Item 1. FINANCIAL STATEMENTS

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

			Three Months Ended
			September 30,
			2021						2020*
Net sales			$	3,762,809					$	3,230,540
Cost of sales			2,713,897						2,386,449
Selling, general and administrative expenses			407,765						369,851
Interest expense			59,350						65,958
Other expense (income), net			10,052						(4,892)
Income before income taxes			571,745						413,174
Income taxes			120,282						93,063
Net income			451,463						320,111
Less: Noncontrolling interest in subsidiaries' earnings			306						308
Net income attributable to common shareholders			$	451,157					$	319,803
Earnings per share attributable to common shareholders:
Basic			$	3.50					$	2.48
Diluted			$	3.45					$	2.45
*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2021 Annual Report on Form 10-K.

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

			Three Months Ended
			September 30,
			2021						2020*
Net income			$	451,463					$	320,111
Less: Noncontrolling interests in subsidiaries' earnings			306						308
Net income attributable to common shareholders			451,157						319,803
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment			(68,324)						130,682
Retirement benefits plan activity			29,022						40,152
Other comprehensive (loss) income			(39,302)						170,834
Less: Other comprehensive (loss) income for noncontrolling interests			(539)						431
Other comprehensive (loss) income attributable to common shareholders			(38,763)						170,403
Total comprehensive income attributable to common shareholders			$	412,394					$	490,206
*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2021 Annual Report on Form 10-K.

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

(Unaudited)

			September 30, 2021						June 30, 2021
ASSETS
Current assets:
Cash and cash equivalents			$	478,582					$	733,117
Marketable securities and other investments			40,160						39,116
Trade accounts receivable, net			2,109,648						2,183,594
Non-trade and notes receivable			315,571						326,315
Inventories			2,264,725						2,090,642
Prepaid expenses and other			422,588						243,966
Total current assets			5,631,274						5,616,750
Property, plant and equipment			6,019,237						6,040,220
Less: Accumulated depreciation			3,795,703						3,773,744
Property, plant and equipment, net			2,223,534						2,266,476
Deferred income taxes			145,972						104,251
Investments and other assets			800,211						774,239
Intangible assets, net			3,426,540						3,519,797
Goodwill			8,009,340						8,059,687
Total assets			$	20,236,871					$	20,341,200
LIABILITIES
Current liabilities:
Notes payable and long-term debt payable within one year			$	302,309					$	2,824
Accounts payable, trade			1,636,272						1,667,878
Accrued payrolls and other compensation			341,355						507,027
Accrued domestic and foreign taxes			279,173						236,384
Other accrued liabilities			724,134						682,390
Total current liabilities			3,283,243						3,096,503
Long-term debt			6,263,941						6,582,053
Pensions and other postretirement benefits			997,392						1,055,638
Deferred income taxes			568,369						553,981
Other liabilities			618,081						639,355
Total liabilities			11,731,026						11,927,530
EQUITY
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 at September 30 and June 30			90,523						90,523
Additional capital			358,677						329,619
Retained earnings			15,233,799						14,915,497
Accumulated other comprehensive (loss)			(1,605,490)						(1,566,727)
Treasury shares, at cost; 52,531,175 shares at September 30 and 51,900,460 shares at June 30			(5,586,728)						(5,370,605)
Total shareholders’ equity			8,490,781						8,398,307
Noncontrolling interests			15,064						15,363
Total equity			8,505,845						8,413,670
Total liabilities and equity			$	20,236,871					$	20,341,200

