		136,000
Income tax benefit	$	21,132	$	15,584	$	28,701
Number of shares surrendered	228,986		158,610		269,670

RSUs - RSUs constitute an agreement to deliver shares of common stock to the participant at the end of a vesting period. Generally, the RSUs granted to employees vest, and the underlying stock is issued ratably, over a three-year graded vesting period. Nonvested RSUs may not be transferred and do not have dividend or voting rights. For each nonvested RSU, recipients are entitled to receive a dividend equivalent, payable in cash or common shares, equal to the cash dividend per share paid to common shareholders.

The fair value of each RSU award granted in 2020, 2019 and 2018 was based on the fair market value of our common stock on the date of grant. A summary of the status and changes of shares subject to RSU awards for employees and the related average price per share follows:



	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested June 30, 2019	374,080		$	155.07
Granted	150,489		$	160.54
Vested	(158,823	)	$	147.20
Canceled	(15,173	)	$	162.41
Nonvested June 30, 2020	350,573		$	160.66

During 2020, 2019 and 2018, we recognized stock-based compensation expense of $25,560, $25,258 and $24,073, respectively, relating to RSU awards for employees. At June 30, 2020, $18,474 of expense with respect to nonvested RSU awards has yet to be recognized and will be amortized into expense over a weighted-average period of approximately 19 months. The total fair value of RSU awards vested during 2020, 2019 and 2018 was $23,380, $20,475 and $20,681, respectively. We recognized an income tax benefit of $1,037, $1,548 and $2,451 relating to the issuance of common stock for RSU awards that vested during 2020, 2019 and 2018, respectively.

Additionally, we granted RSUs with a one-year vesting period to non-employee members of the Board of Directors. Recipients receive a dividend equivalent payable in common shares, equal to the cash dividend per share paid to common shareholders. A summary of the status and changes of shares subject to Board of Directors RSU awards and the related average price per share follows:



	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested June 30, 2019	8,003		$	147.38
Granted	8,300		$	187.31
Vested	(8,041	)	$	147.38
Nonvested June 30, 2020	8,262		$	187.49

The fair value of each RSU award granted to the Board of Directors in 2020, 2019 and 2018 was based on the fair market value of our common stock on the date of grant. In 2020, 2019 and 2018, we recognized stock-based compensation expense of $1,434, $1,345, and $1,697, respectively, relating to these awards. During 2020, 2019 and 2018, we recognized an income tax benefit (cost) of $86, $(82) and $270, respectively related to the vesting of Board of Directors RSU awards. At June 30, 2020, $510 of expense with respect to nonvested RSU awards granted to the Board of Directors has yet to be recognized and will be amortized into expense over a weighted-average period of approximately four months.

LTIP - The Company's Long Term Incentive Plans ("LTIP") provide for the issuance of unrestricted stock to certain officers and key employees based on the attainment of certain goals relating to our revenue growth, earnings per share growth and return on invested capital during the three-year performance period.



Stock issued and surrendered for LTIP	2020		2019		2018
LTIP three-year plan	2017-18-19		2016-17-18		2015-16-17
Number of shares issued	279,469		293,136		308,278
Number of shares surrendered	132,449		134,169		139,918
Share value on date of issuance	$	134.95	$	183.00	$	176.39
Total value of shares issued	$	37,714	$	53,644	$	54,377

Under the Company's 2018-19-20 LTIP, a payout of unrestricted stock will be issued in April 2021.

The fair value of each LTIP award granted in 2020, 2019 and 2018 was based on the fair market value of our common stock on the date of grant. Beginning January 2019, we changed the terms of the LTIP plan allowing newly granted LTIP awards to earn a dividend equivalent unit, payable in common shares, equal to the cash dividend per share paid to common shareholders. These dividend equivalent units do not have dividend or voting rights and are subject to the same performance goals as the initial award granted. Since the revised terms of the LTIP were not applied retroactively, any nonvested LTIP awards granted prior to January 2019 are ineligible to earn dividend equivalent units. A summary of the status and changes of shares relating to the LTIP and the related average price per share follows:



	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested June 30, 2019	600,717		$	169.36
Granted	173,075		$	197.84
Vested	(226,081	)	$	149.52
Canceled	(8,652	)	$	174.29
Nonvested June 30, 2020	539,059		$	186.75

During 2020, 2019 and 2018, we recorded stock-based compensation expense of $58,273, $50,908 and $65,640, respectively, relating to the LTIP. During 2020, 2019 and 2018, we recognized an income tax (cost) benefit of $(1,251), $14,101 and $3,893, respectively, relating to the LTIP.


15.	Research and Development

Research and development costs amounted to $293,837 in 2020, $294,852 in 2019 and $327,877 in 2018. These amounts include both 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 amounted to $56,964 in 2020, $44,484 in 2019 and $40,823 in 2018. These costs are included in the total research and development cost for each of the respective years.


16.	Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities and other investments, accounts receivable and long-term investments as well as obligations under accounts payable, trade, notes payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable, accounts payable, trade and notes payable approximate fair value.

Marketable securities and other investments include deposits and equity investments. Deposits are recorded at cost, and equity investments are recorded at fair value. Changes in fair value of equity investments are recognized in net income.

Gross unrealized gains and losses related to equity investments were not material as of June 30, 2020 and 2019. There were no facts or circumstances that indicated the unrealized losses were other than temporary.

