filings.toolsItem 1. FINANCIAL STATEMENTS
78K characters. Original on sec.gov · Markdown
Item 1. FINANCIAL STATEMENTS
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021* | 2022 | 2021* | ||||||||||||||||||||
| Net sales | $ | 4,086,387 | $ | 3,746,326 | $ | 11,673,776 | $ | 10,388,771 | |||||||||||||||
| Cost of sales | 2,927,991 | 2,712,785 | 8,406,613 | 7,617,399 | |||||||||||||||||||
| Selling, general and administrative expenses | 412,431 | 386,831 | 1,200,906 | 1,113,254 | |||||||||||||||||||
| Interest expense | 63,272 | 60,830 | 183,982 | 189,778 | |||||||||||||||||||
| Other expense (income), net | 248,704 | (13,460) | 386,217 | (122,066) | |||||||||||||||||||
| Income before income taxes | 433,989 | 599,340 | 1,496,058 | 1,590,406 | |||||||||||||||||||
| Income taxes | 85,901 | 126,101 | 308,778 | 348,514 | |||||||||||||||||||
| Net income | 348,088 | 473,239 | 1,187,280 | 1,241,892 | |||||||||||||||||||
| Less: Noncontrolling interest in subsidiaries' earnings | 71 | 86 | 506 | 585 | |||||||||||||||||||
| Net income attributable to common shareholders | $ | 348,017 | $ | 473,153 | $ | 1,186,774 | $ | 1,241,307 | |||||||||||||||
| Earnings per share attributable to common shareholders: | |||||||||||||||||||||||
| Basic | $ | 2.71 | $ | 3.67 | $ | 9.23 | $ | 9.63 | |||||||||||||||
| Diluted | $ | 2.67 | $ | 3.60 | $ | 9.10 | $ | 9.50 | |||||||||||||||
| *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.
- 2 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021* | 2022 | 2021* | ||||||||||||||||||||
| Net income | $ | 348,088 | $ | 473,239 | $ | 1,187,280 | $ | 1,241,892 | |||||||||||||||
| Less: Noncontrolling interests in subsidiaries' earnings | 71 | 86 | 506 | 585 | |||||||||||||||||||
| Net income attributable to common shareholders | 348,017 | 473,153 | 1,186,774 | 1,241,307 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustment | (16,898) | (65,970) | (56,730) | 282,539 | |||||||||||||||||||
| Retirement benefits plan activity | 30,455 | 39,723 | 91,335 | 120,859 | |||||||||||||||||||
| Other comprehensive income (loss) | 13,557 | (26,247) | 34,605 | 403,398 | |||||||||||||||||||
| Less: Other comprehensive (loss) income for noncontrolling interests | (276) | (463) | (862) | 813 | |||||||||||||||||||
| Other comprehensive income (loss) attributable to common shareholders | 13,833 | (25,784) | 35,467 | 402,585 | |||||||||||||||||||
| Total comprehensive income attributable to common shareholders | $ | 361,850 | $ | 447,369 | $ | 1,222,241 | $ | 1,643,892 | |||||||||||||||
| *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.