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

			Three Months Ended
			September 30,
			2021						2020*
CASH FLOWS FROM OPERATING ACTIVITIES
Net income			$	451,463					$	320,111
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			65,751						66,739
Amortization			79,771						81,703
Share incentive plan compensation			57,666						58,461
Deferred income taxes			(40,027)						11,043
Foreign currency transaction gain			(9,470)						(4,855)
Gain on disposal of property, plant and equipment			(30)						(498)
Loss (gain) on marketable securities			804						(340)
Gain on investments			(200)						(970)
Other			42,823						5,302
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable, net			74,070						15,532
Inventories			(190,779)						42,039
Prepaid expenses and other			37,763						53,129
Other assets			(27,553)						(9,693)
Accounts payable, trade			(20,365)						138,900
Accrued payrolls and other compensation			(161,560)						(98,186)
Accrued domestic and foreign taxes			46,592						(2,209)
Other accrued liabilities			36,288						34,457
Pensions and other postretirement benefits			(15,651)						17,652
Other liabilities			(2,997)						9,057
Net cash provided by operating activities			424,359						737,374
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(48,203)						(42,117)
Proceeds from sale of property, plant and equipment			7,751						6,590
Purchases of marketable securities and other investments			(7,456)						(10,726)
Maturities and sales of marketable securities and other investments			5,312						49,107
Other			649						1,054
Net cash (used in) provided by investing activities			(41,947)						3,908
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options			1,089						989
Payments for common shares			(245,820)						(22,739)
(Payments for) proceeds from notes payable, net			(4)						114,400
Proceeds from long-term borrowings			1						—
Payments for long-term borrowings			(592)						(671,842)
Financing fees paid			(42,703)						—
Dividends paid			(132,921)						(113,542)
Net cash (used in) financing activities			(420,950)						(692,734)
Effect of exchange rate changes on cash			(997)						8,332
Net (decrease) increase in cash, cash equivalents and restricted cash			(39,535)						56,880
Cash, cash equivalents and restricted cash at beginning of year			733,117						685,514
Cash, cash equivalents and restricted cash at end of period			$	693,582					$	742,394
*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2021 Annual Report on Form 10-K.

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

BUSINESS SEGMENT INFORMATION

(Dollars in thousands)

(Unaudited)

The Company operates in two reportable business segments: Diversified Industrial and Aerospace Systems. Both segments utilize eight core technologies, including hydraulics, pneumatics, electromechanical, filtration, fluid and gas handling, process control, engineered materials and climate control, to drive superior customer problem solving and value creation.

Diversified Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural, and military machinery and equipment and has significant international operations. Sales are made directly to major original equipment manufacturers ("OEMs") and through a broad distribution network to smaller OEMs and the aftermarket.

Aerospace Systems - This segment designs and manufactures products and provides aftermarket support for commercial, business jet, military and general aviation aircraft, missile and spacecraft markets. The Aerospace Systems Segment provides a full range of systems and components for hydraulic, pneumatic and fuel applications.

						Three Months Ended
						September 30,
						2021						2020*
Net sales
Diversified Industrial:
North America						$	1,793,715					$	1,528,111
International						1,376,436						1,129,251
Aerospace Systems						592,658						573,178
Total net sales						$	3,762,809					$	3,230,540
Segment operating income
Diversified Industrial:
North America						$	333,702					$	268,833
International						291,176						186,901
Aerospace Systems						118,251						86,766
Total segment operating income						743,129						542,500
Corporate general and administrative expenses						49,072						36,735
Income before interest expense and other expense						694,057						505,765
Interest expense						59,350						65,958
Other expense						62,962						26,633
Income before income taxes						$	571,745					$	413,174
*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2021 Annual Report on Form 10-K.

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PARKER-HANNIFIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.

1. Management representation

In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of September 30, 2021, the results of operations for the three months ended September 30, 2021 and 2020 and cash flows for the three months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2021 Annual Report on Form 10-K.

The future impacts of the novel coronavirus ("COVID-19") pandemic and its residual effects, including economic uncertainty and disruption within the global supply chain, labor markets and aerospace industry, on our business remain uncertain. Therefore, accounting estimates and assumptions may change over time in response to the impacts of COVID-19. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.

Subsequent Events

The Company has evaluated subsequent events that occurred through the date these financial statements were issued. In connection with the proposed acquisition of Meggitt plc ("Meggitt"), the Company entered into deal-contingent forward contracts during October 2021 to mitigate the risk of appreciation in the GBP-denominated purchase price. The deal-contingent forward contracts have an aggregate notional amount of £6,415 million, and settlement is contingent upon closing the proposed acquisition.

During October 2021, we issued $2,126 million of commercial paper. We used the net proceeds and cash on hand to deposit a total of $2,272 million into the escrow account designated for the proposed acquisition. As of October 31, 2021, the balance of the escrow account is $2,487 million. After consideration of the increase in funds designated for the proposed acquisition and the deal-contingent forward contracts, the aggregate principal amount of the bridge credit agreement, dated August 2, 2021 (the "Bridge Credit Agreement") was decreased to £3,200 million.

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.

