Parker-Hannifin 10-Q 2021-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2021

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File number 1-4982

PARKER-HANNIFIN CORPORATION

(Exact name of registrant as specified in its charter)

Ohio									34-0451060
(State or other jurisdiction of Incorporation or Organization)									(I.R.S. Employer Identification No.)
6035 Parkland Boulevard,			Cleveland,			Ohio			44124-4141
(Address of Principal Executive Offices)									(Zip Code)

Registrant’s telephone number, including area code: (216) 896-3000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class						Trading Symbol						Name of Each Exchange on which Registered
Common Shares, $.50 par value						PH						New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer						☒						Accelerated filer						☐
Non-accelerated filer						☐						Smaller reporting company						☐
												Emerging growth company						☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of Common Shares outstanding at December 31, 2021: 128,477,634

PART I - FINANCIAL INFORMATION

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

			Three Months Ended												Six Months Ended
			December 31,												December 31,
			2021						2020*						2021						2020*
Net sales			$	3,824,580					$	3,411,905					$	7,587,389					$	6,642,445
Cost of sales			2,764,725						2,518,165						5,478,622						4,904,614
Selling, general and administrative expenses			380,710						356,572						788,475						726,423
Interest expense			61,360						62,990						120,710						128,948
Other expense (income), net			127,461						(103,714)						137,513						(108,606)
Income before income taxes			490,324						577,892						1,062,069						991,066
Income taxes			102,595						129,350						222,877						222,413
Net income			387,729						448,542						839,192						768,653
Less: Noncontrolling interest in subsidiaries' earnings			129						191						435						499
Net income attributable to common shareholders			$	387,600					$	448,351					$	838,757					$	768,154
Earnings per share attributable to common shareholders:
Basic			$	3.02					$	3.48					$	6.52					$	5.96
Diluted			$	2.97					$	3.42					$	6.42					$	5.89
*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												Six Months Ended
			December 31,												December 31,
			2021						2020*						2021						2020*
Net income			$	387,729					$	448,542					$	839,192					$	768,653
Less: Noncontrolling interests in subsidiaries' earnings			129						191						435						499
Net income attributable to common shareholders			387,600						448,351						838,757						768,154
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment			28,491						217,828						(39,833)						348,510
Retirement benefits plan activity			31,859						40,984						60,881						81,136
Other comprehensive income			60,350						258,812						21,048						429,646
Less: Other comprehensive (loss) income for noncontrolling interests			(47)						846						(586)						1,277
Other comprehensive income attributable to common shareholders			60,397						257,966						21,634						428,369
Total comprehensive income attributable to common shareholders			$	447,997					$	706,317					$	860,391					$	1,196,523
*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)

			December 31, 2021						June 30, 2021
ASSETS
Current assets:
Cash and cash equivalents			$	449,481					$	733,117
Marketable securities and other investments			40,511						39,116
Trade accounts receivable, net			2,041,953						2,183,594
Non-trade and notes receivable			314,897						326,315
Inventories			2,307,306						2,090,642
Prepaid expenses and other			2,753,501						243,966
Total current assets			7,907,649						5,616,750
Property, plant and equipment			6,019,552						6,040,220
Less: Accumulated depreciation			3,816,620						3,773,744
Property, plant and equipment, net			2,202,932						2,266,476
Deferred income taxes			146,567						104,251
Investments and other assets			794,814						774,239
Intangible assets, net			3,343,612						3,519,797
Goodwill			7,999,901						8,059,687
Total assets			$	22,395,475					$	20,341,200
LIABILITIES
Current liabilities:
Notes payable and long-term debt payable within one year			$	2,201,653					$	2,824
Accounts payable, trade			1,597,025						1,667,878
Accrued payrolls and other compensation			335,417						507,027
Accrued domestic and foreign taxes			294,255						236,384
Other accrued liabilities			829,141						682,390
Total current liabilities			5,257,491						3,096,503
Long-term debt			6,250,525						6,582,053
Pensions and other postretirement benefits			959,741						1,055,638
Deferred income taxes			558,986						553,981
Other liabilities			600,452						639,355
Total liabilities			13,627,195						11,927

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2021

AND COMPARABLE PERIODS ENDED DECEMBER 31, 2020

OVERVIEW

The Company is a global leader in motion and control technologies. For more than a century, the Company has engineered the success of its customers in a wide range of diversified industrial and aerospace markets.