- 3 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
| March 31, 2022 | June 30, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 467,711 | $ | 733,117 | |||||||
| Marketable securities and other investments | 38,561 | 39,116 | |||||||||
| Trade accounts receivable, net | 2,357,244 | 2,183,594 | |||||||||
| Non-trade and notes receivable | 327,186 | 326,315 | |||||||||
| Inventories | 2,330,242 | 2,090,642 | |||||||||
| Prepaid expenses and other | 2,708,750 | 243,966 | |||||||||
| Total current assets | 8,229,694 | 5,616,750 | |||||||||
| Property, plant and equipment | 6,019,745 | 6,040,220 | |||||||||
| Less: Accumulated depreciation | 3,845,508 | 3,773,744 | |||||||||
| Property, plant and equipment, net | 2,174,237 | 2,266,476 | |||||||||
| Deferred income taxes | 144,506 | 104,251 | |||||||||
| Investments and other assets | 787,986 | 774,239 | |||||||||
| Intangible assets, net | 3,254,062 | 3,519,797 | |||||||||
| Goodwill | 7,954,835 | 8,059,687 | |||||||||
| Total assets | $ | 22,545,320 | $ | 20,341,200 | |||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Notes payable and long-term debt payable within one year | $ | 1,923,860 | $ | 2,824 | |||||||
| Accounts payable, trade | 1,732,421 | 1,667,878 | |||||||||
| Accrued payrolls and other compensation | 418,876 | 507,027 | |||||||||
| Accrued domestic and foreign taxes | 276,159 | 236,384 | |||||||||
| Other accrued liabilities | 1,055,348 | 682,390 | |||||||||
| Total current liabilities | 5,406,664 | 3,096,503 | |||||||||
| Long-term debt | 6,229,654 | 6,582,053 | |||||||||
| Pensions and other postretirement benefits | 904,332 | 1,055,638 | |||||||||
| Deferred income taxes | 448,583 | 553,981 | |||||||||
| Other liabilities | 583,228 | 639,355 | |||||||||
| Total liabilities | 13,572,461 | 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 March 31 and June 30 | 90,523 | 90,523 | |||||||||
| Additional capital | 363,367 | 329,619 | |||||||||
| Retained earnings | 15,704,238 | 14,915,497 | |||||||||
| Accumulated other comprehensive (loss) | (1,531,260) | (1,566,727) | |||||||||
| Treasury shares, at cost; 52,674,120 shares at March 31 and 51,900,460 shares at June 30 | (5,667,002) | (5,370,605) | |||||||||
| Total shareholders’ equity | 8,959,866 | 8,398,307 | |||||||||
| Noncontrolling interests | 12,993 | 15,363 | |||||||||
| Total equity | 8,972,859 | 8,413,670 | |||||||||
| Total liabilities and equity | $ | 22,545,320 | $ | 20,341,200 |
See accompanying notes to consolidated financial statements.
- 4 -
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| March 31, | |||||||||||
| 2022 | 2021* | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 1,187,280 | $ | 1,241,892 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 194,945 | 204,615 | |||||||||
| Amortization | 237,377 | 244,193 | |||||||||
| Share incentive plan compensation | 109,781 | 101,907 | |||||||||
| Deferred income taxes | (174,270) | (11,824) | |||||||||
| Foreign currency transaction gain | (26,970) | (8,239) | |||||||||
| Gain on disposal of property, plant and equipment | (6,782) | (108,449) | |||||||||
| Gain on sale of business | (1,472) | — | |||||||||
| Loss (gain) on marketable securities | 2,280 | (8,489) | |||||||||
| Gain on investments | (2,024) | (6,008) | |||||||||
| Other | 66,386 | 11,149 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | (163,900) | (238,882) | |||||||||
| Inventories | (274,717) | (52,398) | |||||||||
| Prepaid expenses and other | 24,061 | 24,757 | |||||||||
| Other assets | (17,317) | (22,191) | |||||||||
| Accounts payable, trade | 91,531 | 417,196 | |||||||||
| Accrued payrolls and other compensation | (80,483) | (2,645) | |||||||||
| Accrued domestic and foreign taxes | 44,266 | 4,768 | |||||||||
| Other accrued liabilities | 372,491 | 17,396 | |||||||||
| Pensions and other postretirement benefits | (20,460) | 32,418 | |||||||||
| Other liabilities | (13,565) | 40,239 | |||||||||
| Net cash provided by operating activities | 1,548,438 | 1,881,405 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (158,864) | (136,064) | |||||||||
| Proceeds from sale of property, plant and equipment | 29,320 | 132,740 | |||||||||
| Proceeds from sale of businesses | 3,366 | — | |||||||||
| Purchases of marketable securities and other investments | (20,012) | (30,608) | |||||||||
| Maturities and sales of marketable securities and other investments | 17,662 | 71,225 | |||||||||
| Other | 2,766 | 14,120 | |||||||||
| Net cash (used in) provided by investing activities | (125,762) | 51,413 | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from exercise of stock options | 2,566 | 4,012 | |||||||||
| Payments for common shares | (374,996) | (129,531) | |||||||||
| Proceeds from (payments for) notes payable, net | 1,621,483 | (539,500) | |||||||||
| Proceeds from long-term borrowings | 10,667 | 2,016 | |||||||||
| Payments for long-term borrowings | (9,708) | (1,211,334) | |||||||||
| Financing fees paid | (52,655) | — | |||||||||
| Dividends paid | (398,099) | (341,333) | |||||||||
| Net cash provided by (used in) financing activities | 799,258 | (2,215,670) | |||||||||
| Effect of exchange rate changes on cash | 106 | 86,938 | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 2,222,040 | (195,914) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 733,117 | 685,514 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 2,955,157 | $ | 489,600 | |||||||
| *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.