Diversified Industrial Segment revenues by technology platform:

						Three Months Ended
						September 30,
						2021						2020
Motion Systems						$	828,672					$	657,141
Flow and Process Control						1,085,423						924,125
Filtration and Engineered Materials						1,256,056						1,076,096
Total						$	3,170,151					$	2,657,362

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Aerospace Systems Segment revenues by product platform:

						Three Months Ended
						September 30,
						2021						2020
Flight Control Actuation						$	177,353					$	158,102
Fuel, Inerting and Engine Motion Control						122,319						118,963
Hydraulics						73,341						75,918
Engine Components						141,608						149,037
Airframe and Engine Fluid Conveyance						54,033						47,362
Other						24,004						23,796
Total						$	592,658					$	573,178

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

						Three Months Ended
						September 30,
						2021						2020
North America						$	2,384,974					$	2,096,165
Europe						761,970						615,572
Asia Pacific						568,134						485,148
Latin America						47,731						33,655
Total						$	3,762,809					$	3,230,540

The majority of revenues from the Aerospace Systems Segment are 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:

						September 30, 2021						June 30, 2021
Contract assets, current (included within Prepaid expenses and other)						$	25,936					$	34,190
Contract assets, noncurrent (included within Investments and other assets)						2,471						1,884
Total contract assets						28,407						36,074
Contract liabilities, current (included within Other accrued liabilities)						(45,439)						(51,211)
Contract liabilities, noncurrent (included within Other liabilities)						(2,250)						(3,080)
Total contract liabilities						(47,689)						(54,291)
Net contract liabilities						$	(19,282)					$	(18,217)

At September 30, 2021, the change in net contract liabilities was primarily due to timing differences between when revenue was recognized and the receipt of advance payments. During the three months ended September 30, 2021, approximately $21 million of revenue was recognized that was included in the contract liabilities at June 30, 2021.

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 September 30, 2021 was $6,783 million, of which approximately 85 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.

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3. Proposed Acquisition

On August 2, 2021, the Company announced that it reached an agreement on the terms of a recommended cash acquisition of the entire issued and to be issued ordinary share capital of Meggitt for 800 pence per share (the "Acquisition"), which is approximately £6,255 million based on issued share capital at September 30, 2021.

Meggitt is a leader in design, manufacturing and aftermarket support of technologically differentiated systems and equipment in aerospace, defense and selected energy markets with annual sales of approximately $2.3 billion for the year ended December 31, 2020. We intend to fund the proposed Acquisition with cash and new debt. Refer to Note 13 for further discussion. The proposed Acquisition remains subject to customary closing conditions, including regulatory clearances. Acquisition-related transaction costs totaled $13 million for the current-year quarter. These costs are included in selling, general and administrative expenses in the Consolidated Statement of Income.

Restricted Cash

At September 30, 2021, the Company held approximately $215 million of cash in an escrow account that was restricted for payments related to the proposed Acquisition, all of which was recorded within prepaid expenses and other in the Consolidated Balance Sheet.

4. Earnings per share

The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three months ended September 30, 2021 and 2020.

									Three Months Ended
									September 30,
															2021						2020*
Numerator:
Net income attributable to common shareholders															$	451,157					$	319,803
Denominator:
Basic - weighted average common shares															128,726,721						128,707,745
Increase in weighted average common shares from dilutive effect of equity-based awards															2,101,250						1,586,478
Diluted - weighted average common shares, assuming exercise of equity-based awards															130,827,971						130,294,223
Basic earnings per share															$	3.50					$	2.48
Diluted earnings per share															$	3.45					$	2.45
*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2021 Annual Report on Form 10-K.

For the three months ended September 30, 2021 and 2020, 165,732 and 530,438 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

5. Share repurchase program

The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized for repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a fiscal year. There is no expiration date for this program. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. During the three months ended September 30, 2021, we repurchased 767,600 shares at an average price, including commissions, of $300.07 per share.

6. 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. We evaluate the collectibility of our receivables based on historical experience and current and forecasted economic conditions based on management's judgment. Additionally, receivables are written off to bad debt when management makes a final determination of uncollectibility. Allowance for credit losses was $12 million at September 30, 2021 and June 30, 2021.