By aligning around our purpose, Enabling Engineering Breakthroughs that Lead to a Better Tomorrow, Parker is better positioned for the challenges and opportunities of tomorrow.

The Win Strategy 3.0 is Parker's business system that defines the goals and initiatives that drive growth, transformation and success. It works with our purpose, which is a foundational element of The Win Strategy, to engage team members and create responsible and sustainable growth. Our shared values shape our culture and our interactions with stakeholders and the communities in which we operate and live.

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

• Serving the customer and continuously enhancing its experience with the Company;

• Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;

• Maintaining a decentralized division and sales company structure;

• Fostering a safety-first and entrepreneurial culture;

• Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;

• Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;

• Enabling a sustainable future by providing innovative technology solutions that offer a positive, global environmental impact and operating responsibly by reducing our energy use and emissions;

• Acquiring strategic businesses;

• Organizing around targeted regions, technologies and markets;

• Driving efficiency by implementing lean enterprise principles; and

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

Our order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. We continue to prioritize the safety of our team members. To minimize the spread of COVID-19 in our workplaces, we implemented heightened prevention, screening and hygiene protocols. Our actions have varied depending on the spread of COVID-19 in the communities in which we operate, applicable government requirements and the needs of our employees, customers and business.

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We are actively managing the impact of the 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. Despite disruption within the aerospace industry, including ongoing travel restrictions, commercial aerospace demand is beginning to recover. We are managing the challenging supply chain environment through our "local for local" manufacturing strategy, ongoing supplier management process, and broadened supply base. Additionally, we are strategically managing our workforce and discretionary spending. At the same time, we are appropriately addressing the ongoing needs of our business so that we may continue to serve our customers.

Over the long term, the extent to which our business and results of operations will be impacted by the pandemic and its residual effects depends on future developments that remain uncertain. These developments include distribution and continuing effectiveness of vaccines, the severity and spread of COVID-19 and its variants, mitigating actions by government authorities, and the duration of the supply chain and labor market constraints.

The discussion below is structured to separately discuss the Consolidated Statement of Income, Business Segment Information, and Liquidity and Capital Resources. 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.

CONSOLIDATED STATEMENT OF INCOME

						Three Months Ended												Six Months Ended
						December 31,												December 31,
(dollars in millions)						2021						2020*						2021						2020*
Net sales						$	3,825					$	3,412					$	7,587					$	6,642
Gross profit margin						27.7		%				26.2		%				27.8		%				26.2		%
Selling, general and administrative expenses						$	381					$	357					$	788					$	726
Selling, general and administrative expenses, as a percent of sales						10.0		%				10.5		%				10.4		%				10.9		%
Interest expense						$	61					$	63					$	121					$	129
Other expense (income), net						$	127					$	(104)					$	138					$	(109)
Effective tax rate						20.9		%				22.4		%				21.0		%				22.4		%
Net income						$	388					$	449					$	839					$	769
Net income, as a percent of sales						10.1		%				13.1		%				11.1		%				11.6		%
*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.

Net sales increased for the current-year quarter and first six months of fiscal 2022 when compared to the prior-year periods primarily due to higher volume in both the Aerospace Systems and Diversified Industrial Segments. The effect of currency rate changes decreased net sales by approximately $38 million and $15 million in the current-year quarter and first six months of fiscal 2022, respectively. Substantially all of the $38 million decrease in the current-year quarter is attributable to the Diversified Industrial International businesses. During the first six months of fiscal 2022, sales in the Diversified Industrial International businesses decreased by $23 million due to currency exchange rates, partially offset by a $9 million increase in sales within the Diversified Industrial North American businesses.