- 5 -
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 | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2022 | 2021* | 2022 | 2021* | |||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| Diversified Industrial: | ||||||||||||||||||||||||||
| North America | $ | 2,014,715 | $ | 1,758,383 | $ | 5,615,454 | $ | 4,853,371 | ||||||||||||||||||
| International | 1,439,357 | 1,388,999 | 4,214,972 | 3,777,875 | ||||||||||||||||||||||
| Aerospace Systems | 632,315 | 598,944 | 1,843,350 | 1,757,525 | ||||||||||||||||||||||
| Total net sales | $ | 4,086,387 | $ | 3,746,326 | $ | 11,673,776 | $ | 10,388,771 | ||||||||||||||||||
| Segment operating income | ||||||||||||||||||||||||||
| Diversified Industrial: | ||||||||||||||||||||||||||
| North America | $ | 413,998 | $ | 336,589 | $ | 1,085,117 | $ | 887,041 | ||||||||||||||||||
| International | 298,475 | 274,427 | 881,206 | 681,541 | ||||||||||||||||||||||
| Aerospace Systems | 119,016 | 102,303 | 352,063 | 279,798 | ||||||||||||||||||||||
| Total segment operating income | 831,489 | 713,319 | 2,318,386 | 1,848,380 | ||||||||||||||||||||||
| Corporate general and administrative expenses | 57,405 | 48,089 | 149,064 | 123,544 | ||||||||||||||||||||||
| Income before interest expense and other expense | 774,084 | 665,230 | 2,169,322 | 1,724,836 | ||||||||||||||||||||||
| Interest expense | 63,272 | 60,830 | 183,982 | 189,778 | ||||||||||||||||||||||
| Other expense (income) | 276,823 | 5,060 | 489,282 | (55,348) | ||||||||||||||||||||||
| Income before income taxes | $ | 433,989 | $ | 599,340 | $ | 1,496,058 | $ | 1,590,406 | ||||||||||||||||||
| *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. |
- 6 -
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 March 31, 2022, the results of operations for the three and nine months ended March 31, 2022 and 2021 and cash flows for the nine 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 Russia-Ukraine war and the novel coronavirus ("COVID-19") pandemic and their residual effects, including economic uncertainty, inflationary environment 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 these impacts. 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. No subsequent events have occurred that required adjustment to or disclosure in these financial statements.
2. New accounting pronouncements
In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, "Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606 as if the acquirer had originated the contracts. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt this standard in the second quarter of fiscal 2022. The impact of the new standard on our consolidated financial statements and related disclosures will depend on the magnitude of future acquisitions.