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7. Non-trade and notes receivable

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

						September 30, 2021						June 30, 2021
Notes receivable						$	128,414					$	144,441
Accounts receivable, other						187,157						181,874
Total						$	315,571					$	326,315

8. Inventories

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

						September 30, 2021						June 30, 2021
Finished products						$	774,749					$	733,744
Work in process						1,189,194						1,089,976
Raw materials						300,782						266,922
Total						$	2,264,725					$	2,090,642

9. Business realignment and acquisition integration charges

We incurred business realignment and acquisition integration charges in the first three months of fiscal 2022 and 2021. In both the first three months of fiscal 2022 and 2021, business realignment charges included severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity, as well as plant closures. During fiscal 2021, business realignment charges primarily consisted of actions taken to address the impact of COVID-19 on our business. 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 charges presented in the Business Segment Information are as follows:

									Three Months Ended
									September 30,
															2021						2020
Diversified Industrial															$	3,017					$	10,572
Aerospace Systems															(3)						3,951
Corporate general and administrative expenses															—						614
Other expense															—						564

Workforce reductions in connection with business realignment charges in the Business Segment Information are as follows:

									Three Months Ended
									September 30,
															2021						2020
Diversified Industrial															35						384
Aerospace Systems															—						240
Corporate general and administrative expenses															—						13

The business realignment charges are presented in the Consolidated Statement of Income as follows:

									Three Months Ended
									September 30,
															2021						2020
Cost of sales															$	1,001					$	12,150
Selling, general and administrative expenses															2,013						2,987
Other expense (income), net															—						564

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During the first three months of fiscal 2022, approximately $9 million in payments were made relating to business realignment charges. Remaining payments related to business realignment actions of approximately $9 million, a majority of which are expected to be paid by June 30, 2022, are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the business realignment actions described above, the timing and amount of which are not known at this time.

We also incurred the following acquisition integration charges related to the fiscal 2020 acquisitions of LORD Corporation ("Lord") and Exotic Metals Forming Company ("Exotic"):

									Three Months Ended
									September 30,
															2021						2020
Diversified Industrial															$	1,202					$	3,615
Aerospace Systems															—						332

In the first three months of fiscal 2022, these charges are evenly split between cost of sales and selling, general and administrative expenses within the Consolidated Statement of Income. In fiscal 2021, these charges were primarily included in selling, general and administrative expenses within the Consolidated Statement of Income.

10. Equity

Changes in equity for the three months ended September 30, 2021 and 2020 are as follows:

			Common Stock						Additional Capital						Retained Earnings						Accumulated Other Comprehensive (Loss)						Treasury Shares						Noncontrolling Interests						Total Equity
Balance at June 30, 2021			$	90,523					$	329,619					$	14,915,497					$	(1,566,727)					$	(5,370,605)					$	15,363					$	8,413,670
Net income															451,157																		306						451,463
Other comprehensive (loss)																					(38,763)												(539)						(39,302)
Dividends paid ($1.03 per share)															(132,855)																		(66)						(132,921)
Stock incentive plan activity									29,058																		14,211												43,269
Shares purchased at cost																											(230,334)												(230,334)
Balance at September 30, 2021			$	90,523					$	358,677					$	15,233,799					$	(1,605,490)					$	(5,586,728)					$	15,064					$	8,505,845

			Common Stock						Additional Capital						Retained Earnings*						Accumulated Other Comprehensive (Loss)						Treasury Shares						Noncontrolling Interests						Total Equity*
Balance at June 30, 2020			$	90,523					$	416,585					$	13,643,907					$	(2,558,875)					$	(5,364,916)					$	14,546					$	6,241,770
Net income															319,803																		308						320,111
Other comprehensive income																					170,403												431						170,834
Dividends paid ($0.88 per share)															(113,542)																								(113,542)
Stock incentive plan activity									11,744																		24,967												36,711
Balance at September 30, 2020			$	90,523					$	428,329					$	13,850,168					$	(2,388,472)					$	(5,339,949)					$	15,285					$	6,655,884
*Prior period has been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2021 Annual Report on Form 10-K.