Gross profit margin (calculated as net sales minus cost of sales, divided by net sales) increased in the current-year quarter and first six months of fiscal 2022 primarily due to higher margins in both the Aerospace Systems and Diversified Industrial Segments. These increases are primarily due to higher sales volume and benefits from continuous improvement initiatives, as well as price increases, partially offset by increased freight, material and labor costs resulting from the ongoing disruption within the global supply chain and labor markets.

Cost of sales included net foreign currency transaction gains (losses) of $8 million and $(4) million for the current-year and prior-year quarter, respectively, and $17 million and $1 million for the first six months of fiscal 2022 and 2021, respectively.

Cost of sales also included business realignment and acquisition integration charges of $2 million and $15 million for the current-year and prior-year quarter, respectively, and $4 million and $27 million for the first six months of fiscal 2022 and 2021, respectively.

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Selling, general and administrative expenses ("SG&A") increased during the current-year quarter and first six months of fiscal 2022 primarily due to acquisition-related transaction costs of $9 million and $22 million, respectively, as well as higher net expense from the Company's deferred compensation plan and related investments and slightly increased discretionary spending. SG&A also included business realignment and acquisition integration charges of $2 million and $7 million for the current-year and prior-year quarter, respectively, and $5 million and $14 million for the first six months of fiscal 2022 and 2021, respectively.

Interest expense for the current-year quarter and first six months of fiscal 2022 decreased due to both lower average debt outstanding and lower average interest rates.

Other expense (income), net included the following:

						Three Months Ended												Six Months Ended
(dollars in millions)						December 31,												December 31,
Expense (income)						2021						2020						2021						2020
Income related to equity method investments						$	(16)					$	(10)					$	(35)					$	(19)
Non-service components of retirement benefit cost						3						14						2						26
Gain on disposal of assets and divestitures						(10)						(102)						(9)						(102)
Interest income						(1)						(2)						(3)						(3)
Acquisition-related financing fees						10						—						49						—
Loss on deal-contingent forward contracts						149						—						149						—
Other items, net						(8)						(4)						(15)						(11)
						$	127					$	(104)					$	138					$	(109)

Gain on disposal of assets and divestitures for the prior-year quarter and first six months of fiscal 2021 includes a gain on the sale of land of approximately $101 million.

Acquisition-related financing fees in the current-year quarter and first six months of fiscal 2022 relate to the bridge credit agreement (the "Bridge Credit Agreement") fees associated with the proposed acquisition (the "Acquisition") of Meggitt plc ("Meggitt"). Refer to Note 14 of the Consolidated Financial Statements for further discussion of the Bridge Credit Agreement.

Loss on deal-contingent forward contracts for the current-year quarter and first six months of fiscal 2021 includes an unrealized loss on the deal-contingent forward contracts related to the proposed Acquisition. Refer to Note 16 to the Consolidated Financial Statements for further discussion of the deal-contingent forward contracts.

Effective tax rate for the current-year quarter and first six months of fiscal 2022 was lower than the comparable prior-year periods primarily due to an overall increase in discrete tax benefits. The fiscal 2022 effective tax rate is expected to be approximately 22 percent.

BUSINESS SEGMENT INFORMATION

Diversified Industrial Segment

						Three Months Ended												Six Months Ended
						December 31,												December 31,
(dollars in millions)						2021						2020						2021						2020
Net sales
North America						$	1,807					$	1,567					$	3,601					$	3,095
International						1,399						1,260						2,776						2,389
Operating income
North America						337						282						671						550
International						$	292					$	220					$	583					$	407
Operating margin
North America						18.7		%				18.0		%				18.6		%				17.8		%
International						20.8		%				17.5		%				21.0		%				17.0		%
Backlog						$	3,903					$	2,499					$	3,903					$	2,499

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The Diversified Industrial Segment operations experienced the following percentage changes in net sales in the current-year periods versus the comparable prior-year periods:

						Period Ending December 31, 2021
						Three Months						Six Months
Diversified Industrial North America – as reported						15.3		%				16.3		%
Currency						—		%				0.3		%
Diversified Industrial North America – without currency1						15.3		%				16.0		%
Diversified Industrial International – as reported						11.1		%				16.2		%
Currency						(3.0)		%				(0.9)		%
Diversified Industrial International – without currency1						14.1		%				17.1		%
Total Diversified Industrial Segment – as reported						13.4		%				16.3		%
Currency						(1.3)		%				(0.2)		%
Total Diversified Industrial Segment – without currency1						14.7		%				16.5		%

1This table reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with accounting principles generally accepted in the United States of America ("GAAP") to percentage changes in net sales adjusted to remove the effects of currency exchange rates (a non-GAAP measure). The effects of currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Net Sales

Diversified Industrial North America - Sales increased 15.3 percent and 16.3 percent during the current-year quarter and first six months of fiscal 2022, respectively. Currency exchange rates did not materially impact sales in the current-year quarter. In the first six months of fiscal 2022, the effect of currency exchange rates increased sales by approximately $9 million. Excluding the effects of currency exchange rates, sales in the Diversified Industrial North American businesses increased 15.3 percent in the current-year quarter and 16.0 percent in the first six months of fiscal 2022 when compared to prior-year levels primarily due to higher demand from distributors and end users across most markets, including the construction, heavy-duty truck, farm and agriculture, engines, life sciences, material handling, refrigeration and oil and gas markets, partially offset by lower end-user demand in the cars and light truck market.

Diversified Industrial International - Sales increased 11.1 percent and 16.2 percent from the prior-year quarter and first six months of fiscal 2021, respectively. The effect of currency exchange rates decreased sales by approximately $38 million and $23 million in the current-year quarter and first six months of fiscal 2022, respectively. Excluding the effects of currency exchange rates, Diversified Industrial International sales increased 14.1 percent in the current-year quarter and 17.1 percent in the first six months of fiscal 2022 from prior-year levels. Europe and the Asia Pacific region accounted for approximately 55 percent and 40 percent, respectively, of the increase in sales during the current-year quarter, while Latin America accounted for the remainder of the change. During the first six months of fiscal 2022, the increase in sales was primarily related to Europe and the Asia Pacific region, which contributed approximately 60 percent and 35 percent of the increase, respectively, while Latin America accounted for the remainder of the change.

Within Europe, sales in the current-year quarter and first six months of fiscal 2022 increased primarily due to higher demand from distributors and end users across most markets, including the construction, machine tool, industrial machinery, material handling, mining and forestry markets, partially offset by lower end-user demand in the oil and gas, power generation, cars and light truck and telecommunications markets.

Within the Asia Pacific region, sales in the current-year quarter and first six months of fiscal 2022 increased primarily due to an increase in demand from distributors and end users across most markets, including the semiconductor, refrigeration, construction, industrial machinery and life sciences markets, partially offset by lower end-user demand in the engines and power generation markets.

Within Latin America, sales in the current-year quarter and first six months of fiscal 2022 increased primarily due to higher demand from distributors and end users in various markets, including the farm and agriculture, mining, and heavy-duty truck markets, partially offset by lower end-user demand in the life sciences market. In the first six months of fiscal 2022, higher end-user demand in the cars and light truck and construction markets also contributed to the increase in sales. However, we experienced a decrease in end-user demand within these markets during the current-year quarter.

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Operating Margin

Diversified Industrial Segment operating margin increased in the current-year quarter and first six months of fiscal 2022 within both the North American and International businesses primarily due to higher sales volume and benefits from continuous improvement initiatives, as well as price increases. These increases were partially offset by increased operating costs, including higher freight, material, and labor costs resulting from the ongoing disruption within the current supply chain environment and labor market. In addition, within the International businesses, operating margin in the current-year quarter and first six months of fiscal 2022 benefited from savings related to prior-year restructuring actions.

Business Realignment

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

						Three Months Ended												Six Months Ended
						December 31,												December 31,
(dollars in millions)						2021						2020						2021						2020
Diversified Industrial North America						$	1					$	5					$	2					$	9
Diversified Industrial International						3						15						6						25

In both 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 the COVID-19 pandemic on our business. Acquisition integration charges relate to the fiscal 2020 acquisition of LORD Corporation ("Lord"). Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe.