3. 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 | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Motion Systems | $ | 895,839 | $ | 820,514 | $ | 2,568,166 | $ | 2,197,971 | ||||||||||||||||||
| Flow and Process Control | 1,197,590 | 1,081,570 | 3,386,417 | 2,955,643 | ||||||||||||||||||||||
| Filtration and Engineered Materials | 1,360,643 | 1,245,298 | 3,875,843 | 3,477,632 | ||||||||||||||||||||||
| Total | $ | 3,454,072 | $ | 3,147,382 | $ | 9,830,426 | $ | 8,631,246 |
- 7 -
Aerospace Systems Segment revenues by product platform:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Flight Control Actuation | $ | 189,162 | $ | 174,067 | $ | 555,657 | $ | 499,432 | ||||||||||||||||||
| Fuel, Inerting and Engine Motion Control | 132,990 | 129,866 | 393,554 | 384,937 | ||||||||||||||||||||||
| Hydraulics | 77,519 | 75,430 | 222,435 | 222,193 | ||||||||||||||||||||||
| Engine Components | 149,269 | 145,819 | 430,346 | 436,119 | ||||||||||||||||||||||
| Airframe and Engine Fluid Conveyance | 55,617 | 49,190 | 161,993 | 141,737 | ||||||||||||||||||||||
| Other | 27,758 | 24,572 | 79,365 | 73,107 | ||||||||||||||||||||||
| Total | $ | 632,315 | $ | 598,944 | $ | 1,843,350 | $ | 1,757,525 |
Total Company revenues by geographic region based on the Company's selling operation's location:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| North America | $ | 2,645,106 | $ | 2,354,251 | $ | 7,451,153 | $ | 6,598,238 | ||||||||||||||||||
| Europe | 829,392 | 788,498 | 2,344,533 | 2,087,030 | ||||||||||||||||||||||
| Asia Pacific | 560,250 | 561,274 | 1,735,574 | 1,586,375 | ||||||||||||||||||||||
| Latin America | 51,639 | 42,303 | 142,516 | 117,128 | ||||||||||||||||||||||
| Total | $ | 4,086,387 | $ | 3,746,326 | $ | 11,673,776 | $ | 10,388,771 |
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:
| March 31, 2022 | June 30, 2021 | |||||||||||||
| Contract assets, current (included within Prepaid expenses and other) | $ | 25,132 | $ | 34,190 | ||||||||||
| Contract assets, noncurrent (included within Investments and other assets) | 551 | 1,884 | ||||||||||||
| Total contract assets | 25,683 | 36,074 | ||||||||||||
| Contract liabilities, current (included within Other accrued liabilities) | (52,479) | (51,211) | ||||||||||||
| Contract liabilities, noncurrent (included within Other liabilities) | (1,848) | (3,080) | ||||||||||||
| Total contract liabilities | (54,327) | (54,291) | ||||||||||||
| Net contract liabilities | $ | (28,644) | $ | (18,217) |
Net contract liabilities at March 31, 2022 increased from the June 30, 2021 amount primarily due to a decrease in contract assets resulting from customer billings. During the nine months ended March 31, 2022, approximately $38 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 March 31, 2022 was $7,761 million, of which approximately 88 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.
- 8 -
4. 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 plc ("Meggitt") for 800 pence per share (the "Acquisition"), which is approximately £6,263 million based on issued share capital at March 31, 2022.
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 $2.1 billion for the year ended December 31, 2021. We intend to fund the proposed Acquisition with cash and new debt. Refer to Note 14 for further discussion. The proposed Acquisition received the European Commission's clearance on April 11, 2022, conditional on full compliance with commitments offered by the Company, including a commitment to divest its wheel and brake business within the Aerospace Systems Segment. The proposed Acquisition remains subject to customary closing conditions, including further regulatory clearances. Acquisition-related transaction costs totaled $34 million for the nine months ended March 31, 2022. These costs are included in selling, general and administrative expenses in the Consolidated Statement of Income.
Restricted Cash
In connection with the proposed Acquisition, we deposited a total of $2,272 million, comprised of cash on hand and net proceeds from the issuance of commercial paper, into an escrow account during the three months ended December 31, 2021. The escrow account is restricted for payments related to the proposed Acquisition. At March 31, 2022, the balance was $2,487 million, which was recorded within prepaid expenses and other in the Consolidated Balance Sheet.