The carrying value of long-term debt and estimated fair value of long-term debt at June 30 are as follows:



	2020		2019
Carrying value of long-term debt	$	7,809,541	$	6,596,380
Estimated fair value of long-term debt	8,574,401		7,012,641

The fair value of long-term debt is classified within level 2 of the fair value hierarchy.

The Company utilizes derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions, and 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.

The Company’s €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.

During 2020, we settled the cross-currency swap with an aggregate notional amount of €235 million, which was designated as a net investment hedge, for proceeds of $44 million. These proceeds are included in cash flows from investing activities in the Consolidated Statement of Cash Flows. Additionally, we entered into two cross-currency swaps with aggregate notional amounts of €359 million and ¥2,149 million due June 2029. These cross-currency swaps have been designated as hedges of net investments in certain foreign subsidiaries.

Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value.

The location and fair value of derivative financial instruments reported on the Consolidated Balance Sheet are as follows:



	Balance Sheet Caption	2020		2019
Net investment hedges
Cross-currency swap contracts	Investments and other assets	$	—	$	24,545
Cross-currency swap contracts	Other liabilities	30,860		—
Cash flow hedges
Forward exchange contracts	Non-trade and notes receivable	5,311		13,242
Forward exchange contracts	Other accrued liabilities	3,474		2,578
Costless collar contracts	Non-trade and notes receivable	2,250		457
Costless collar contracts	Other accrued liabilities	661		1,934

The cross-currency swap, forward exchange contracts and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. The Company has not entered into any master netting arrangements.

The cross-currency swap contracts have been designated as hedging instruments. The forward exchange and costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.

Derivatives not designated as hedges are adjusted to fair value by recording gains and losses through the cost of sales caption in the Consolidated Statement of Income.

Derivatives designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive (loss) on the Consolidated Balance Sheet until the hedged item is recognized in earnings. We elected to assess the effectiveness of the €359 million and ¥2,149 million cross-currency swap hedging instruments using the spot method. Under this method, the periodic interest settlements are recognized directly in earnings through interest expense.

Net (losses) of $(27) million relating to forward exchange contracts were recorded within cost of sales on the Consolidated Statement of Income for the year ended June 30, 2020. All other gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income during 2020, 2019 and 2018 were not material.

(Losses) gains on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) in the Consolidated Balance Sheet are as follows:



	2020			2019
Cross-currency swap contracts	$	(9,435	)	$	13,723
Foreign denominated debt	7,205			16,458

During 2020, the periodic interest settlements related to the cross currency swaps were not material. No portion of these financial instruments were excluded from the effectiveness testing during 2019 and 2018.

A summary of financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 2020 and 2019 are as follows:



	June 30, 2020		Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Equity securities	$	7,901	$	7,901	$	—	$	—
Derivatives	7,561		—		7,561		—
Liabilities:
Derivatives	34,995		—		34,995		—



	June 30, 2019		Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Equity securities	$	7,533	$	7,533	$	—	$	—
Derivatives	38,244		—		38,244		—
Investments measured at net asset value	9,728
Liabilities:
Derivatives	4,512		—		4,512		—

The fair values of the equity securities are determined using the closing market price reported in the active market in which the fund is traded.

Derivatives consist of forward exchange, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.

Investments measured at net asset value primarily consist of investments in fixed income mutual funds, which are measured at fair value using the net asset value per share practical expedient. These investments have not been categorized in the fair value hierarchy. The Company has the ability to liquidate these investments after giving appropriate notice to the issuer.

The primary investment objective for all investments is the preservation of principal and liquidity while earning income.

There are no other financial assets or financial liabilities that are marked to market on a recurring basis.


17.	Contingencies

The Company is involved in various litigation matters arising in the normal course of business, including proceedings based on product liability claims, workers' compensation claims and alleged violations of various environmental laws. We are self-insured in the United States for health care, workers' compensation, general liability and product liability up to predetermined amounts, above which third party insurance applies. Management regularly reviews the probable outcome of these proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage and the established accruals for liabilities. While the outcome of pending proceedings cannot be predicted with certainty, management believes that any liabilities that may result from these proceedings will not have a material adverse effect on our liquidity, financial condition or results of operations.

Environmental - The Company is currently responsible for environmental remediation at various manufacturing facilities presently or formerly operated by the Company and has been named as a “potentially responsible party,” along with other companies, at off-site waste disposal facilities and regional sites.

As of June 30, 2020, we had an accrual of $19,351 for environmental matters, which are probable and reasonably estimable. The accrual is 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 our liability in proportion to other responsible parties.

Our estimated total liability for environmental matters ranges from a minimum of $19.4 million to a maximum of $81.9 million. The largest range for any one site is approximately $10.5 million. The actual costs we will incur are 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 other responsible parties to pay, and any insurance or other third-party recoveries.


18.	Quarterly Information (Unaudited)



2020	1st		2nd		3rd		4th		Total
Net sales	$	3,334,511	$	3,497,974	$	3,702,432	$	3,160,603	$	13,695,520
Net income attributable to common shareholders	338,898		204,474		367,253		295,716		1,206,341
Diluted earnings per share	2.60		1.57		2.83		2.27		9.29



2019	1st		2nd		3rd		4th		Total
Net sales	$	3,479,294	$	3,472,045	$	3,687,518	$	3,681,467	$	14,320,324
Net income attributable to common shareholders	375,711		311,737		411,248		413,668		1,512,364
Diluted earnings per share	2.79		2.36		3.14		3.17		11.48

Earnings per share amounts are computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share amounts may not equal the total computed for the year.

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