We anticipate that cost savings realized from the workforce reduction measures taken in the first six months of fiscal 2022 will not materially impact operating income in fiscal 2022 or 2023. We expect to continue to take actions necessary to integrate acquisitions and structure appropriately the operations of the Diversified Industrial Segment. We currently anticipate incurring approximately $26 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2022. However, continually changing business conditions could impact the ultimate costs we incur.

Backlog

Diversified Industrial Segment backlog as of December 31, 2021 increased from the prior-year quarter due to orders exceeding shipments in both the North American and International businesses. Backlog in the North American and International businesses accounted for approximately 60 percent and 40 percent of the change, respectively. Within the International businesses, Europe, the Asia Pacific region and Latin America accounted for approximately 55 percent, 40 percent and five percent of the change, respectively.

As of December 31, 2021, Diversified Industrial Segment backlog increased compared to the June 30, 2021 amount of $3,239 million due to orders exceeding shipments in both the North American and International businesses. Backlog in the North American and International businesses accounted for approximately 65 percent and 35 percent of the change, respectively. Within the International businesses, the Asia Pacific region, Europe and Latin America accounted for approximately 55 percent, 40 percent and five percent of the increase, respectively.

Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

Aerospace Systems Segment

						Three Months Ended												Six Months Ended
						December 31,												December 31,
(dollars in millions)						2021						2020						2021						2020
Net sales						$	618					$	585					$	1,211					$	1,159
Operating income						$	115					$	91					$	233					$	177
Operating margin						18.6		%				15.5		%				19.2		%				15.3		%
Backlog						$	3,245					$	3,263					$	3,245					$	3,263

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Net Sales

Aerospace Systems Segment sales for the current-year quarter and first six months of fiscal 2022 increased compared to the same prior-year periods primarily due to higher volume in the commercial original equipment manufacturer ("OEM") and aftermarket businesses, partially offset by lower military OEM and aftermarket volume.

Operating Margin

Aerospace Systems Segment operating margin increased during the current-year quarter and first six months of fiscal 2022 primarily due to higher sales volume and aftermarket profitability as well as lower business realignment and engineering development expenses. These benefits were partially offset by challenges created by the ongoing disruption within the supply chain and labor markets as well as unfavorable commercial OEM product mix.

Business Realignment

As the commercial aerospace markets are recovering, we do not intend to incur significant additional business realignment and acquisition integration charges in the remainder of fiscal 2022. However, continually changing business conditions could impact the ultimate costs we incur.

Backlog

Aerospace Systems Segment backlog as of December 31, 2021 decreased from the prior-year quarter and from the June 30, 2021 amount of $3,264 million primarily due to shipments exceeding orders in the military OEM and aftermarket businesses, partially offset by orders exceeding shipments in the commercial OEM and aftermarket businesses.

Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

Corporate general and administrative expenses

						Three Months Ended												Six Months Ended
(dollars in millions)						December 31,												December 31,
Expense (income)						2021						2020						2021						2020
Corporate general and administrative expense						$	43					$	39					$	92					$	75
Corporate general and administrative expense, as a percent of sales						1.1		%				1.1		%				1.2		%				1.1		%

Corporate general and administrative expenses increased in both the current-year quarter and first six months of fiscal 2022 primarily due to higher net expense from the Company's deferred compensation plan and related investments and slightly increased discretionary spending, partially offset by lower pension expense and charitable contributions.

- 23 -

Other expense (income) (in the Business Segment Information) included the following:

						Three Months Ended												Six Months Ended
(dollars in millions)						December 31,												December 31,
Expense (income)						2021						2020*						2021						2020*
Foreign currency transaction						$	(8)					$	4					$	(17)					$	(1)
Stock-based compensation						9						9						46						46
Pensions						(3)						6						(8)						10
Acquisition-related expenses						19						—						71						—
Loss on deal-contingent forward contracts						149						—						149						—
Gain on disposal of assets and divestitures						(10)						(102)						(9)						(102)
Interest income						(1)						(2)						(3)						(3)
Other items, net						(6)						(2)						(17)						(10)
						$	149					$	(87)					$	212					$	(60)
*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.