5. Earnings per share
The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and nine months ended March 31, 2022 and 2021.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021* | 2022 | 2021* | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 348,017 | $ | 473,153 | $ | 1,186,774 | $ | 1,241,307 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic - weighted average common shares | 128,426,675 | 129,085,563 | 128,549,040 | 128,935,696 | |||||||||||||||||||
| Increase in weighted average common shares from dilutive effect of equity-based awards | 1,916,906 | 2,292,370 | 1,889,553 | 1,690,904 | |||||||||||||||||||
| Diluted - weighted average common shares, assuming exercise of equity-based awards | 130,343,581 | 131,377,933 | 130,438,593 | 130,626,600 | |||||||||||||||||||
| Basic earnings per share | $ | 2.71 | $ | 3.67 | $ | 9.23 | $ | 9.63 | |||||||||||||||
| Diluted earnings per share | $ | 2.67 | $ | 3.60 | $ | 9.10 | $ | 9.50 | |||||||||||||||
| *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 March 31, 2022 and 2021, 493,609 and 133 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. For the nine months ended March 31, 2022 and 2021, 384,955 and 589,364 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.
6. 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 March 31, 2022, we repurchased 165,622 shares at an average price, including commissions, of $301.89 per share. During the nine months ended March 31, 2022, we repurchased 1,095,430 shares at an average price, including commissions, of $301.56 per share.
- 9 -
7. 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 $10 million and $12 million at March 31, 2022 and June 30, 2021, respectively.
8. Non-trade and notes receivable
The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
| March 31, 2022 | June 30, 2021 | |||||||||||||
| Notes receivable | $ | 128,145 | $ | 144,441 | ||||||||||
| Accounts receivable, other | 199,041 | 181,874 | ||||||||||||
| Total | $ | 327,186 | $ | 326,315 |
9. Inventories
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
| March 31, 2022 | June 30, 2021 | |||||||||||||
| Finished products | $ | 827,464 | $ | 733,744 | ||||||||||
| Work in process | 1,214,415 | 1,089,976 | ||||||||||||
| Raw materials | 288,363 | 266,922 | ||||||||||||
| Total | $ | 2,330,242 | $ | 2,090,642 |
10. Business realignment and acquisition integration charges
We incurred business realignment and acquisition integration charges in the first nine months of fiscal 2022 and 2021. In both the first nine 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 | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Diversified Industrial | $ | 2,771 | $ | 4,139 | $ | 8,835 | $ | 31,247 | |||||||||||||||
| Aerospace Systems | 318 | 1,306 | 913 | 6,643 | |||||||||||||||||||
| Corporate general and administrative expenses | — | 156 | — | 954 | |||||||||||||||||||
| Other expense | 63 | 1 | 63 | 1,226 |
Workforce reductions in connection with business realignment charges in the Business Segment Information are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Diversified Industrial | 50 | 65 | 133 | 741 | |||||||||||||||||||
| Aerospace Systems | 4 | 41 | 9 | 326 | |||||||||||||||||||
| Corporate general and administrative expenses | — | 1 | — | 19 |
- 10 -
The business realignment charges are presented in the Consolidated Statement of Income as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of sales | $ | 1,757 | $ | 3,056 | $ | 4,468 | $ | 29,389 | |||||||||||||||
| Selling, general and administrative expenses | 1,332 | 2,545 | 5,280 | 9,455 | |||||||||||||||||||
| Other expense (income), net | 63 | 1 | 63 | 1,226 |
During the first nine months of fiscal 2022, approximately $17 million in payments were made relating to business realignment charges. Remaining payments related to business realignment actions of approximately $7 million, a majority of which are expected to be paid by December 31, 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.
In addition to the business realignment charges discussed above, we also incurred $20 million of expense as a result of our exit of business operations in Russia. These charges primarily consist of write-downs of inventory and other working capital items and $8 million of foreign currency translation expense reclassified from accumulated other comprehensive income. Within the Business Segment Information, $7 million of expense was recorded in the other expense (income) caption, while the remainder of the charge was split evenly between the Aerospace Systems Segment and the Diversified Industrial International businesses.