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Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the three months ended September 30, 2021 and 2020 are as follows:

			Foreign Currency Translation Adjustment						Retirement Benefit Plans						Total
Balance at June 30, 2021			$	(865,865)					$	(700,862)					$	(1,566,727)
Other comprehensive (loss) before reclassifications			(67,785)						—						(67,785)
Amounts reclassified from accumulated other comprehensive (loss)			—						29,022						29,022
Balance at September 30, 2021			$	(933,650)					$	(671,840)					$	(1,605,490)

			Foreign Currency Translation Adjustment						Retirement Benefit Plans						Total
Balance at June 30, 2020			$	(1,193,937)					$	(1,364,938)					$	(2,558,875)
Other comprehensive income before reclassifications			130,251						—						130,251
Amounts reclassified from accumulated other comprehensive (loss)			—						40,152						40,152
Balance at September 30, 2020			$	(1,063,686)					$	(1,324,786)					$	(2,388,472)

Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three months ended September 30, 2021 and 2020 are as follows:

Details about Accumulated Other Comprehensive (Loss) Components						Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)												Consolidated Statement of Income Classification
						Three Months Ended
						September 30, 2021
Retirement benefit plans
Amortization of prior service cost and initial net obligation						$	(936)											Other expense (income), net
Recognized actuarial loss						(37,503)												Other expense (income), net
Total before tax						(38,439)
Tax benefit						9,417
Net of tax						$	(29,022)

Details about Accumulated Other Comprehensive (Loss) Components						Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss)												Consolidated Statement of Income Classification
						Three Months Ended
						September 30, 2020
Retirement benefit plans
Amortization of prior service cost and initial net obligation						$	(818)											Other expense (income), net
Recognized actuarial loss						(52,265)												Other expense (income), net
Total before tax						(53,083)
Tax benefit						12,931
Net of tax						$	(40,152)

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11. Goodwill and intangible assets

The changes in the carrying amount of goodwill for the three months ended September 30, 2021 are as follows:

			Diversified Industrial Segment						Aerospace Systems Segment						Total
Balance at June 30, 2021			$	7,457,309					$	602,378					$	8,059,687
Foreign currency translation and other			(50,340)						(7)						(50,347)
Balance at September 30, 2021			$	7,406,969					$	602,371					$	8,009,340

Intangible assets are amortized using the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:

			September 30, 2021												June 30, 2021
			Gross Carrying Amount						Accumulated Amortization						Gross Carrying Amount						Accumulated Amortization
Patents and technology			$	997,890					$	227,415					$	999,952					$	216,314
Trademarks			757,627						338,001						762,130						331,905
Customer lists and other			3,847,159						1,610,720						3,869,772						1,563,838
Total			$	5,602,676					$	2,176,136					$	5,631,854					$	2,112,057

Total intangible amortization expense for the three months ended September 30, 2021 and 2020 was $80 million and $82 million, respectively. The estimated amortization expense for the five years ending June 30, 2022 through 2026 is $320 million, $305 million, $298 million, $288 million and $282 million, respectively.

Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No material intangible asset impairments occurred during the three months ended September 30, 2021 and 2020.

12. Retirement benefits

Net pension benefit expense recognized included the following components:

			Three Months Ended
			September 30,
			2021						2020
Service cost			$	20,662					$	22,810
Interest cost			27,429						25,417
Expected return on plan assets			(67,328)						(66,402)
Amortization of prior service cost			934						843
Amortization of net actuarial loss			37,531						52,331
Amortization of initial net obligation			2						5
Net pension benefit expense			$	19,230					$	35,004

During the three months ended September 30, 2021 and 2020, we recognized $0.3 million and $0.4 million, respectively, in expense related to other postretirement benefits. Components of retirement benefits expense, other than service cost, are included in other expense (income), net in the Consolidated Statement of Income.

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13. Debt

In connection with the proposed Acquisition of Meggitt, the Company entered into a Bridge Credit Agreement on August 2, 2021. Under the Bridge Credit Agreement, the lenders committed to provide senior, unsecured financing in the aggregate principal amount of £6,524 million at August 2, 2021. As permanent financing for the proposed Acquisition is secured, the principal amount of the Bridge Credit Agreement is reduced. At September 30, 2021, the aggregate principal amount was £5,100 million. Any borrowings made under the Bridge Credit Agreement would mature 364 days from the initial funding date. The commitments are intended to be drawn to finance the proposed Acquisition only to the extent that we do not arrange for alternative financing prior to closing. We incurred $39 million in financing fees related to the Bridge Credit Agreement, all of which was included in Other expense (income), net within the Consolidated Statement of Income.