Foreign currency transaction primarily relates to the impact of exchange rates on cash, marketable securities and other investments, forward contracts and intercompany transactions.

Acquisition-related expenses include Bridge Credit Agreement financing fees and transaction costs related to the proposed Acquisition. Refer to Notes 4 and 14 to the Consolidated Financial Statements for further discussion of the acquisition-related transaction costs and Bridge Credit Agreement, respectively.

Loss on deal-contingent forward contracts for the current-year quarter and first six months of fiscal 2021 includes an unrealized loss on the deal-contingent forward contracts related to the proposed Acquisition. Refer to Note 16 to the Consolidated Financial Statements for further discussion of the deal-contingent forward contracts.

Gain on disposal of assets and divestitures for the prior-year quarter and first six months of fiscal 2021 includes a gain on the sale of land of approximately $101 million.

LIQUIDITY AND CAPITAL RESOURCES

We believe that we are great generators and deployers of cash. We assess our liquidity in terms of our ability to generate cash to fund our operations and meet our strategic capital deployment objectives, which include the following:

• Continuing our record annual dividend increases

• Investing in organic growth and productivity

• Strategic acquisitions that strengthen our portfolio

• Offset share dilution through 10b5-1 share repurchase program

Cash Flows

A summary of cash flows follows:

						Six Months Ended
						December 31,
(dollars in millions)						2021						2020
Cash provided by (used in):
Operating activities						$	1,005					$	1,354
Investing activities						(74)						79
Financing activities						1,266						(1,609)
Effect of exchange rates						7						56
Net increase (decrease) in cash, cash equivalents and restricted cash						$	2,204					$	(120)

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Cash flows from operating activities for the first six months of fiscal 2022 were $1,005 million compared to $1,354 million for the first six months of fiscal 2021. This decrease of $349 million was primarily driven by increased working capital requirements of $406 million, partially offset by an increase in net income of $71 million in fiscal 2022 compared to the same prior-year period.

• Days sales outstanding relating to trade accounts receivable was 49 days at December 31, 2021, 50 days at June 30, 2021 and 49 days at December 31, 2020.

• Days supply of inventory on hand was 86 days at December 31, 2021, 75 days at June 30, 2021 and 84 days at December 31, 2020.

Cash flows from investing activities for the first six months of fiscal 2022 and 2021 were impacted by the following factors:

• Net maturities of marketable securities of $4 million in fiscal 2022 compared to net maturities of marketable securities of $36 million in fiscal 2021.

• Capital expenditures of $106 million in fiscal 2022 compared to $93 million in the same prior-year period.

• Net proceeds from the sale of land of approximately $111 million in fiscal 2021.

Cash flows from financing activities for the first six months of fiscal 2022 and 2021 were impacted by the following factors:

• Repurchases of 0.9 million common shares for $280 million during fiscal 2022.

• Term loan repayments of $1,210 million in fiscal 2021.

• Net commercial paper borrowings of $1,899 million in fiscal 2022 compared to net commercial paper repayments of $114 million in fiscal 2021.

Cash Requirements

We are actively monitoring our liquidity position and remain focused on managing our inventory and other working capital requirements. We are continuing to target two percent of sales for capital expenditures and are prioritizing those related to safety and strategic investments. We believe that cash generated from operations and our commercial paper program will satisfy our operating needs for the foreseeable future.

Dividends

We declared a quarterly dividend of $1.03 per share on October 27, 2021, which was paid on December 3, 2021. Dividends have been paid for 286 consecutive quarters, including a yearly increase in dividends for the last 65 years. Additionally, we declared a quarterly dividend of $1.03 on January 27, 2022, payable on March 4, 2022.

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. Refer to Note 6 to the Consolidated Financial Statements for further discussion of share repurchases.