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 | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Diversified Industrial | $ | 933 | $ | 2,631 | $ | 2,942 | $ | 9,495 | |||||||||||||||
| Aerospace Systems | — | 24 | — | 699 |
In the first nine months of fiscal 2022, these charges were recorded in both 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.
- 11 -
11. Equity
Changes in equity for the three months ended March 31, 2022 and 2021 are as follows:
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 90,523 | $ | 344,312 | $ | 15,488,764 | $ | (1,545,093) | $ | (5,623,424) | $ | 13,198 | $ | 8,768,280 | |||||||||||||||||||||||||||
| Net income | 348,017 | 71 | 348,088 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 13,833 | (276) | 13,557 | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($1.03 per share) | (132,543) | (132,543) | |||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | 19,055 | 6,422 | 25,477 | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 90,523 | $ | 363,367 | $ | 15,704,238 | $ | (1,531,260) | $ | (5,667,002) | $ | 12,993 | $ | 8,972,859 |
| Common Stock | Additional Capital | Retained Earnings* | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity* | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 90,523 | $ | 385,049 | $ | 14,184,833 | $ | (2,130,506) | $ | (5,311,236) | $ | 16,322 | $ | 7,234,985 | |||||||||||||||||||||||||||
| Net income | 473,153 | 86 | 473,239 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | (25,784) | (463) | (26,247) | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($0.88 per share) | (113,888) | (218) | (114,106) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | (10,552) | 14,796 | 4,244 | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 90,523 | $ | 374,497 | $ | 14,544,098 | $ | (2,156,290) | $ | (5,346,440) | $ | 15,727 | $ | 7,522,115 | |||||||||||||||||||||||||||
| *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. |
Changes in equity for the nine months ended March 31, 2022 and 2021 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 | 1,186,774 | 506 | 1,187,280 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 35,467 | (862) | 34,605 | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($3.09 per share) | (398,033) | (66) | (398,099) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | 33,748 | 33,937 | 67,685 | ||||||||||||||||||||||||||||||||||||||
| Liquidation activity | (1,948) | (1,948) | |||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (330,334) | (330,334) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 90,523 | $ | 363,367 | $ | 15,704,238 | $ | (1,531,260) | $ | (5,667,002) | $ | 12,993 | $ | 8,972,859 |
- 12 -
| 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 | 1,241,307 | 585 | 1,241,892 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 402,585 | 813 | 403,398 | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($2.64 per share) | (341,116) | (217) | (341,333) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | (42,088) | 68,476 | 26,388 | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 90,523 | $ | 374,497 | $ | 14,544,098 | $ | (2,156,290) | $ | (5,346,440) | $ | 15,727 | $ | 7,522,115 | |||||||||||||||||||||||||||
| *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. |
Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the nine months ended March 31, 2022 and 2021 are as follows:
| Foreign Currency Translation Adjustment and Other | Retirement Benefit Plans | Total | |||||||||||||||
| Balance at June 30, 2021 | $ | (865,865) | $ | (700,862) | $ | (1,566,727) | |||||||||||
| Other comprehensive (loss) before reclassifications | (63,515) | — | (63,515) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive (loss) | 7,647 | 91,335 | 98,982 | ||||||||||||||
| Balance at March 31, 2022 | $ | (921,733) | $ | (609,527) | $ | (1,531,260) |
| 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 | 281,726 | — | 281,726 | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive (loss) | — | 120,859 | 120,859 | ||||||||||||||
| Balance at March 31, 2021 | $ | (912,211) | $ | (1,244,079) | $ | (2,156,290) |