On August 27, 2021, the Company entered into a credit agreement, which provides for a senior, unsecured delayed-draw term loan facility in an aggregate principal amount of $2,000 million (the “Term Loan Facility”). The proceeds of the Term Loan Facility, if drawn, will be used solely by the Company to finance a portion of the consideration of its proposed Acquisition and would mature in its entirety three years after the initial draw. Additionally, the provisions of the Term Loan Facility allow for prepayments at the Company's discretion.

During the first three months of fiscal 2022, we amended our existing multi-currency credit agreement, increasing its capacity to $3,000 million. There were no outstanding commercial paper notes as of September 30, 2021 and June 30, 2021. Based on the Company’s rating level at September 30, 2021, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At September 30, 2021, our debt to debt-shareholders' equity ratio was 0.44 to 1.0. We are in compliance, and expect to remain in compliance, with all covenants set forth in the credit agreements and indentures.

14. Income taxes

We file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world. We are open to assessment on our U.S. federal income tax returns by the Internal Revenue Service for fiscal years after 2013, and our state and local returns for fiscal years after 2016. We are also open to assessment for significant foreign jurisdictions for fiscal years after 2011. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements.

As of September 30, 2021, we had gross unrecognized tax benefits of $99 million, all of which, if recognized, would impact the effective tax rate. The accrued interest related to the gross unrecognized tax benefits, excluded from the amount above, is $18 million. 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 million as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of gross unrecognized tax benefits within the next 12 months is expected to be insignificant.

15. Financial instruments

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

Marketable securities and other investments include deposits and equity investments. Deposits are recorded at cost, and equity investments are recorded at fair value. Changes in fair value related to equity investments are recorded in net income. Unrealized gains and losses related to equity investments were not material as of September 30, 2021 and 2020.

The carrying value of long-term debt, which excludes the impact of net unamortized debt issuance costs, and estimated fair value of long-term debt are as follows:

						September 30, 2021						June 30, 2021
Carrying value of long-term debt						$	6,625,692					$	6,646,029
Estimated fair value of long-term debt						7,406,724						7,527,268

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

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We utilize derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions, and we do not anticipate any material non-performance by any of the counterparties. We do not hold or issue derivative financial instruments for trading purposes.

The Company’s €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.

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 in the Consolidated Balance Sheet are as follows:

						Balance Sheet Caption						September 30, 2021						June 30, 2021
Net investment hedges
Cross-currency swap contracts						Other liabilities						$	53,723					$	71,798
Cash flow hedges
Forward exchange contracts						Non-trade and notes receivable						9,463						5,376
Forward exchange contracts						Other accrued liabilities						6,364						9,435
Costless collar contracts						Non-trade and notes receivable						807						110
Costless collar contracts						Other accrued liabilities						3,308						901

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

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

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

Derivatives designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive (loss) on the Consolidated Balance Sheet until the hedged item is recognized in earnings. We assess the effectiveness of the €69 million, €290 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 gains of $4 million and $20 million relating to forward exchange contracts were recorded within cost of sales in the Consolidated Statement of Income for the three months ended September 30, 2021 and 2020, respectively. All other gains or losses on derivative financial instruments that were recorded in the Consolidated Statement of Income for the three months ended September 30, 2021 and 2020 were not material.

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

									Three Months Ended
									September 30,
															2021						2020
Cross-currency swap contracts															$	12,371					$	(17,134)
Foreign denominated debt															14,864						(25,727)

During the three months ended September 30, 2021 and 2020, the periodic interest settlements related to the cross-currency swaps were not material.

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A summary of financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2021 and June 30, 2021 are as follows:

												Quoted Prices						Significant Other						Significant
						Fair						In Active						Observable						Unobservable
						Value at						Markets						Inputs						Inputs
						September 30, 2021						(Level 1)						(Level 2)						(Level 3)
Assets:
Equity securities						$	19,169					$	19,169					$	—					$	—
Derivatives						10,270						—						10,270						—
Liabilities:
Derivatives						63,395						—						63,395						—

												Quoted Prices						Significant Other						Significant
						Fair						In Active						Observable						Unobservable
						Value at						Markets						Inputs						Inputs
						June 30, 2021						(Level 1)						(Level 2)						(Level 3)
Assets:
Equity securities						$	20,517					$	20,517					$	—					$	—
Derivatives						5,486						—						5,486						—
Liabilities:
Derivatives						82,134						—						82,134						—

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

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

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

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

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PARKER-HANNIFIN CORPORATION

FORM 10-Q