Liquidity

Cash, comprised of cash and cash equivalents and marketable securities and other investments, includes $449 million and $467 million held by the Company's foreign subsidiaries at December 31, 2021 and June 30, 2021, respectively. The Company does not permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested.

We are currently authorized to sell up to $3,000 million of short-term commercial paper notes. During October 2021, we issued $2,126 million of commercial paper to finance the proposed Acquisition. Refer to the Strategic Acquisitions section below for further discussion. As of December 31, 2021, $1,899 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $2,342 million.

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The Company has a line of credit through a multi-currency revolving credit agreement with a group of banks. During August 2021, we amended the existing credit agreement, increasing its capacity from $2,500 million to $3,000 million, by exercising the accordion feature. At December 31, 2021, $1,101 million was available. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement supports our commercial paper program, and issuances of commercial paper reduce the amount of credit available under the 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 may result in changes to the current terms and conditions of the credit agreement. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement, nor would it accelerate the repayment of any outstanding borrowings. Refer to Note 14 to the Consolidated Financial Statements for further discussion.

We primarily utilize unsecured medium-term notes and senior notes to meet our financing needs and we expect to continue to borrow funds at reasonable rates over the long term. Refer to the Cash flows from financing activities section above and Note 14 to the Consolidated Financial Statements for further discussion.

The Company’s credit agreements and indentures governing certain debt securities contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at December 31, 2021, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At December 31, 2021, the Company's debt to debt-shareholders' equity ratio was 0.49 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and indentures.

Our goal is to maintain an investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At December 31, 2021, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:

Fitch Ratings						BBB+
Moody's Investors Services, Inc.						Baa1
Standard & Poor's						BBB+

Strategic Acquisitions

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, or approximately £6,256 million based on issued share capital at December 31, 2021. We intend to fund the proposed Acquisition with cash and new debt. The proposed Acquisition remains subject to customary closing conditions, including regulatory clearances.

In connection with the proposed Acquisition, 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 December 31, 2021, the aggregate principal amount was £3,200 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.

Additionally, we entered into a senior, unsecured delayed-draw term loan facility in an aggregate principal amount of $2,000 million (the “Term Loan Facility”) on August 27, 2021. 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. Refer to Note 14 of the Consolidated Financial Statements for further discussion of the Bridge Credit Agreement and the Term Loan Facility.

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. At December 31, 2021, the balance in the escrow account of $2,487 million is recorded as restricted cash on our Consolidated Balance Sheet within the prepaid expenses and other caption.

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In connection with the proposed Acquisition, 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. We expect to record the related fair value gains and losses, which may be significant, through the Consolidated Statement of Income until the closing of the proposed Acquisition. Refer to Note 16 to the Consolidated Financial Statements for further discussion.

Forward-Looking Statements

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. Often but not always, these statements may be identified from the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “should,” “could,” “expects,” “targets,” “is likely,” “will,” or the negative of these terms and similar expressions, and include all statements regarding future performance, earnings projections, events or developments. Neither Parker nor any of its respective associates or directors, officers or advisers, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements will actually occur. Parker cautions readers not to place undue reliance on these statements. It is possible that the future performance and earnings projections of the company, including its individual segments, may differ materially from past performance or current expectations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.

Among other factors which may affect future performance are:

• the impact of the global outbreak of COVID-19 and governmental and other actions taken in response;

• changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;

• disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs and changes in product mix;

• ability to identify acceptable strategic acquisition targets; uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions, including the integration of Lord and Exotic and the proposed acquisition of Meggitt; and our ability to effectively manage expanded operations from the acquisitions of Lord and Exotic and the proposed acquisition of Meggitt;

• the ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;

• the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;

• ability to implement successfully capital allocation initiatives, including timing, price and execution of share repurchases;

• availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;

• ability to manage costs related to insurance and employee retirement and health care benefits;

• legal and regulatory developments and changes;

• additional liabilities relating to changes in tax rates or regulations in the United Stated and foreign jurisdictions or exposure to additional income tax liabilities;

• ability to enter into, own, renew, protect and maintain intellectual property and know-how;