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three and nine months ended March 31, 2022 and 2021 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 | Nine Months Ended | |||||||||||||||||||
| March 31, 2022 | March 31, 2022 | |||||||||||||||||||
| Retirement benefit plans | ||||||||||||||||||||
| Amortization of prior service cost and initial net obligation | $ | (1,030) | $ | (3,090) | Other expense (income), net | |||||||||||||||
| Recognized actuarial loss | (39,292) | (117,852) | Other expense (income), net | |||||||||||||||||
| Total before tax | (40,322) | (120,942) | ||||||||||||||||||
| Tax benefit | 9,867 | 29,607 | ||||||||||||||||||
| Net of tax | $ | (30,455) | $ | (91,335) |
- 13 -
| Details about Accumulated Other Comprehensive (Loss) Components | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | Consolidated Statement of Income Classification | ||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| March 31, 2021 | March 31, 2021 | |||||||||||||||||||
| Retirement benefit plans | ||||||||||||||||||||
| Amortization of prior service cost and initial net obligation | $ | (1,304) | $ | (3,542) | Other expense (income), net | |||||||||||||||
| Recognized actuarial loss | (51,212) | (156,240) | Other expense (income), net | |||||||||||||||||
| Total before tax | (52,516) | (159,782) | ||||||||||||||||||
| Tax benefit | 12,793 | 38,923 | ||||||||||||||||||
| Net of tax | $ | (39,723) | $ | (120,859) |
12. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the nine months ended March 31, 2022 are as follows:
| Diversified Industrial Segment | Aerospace Systems Segment | Total | |||||||||||||||
| Balance at June 30, 2021 | $ | 7,457,309 | $ | 602,378 | $ | 8,059,687 | |||||||||||
| Divestitures | (164) | — | (164) | ||||||||||||||
| Foreign currency translation and other | (104,668) | (20) | (104,688) | ||||||||||||||
| Balance at March 31, 2022 | $ | 7,352,477 | $ | 602,358 | $ | 7,954,835 |
Divestitures represent goodwill associated with the sale of a business during the current-year quarter.
Goodwill is tested for impairment at the reporting unit level annually and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. At December 31, 2021, the Company performed its fiscal 2022 annual goodwill impairment test, which indicated no impairment existed.
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:
| March 31, 2022 | June 30, 2021 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Patents and technology | $ | 995,313 | $ | 250,377 | $ | 999,952 | $ | 216,314 | |||||||||||||||
| Trademarks | 752,259 | 352,223 | 762,130 | 331,905 | |||||||||||||||||||
| Customer lists and other | 3,823,435 | 1,714,345 | 3,869,772 | 1,563,838 | |||||||||||||||||||
| Total | $ | 5,571,007 | $ | 2,316,945 | $ | 5,631,854 | $ | 2,112,057 |
Total intangible amortization expense for the nine months ended March 31, 2022 and 2021 was $237 million and $244 million, respectively. The estimated amortization expense for the five years ending June 30, 2022 through 2026 is $315 million, $304 million, $297 million, $286 million and $281 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 nine months ended March 31, 2022 and 2021.
- 14 -
13. Retirement benefits
Net pension benefit expense recognized included the following components:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Service cost | $ | 18,238 | $ | 21,016 | $ | 57,599 | $ | 63,215 | |||||||||||||||
| Interest cost | 27,953 | 25,661 | 82,941 | 76,833 | |||||||||||||||||||
| Expected return on plan assets | (67,024) | (67,201) | (201,487) | (200,410) | |||||||||||||||||||
| Amortization of prior service cost | 1,028 | 1,294 | 3,084 | 3,583 | |||||||||||||||||||
| Amortization of net actuarial loss | 39,570 | 51,094 | 118,186 | 156,254 | |||||||||||||||||||
| Amortization of initial net obligation | 2 | 4 | 6 | 13 | |||||||||||||||||||
| Net pension benefit expense | $ | 19,767 | $ | 31,868 | $ | 60,329 | $ | 99,488 |
We recognized $0.1 million in expense related to other postretirement benefits during both the three months ended March 31, 2022 and 2021. During the nine months ended March 31, 2022 and 2021, we recognized $0.7 million and $0.9 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.