• leverage and future debt service obligations;

• potential impairment of goodwill;

• compliance costs associated with environmental laws and regulations;

• potential supply chain and labor disruptions, including as a result of labor shortages;

• uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals;

• global competitive market conditions, including U.S. trade policies and resulting effects on sales and pricing;

• global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates, credit availability and changes in consumer habits and preferences;

• local and global political and economic conditions;

• inability to obtain, or meet conditions imposed for, required governmental and regulatory approvals;

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• government actions and natural phenomena such as floods, earthquakes, hurricanes and pandemics;

• increased cybersecurity threats and sophisticated computer crime; and

• success of business and operating initiatives.

The Company makes these statements as of the date of the filing of its Quarterly Report on Form 10-Q for the quarter ended December 31, 2021, and undertakes no obligation to update them unless otherwise required by law.

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

Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Further information on the fair value of these contracts is provided in Note 16 to the Consolidated Financial Statements. Derivatives that are not designated as hedges are adjusted to fair value by recording gains and losses through the Consolidated Statement of Income. Derivatives that are designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings. For cross-currency swaps measured using the spot method, the periodic interest settlements are recognized directly in earnings through interest expense. The translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive income (loss) and remains there until the underlying net investment is sold or substantially liquidated.

The Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. Our objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting our exposure to changes in near-term interest rates.

As discussed elsewhere in this report, the future impacts of the 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. As we cannot anticipate the ultimate duration or scope of the COVID-19 pandemic, the ultimate financial impact to our results cannot be reasonably estimated, but could be material.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2021. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of December 31, 2021, the Company’s disclosure controls and procedures were effective.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. In response to the COVID-19 pandemic, many of our team members have been working remotely. While there were no material changes in our internal control over financial reporting during the quarter ended December 31, 2021, we are continually monitoring and assessing the changing business environment resulting from the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.

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PARKER-HANNIFIN CORPORATION

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

From time to time we are involved in matters that involve governmental authorities as a party under federal, state and local laws that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment. We will report such matters that exceed, or that we reasonably believe may exceed, $1.0 million or more in monetary sanctions.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)Unregistered Sales of Equity Securities. Not applicable.

(b)Use of Proceeds. Not applicable.

(c)Issuer Purchases of Equity Securities.

Period						(a) Total Number of Shares Purchased						(b) Average Price Paid Per Share						(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)						(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2021 through October 31, 2021						55,700						$	293.82					55,700						8,873,680
November 1, 2021 through November 30, 2021						52,700						$	321.16					52,700						8,820,980
December 1, 2021 through December 31, 2021						53,808						$	310.47					53,808						8,767,172
Total:						162,208												162,208

(1)On October 22, 2014, the Company publicly announced that the Board of Directors increased the overall maximum number of shares authorized for repurchase under the Company's share repurchase program, first announced on August 16, 1990, so that, beginning on October 22, 2014, the maximum aggregate number of shares authorized for repurchase was 35 million shares. There is no limitation on the amount of shares that can be repurchased in a fiscal year. There is no expiration date for this program.

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The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K:

Exhibit No.						Description of Exhibit
31(a)						Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002. Act of 2002.*
31(b)						Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002. of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
32						Certification Pursuant Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002. 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.*
101.INS						Inline XBRL Instance Document.*
101.SCH						Inline XBRL Taxonomy Extension Schema Document.*
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document. *
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104						Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

*			Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three and six months ended December 31, 2021 and 2020, (ii) Consolidated Statement of Comprehensive Income for the three and six months ended December 31, 2021 and 2020, (iii) Consolidated Balance Sheet at December 31, 2021 and June 30, 2021, (iv) Consolidated Statement of Cash Flows for the six months ended December 31, 2021 and 2020, and (v) Notes to Consolidated Financial Statements for the six months ended December 31, 2021.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

						PARKER-HANNIFIN CORPORATION
						(Registrant)
						/s/ Todd M. Leombruno
						Todd M. Leombruno
						Executive Vice President and Chief Financial Officer
Date:			February 4, 2022

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