14. Debt
In connection with the proposed Acquisition, the Company entered into a bridge credit agreement on August 2, 2021 (the "Bridge Credit Agreement"). 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 March 31, 2022, 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. During the nine months ended March 31, 2022, we incurred $51 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 nine months of fiscal 2022, we amended our existing multi-currency credit agreement, increasing its capacity to $3,000 million. During October 2021, we issued $2,126 million of commercial paper to finance the proposed Acquisition. Commercial paper notes outstanding at March 31, 2022 were $1,621 million. There were no outstanding commercial paper notes as of June 30, 2021.
Based on the Company’s rating level at March 31, 2022, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At March 31, 2022, our debt to debt-shareholders' equity ratio was 0.48 to 1.0. We are in compliance, and expect to remain in compliance, with all covenants set forth in the credit agreements and indentures.
15. 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.
- 15 -
As of March 31, 2022, we had gross unrecognized tax benefits of $95 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 $19 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 $30 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.
16. 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 March 31, 2022 and 2021.
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:
| March 31, 2022 | June 30, 2021 | |||||||||||||
| Carrying value of long-term debt | $ | 6,588,048 | $ | 6,646,029 | ||||||||||
| Estimated fair value of long-term debt | 6,680,555 | 7,527,268 |
The fair value of long-term debt is classified within level 2 of the fair value hierarchy.
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.
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.
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 | March 31, 2022 | June 30, 2021 | ||||||||||||||||||
| Net investment hedges | ||||||||||||||||||||
| Cross-currency swap contracts | Other liabilities | 29,299 | 71,798 | |||||||||||||||||
| Cash flow hedges | ||||||||||||||||||||
| Forward exchange contracts | Non-trade and notes receivable | 30,355 | 5,376 | |||||||||||||||||
| Forward exchange contracts | Other accrued liabilities | 9,540 | 9,435 | |||||||||||||||||
| Deal-contingent forward contracts | Other accrued liabilities | 396,365 | — | |||||||||||||||||
| Costless collar contracts | Non-trade and notes receivable | 279 | 110 | |||||||||||||||||
| Costless collar contracts | Other accrued liabilities | 3,662 | 901 |
- 16 -
The cross-currency swap, forward exchange, deal-contingent forward 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, deal-contingent forward and costless collar contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
The forward exchange and costless collar contracts are adjusted to fair value by recording gains and losses through the cost of sales caption in the Consolidated Statement of Income. The deal-contingent forward contracts are adjusted to fair value by recording gains and losses through the other expense (income), net 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 (losses) of $24 million and $(3) million relating to forward exchange contracts were recorded during the three months ended March 31, 2022 and 2021, respectively. Net gains of $47 million and $21 million relating to forward exchange contracts were recorded during the nine months ended March 31, 2022 and 2021, respectively. Net (losses) of $(247) million and $(396) million relating to the deal-contingent forward contracts were recorded during the three and nine months ended March 31, 2022, respectively. All other gains or losses on derivative financial instruments recorded in the Consolidated Statement of Income for the three and nine months ended March 31, 2022 and 2021 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 | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cross-currency swap contracts | $ | 887 | $ | 5,188 | $ | 30,205 | $ | (33,675) | |||||||||||||||
| Foreign denominated debt | 16,194 | 25,636 | 41,843 | (26,200) |
During the nine months ended March 31, 2022 and 2021, the periodic interest settlements related to the cross-currency swaps were not material.
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2022 and June 30, 2021 are as follows:
| Quoted Prices | Significant Other | Significant | ||||||||||||||||||||||||
| Fair | In Active | Observable | Unobservable | |||||||||||||||||||||||
| Value at | Markets | Inputs | Inputs | |||||||||||||||||||||||
| March 31, 2022 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Equity securities | $ | 17,057 | $ | 17,057 | $ | — | $ | — | ||||||||||||||||||
| Derivatives | 30,634 | — | 30,634 | — | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivatives | 438,866 | — | 438,866 | — |
| 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 | — |
- 17 -
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, deal-contingent forward, 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.
- 18 -
PARKER-HANNIFIN CORPORATION
FORM 10-Q
Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF