Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

51K characters. Original on sec.gov · Markdown

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2022

AND COMPARABLE PERIODS ENDED MARCH 31, 2021

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.

Recent events impacting our business include the Russia-Ukraine war and COVID-19 pandemic and their residual effects, including the inflationary cost environment as well as disruption within the global supply chain, labor markets and aerospace industry. We are actively managing the impact of these events on our business. In compliance with international sanctions, we immediately suspended all shipments to and from Russia and, in March 2022, we closed our office and warehouse facility in Moscow. We do not expect our exit of business operations in Russia to materially impact our business, operations or financial results.

- 19 -

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.

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.

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

As previously announced, on March 14, 2022, we detected that a third party gained unauthorized access to our systems and immediately activated incident response protocols. We believe that data was exfiltrated in the incident, including personal information of our team members. However, based on our ongoing assessments, the incident has not had a significant financial or operational impact and has not had a material impact on our business, operations or financial results.

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						Nine Months Ended
	March 31,						March 31,
(dollars in millions)	2022			2021*			2022			2021*
Net sales	$	4,086		$	3,746		$	11,674		$	10,389
Gross profit margin	28.3		%	27.6		%	28.0		%	26.7		%
Selling, general and administrative expenses	$	412		$	387		$	1,201		$	1,113
Selling, general and administrative expenses, as a percent of sales	10.1		%	10.3		%	10.3		%	10.7		%

Interest expense	$	63		$	61		$	184		$	190
Other expense (income), net	$	249		$	(13)		$	386		$	(122)
Effective tax rate	19.8		%	21.0		%	20.6		%	21.9		%
Net income	$	348		$	473		$	1,187		$	1,242
Net income, as a percent of sales	8.5		%	12.6		%	10.2		%	12.0		%

*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 nine months of fiscal 2022 when compared to the prior-year periods primarily due to higher volume in both the Diversified Industrial and Aerospace Systems Segments. The effect of currency rate changes decreased net sales by approximately $74 million and $89 million in the current-year quarter and first nine months of fiscal 2022, respectively. Substantially all of the $74 million decrease in the current-year quarter is attributable to the Diversified Industrial International businesses. During the first nine months of fiscal 2022, the effect of currency rate changes decreased net sales by approximately $96 million and $3 million in the Diversified Industrial International businesses and Aerospace Systems Segment, respectively. These decreases were partially offset by a $10 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 nine 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 inflationary environment and disruption within the global supply chain and labor markets.

- 20 -

Cost of sales included net foreign currency transaction gains of $10 million and $8 million for the current-year and prior-year quarter, respectively, and $27 million and $8 million for the first nine months of fiscal 2022 and 2021, respectively.

Cost of sales also included business realignment and acquisition integration charges of $2 million and $3 million for the current-year and prior-year quarter, respectively, and $6 million and $31 million for the first nine months of fiscal 2022 and 2021, respectively.

Selling, general and administrative expenses ("SG&A") increased during the current-year quarter and first nine months of fiscal 2022 primarily due to acquisition-related transaction costs of $12 million and $34 million, respectively, as well as higher net expense from the Company's deferred compensation plan and related investments and higher professional fees and related expenses. SG&A also included business realignment and acquisition integration charges of $2 million and $5 million for the current-year and prior-year quarter, respectively, and $7 million and $19 million for the first nine months of fiscal 2022 and 2021, respectively.

Interest expense for the current-year quarter increased primarily due to higher average debt outstanding. Interest expense decreased during the first nine months of fiscal 2022 primarily due to lower average debt outstanding.

Other expense (income), net included the following:


	Three Months Ended				Nine Months Ended
(dollars in millions)	March 31,				March 31,
Expense (income)	2022		2021		2022		2021
Income related to equity method investments	$	(17)	$	(11)	$	(52)	$	(30)
Non-service components of retirement benefit cost	2		11		3		37
Loss (gain) on disposal of assets and divestitures	1		(6)		(8)		(108)

Acquisition-related financing fees	1		—		51		—
Loss on deal-contingent forward contracts	247		—		396		—
Russia liquidation	8		—		8		—
Other items, net	7		(7)		(12)		(21)
	$	249	$	(13)	$	386	$	(122)

Loss (gain) on disposal of assets and divestitures for the prior-year quarter and first nine 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 nine 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 nine months of fiscal 2022 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 nine 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 21.5 percent.

- 21 -

BUSINESS SEGMENT INFORMATION

Diversified Industrial Segment


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
(dollars in millions)	2022			2021			2022			2021
Net sales
North America	$	2,015		$	1,758		$	5,615		$	4,853
International	1,439			1,389			4,215			3,778
Operating income
North America	414			337			1,085			887
International	$	298		$	274		$	881		$	682
Operating margin
North America	20.5		%	19.1		%	19.3		%	18.3		%
International	20.7		%	19.8		%	20.9		%	18.0		%
Backlog	$	4,446		$	2,850		$	4,446		$	2,850

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 March 31, 2022
	Three Months		Nine Months
Diversified Industrial North America – as reported	14.6	%	15.7	%


Currency	0.1	%	0.2	%
Diversified Industrial North America – without currency1	14.5	%	15.5	%

Diversified Industrial International – as reported	3.6	%	11.6	%


Currency	(5.3)	%	(2.5)	%
Diversified Industrial International – without currency1	8.9	%	14.1	%

Total Diversified Industrial Segment – as reported	9.7	%	13.9	%


Currency	(2.3)	%	(1.0)	%
Total Diversified Industrial Segment – without currency1	12.0	%	14.9	%

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 14.6 percent and 15.7 percent during the current-year quarter and first nine months of fiscal 2022, respectively. Currency exchange rates did not materially impact sales in the current-year quarter. In the first nine months of fiscal 2022, the effect of currency exchange rates increased sales by approximately $10 million. Excluding the effects of currency exchange rates, sales in the Diversified Industrial North American businesses increased 14.5 percent in the current-year quarter and 15.5 percent in the first nine 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 life sciences, construction, heavy-duty truck, farm and agriculture, engines, material handling, refrigeration and metal fabrication markets, partially offset by lower end-user demand in the power generation market. Additionally, end-user demand decreased in the machine tool and cars and light truck markets from the prior-year quarter and first nine months of fiscal 2021, respectively.

- 22 -

Diversified Industrial International - Sales increased 3.6 percent and 11.6 percent from the prior-year quarter and first nine months of fiscal 2021, respectively. The effect of currency exchange rates decreased sales by approximately $74 million and $96 million in the current-year quarter and first nine months of fiscal 2022, respectively. Excluding the effects of currency exchange rates, Diversified Industrial International sales increased 8.9 percent in the current-year quarter and 14.1 percent in the first nine months of fiscal 2022 from prior-year levels. Europe accounted for approximately 80 percent of the increase in sales during the current-year quarter, while both the Asia Pacific region and Latin America each contributed approximately 10 percent of the change. During the first nine months of fiscal 2022, the increase in sales was primarily related to Europe and the Asia Pacific region, which contributed approximately 65 percent and 30 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 nine months of fiscal 2022 increased primarily due to higher demand from distributors and end users across most markets, including the construction, industrial machinery, machine tool, mining, material handling, heavy-duty truck, forestry and life sciences markets, partially offset by lower end-user demand in the cars and light truck, telecommunications, and power generation markets. In the first nine months of fiscal 2022, lower end-user demand in the oil and gas market partially offset the increase in sales. However, we experienced an increase in end-user demand within the oil and gas market during the current-year quarter.

Within the Asia Pacific region, sales in the current-year quarter and first nine months of fiscal 2022 increased primarily due to an increase in demand from distributors and end users in the semiconductor, refrigeration, and machine tool markets, partially offset by lower end-user demand in the engines and power generation markets. In the first nine months of fiscal 2022, we experienced higher end-user demand in the industrial machinery, construction and life sciences markets compared to the same prior-year period. In the current year-quarter, end-user demand decreased in the construction and life sciences markets.

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

Operating Margin

Diversified Industrial Segment operating margin increased in the current-year quarter and first nine 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 nine 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				Nine Months Ended
	March 31,				March 31,
(dollars in millions)	2022		2021		2022		2021
Diversified Industrial North America	$	1	$	2	$	3	$	11
Diversified Industrial International	3		5		9		30

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 nine 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 $12 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.

- 23 -

During the current-year quarter and first nine months of fiscal 2022, we also incurred $6 million of expense within the Diversified Industrial International businesses 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.

Backlog

Diversified Industrial Segment backlog as of March 31, 2022 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 65 percent and 35 percent of the change, respectively. Within the International businesses, Europe, the Asia Pacific region and Latin America accounted for approximately 50 percent, 45 percent and five percent of the change, respectively.

As of March 31, 2022, 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 70 percent and 30 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						Nine Months Ended
	March 31,						March 31,
(dollars in millions)	2022			2021			2022			2021
Net sales	$	632		$	599		$	1,843		$	1,758
Operating income	$	119		$	102		$	352		$	280
Operating margin	18.8		%	17.1		%	19.1		%	15.9		%
Backlog	$	3,315		$	3,335		$	3,315		$	3,335

Net Sales

Aerospace Systems Segment sales for the current-year quarter and first nine 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 nine months of fiscal 2022 primarily due to higher sales volume, favorable commercial aftermarket product mix, higher aftermarket profitability as well as lower engineering development expenses. These benefits were partially offset by challenges created by the ongoing inflationary environment, 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.

During the current-year quarter and first nine months of fiscal 2022, we also incurred $7 million of expense within the Aerospace Systems Segment 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.

- 24 -

Backlog

Aerospace Systems Segment backlog as of March 31, 2022 decreased from the prior-year quarter 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 increased from the June 30, 2021 amount of $3,264 million primarily due to orders exceeding shipments in the commercial OEM and aftermarket businesses, partially offset by shipments exceeding shipments in the military OEM and aftermarket businesses.

Corporate general and administrative expenses


	Three Months Ended						Nine Months Ended
(dollars in millions)	March 31,						March 31,
Expense (income)	2022			2021			2022			2021
Corporate general and administrative expense	$	57		$	48		$	149		$	124
Corporate general and administrative expense, as a percent of sales	1.4		%	1.3		%	1.3		%	1.2		%

Corporate general and administrative expenses increased in both the current-year quarter and first nine months of fiscal 2022 primarily due to higher net expense from the Company's deferred compensation plan and related investments, higher professional fees and related expenses as well as higher incentive compensation expense. These expenses were partially offset by lower pension expense and lower charitable contributions.

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


	Three Months Ended				Nine Months Ended
(dollars in millions)	March 31,				March 31,
Expense (income)	2022		2021*		2022		2021*
Foreign currency transaction	$	(9)	$	(8)	$	(27)	$	(8)
Stock-based compensation	9		8		55		54
Pensions	(4)		6		(12)		16
Acquisition-related expenses	13		1		84		1
Loss on deal-contingent forward contracts	247		—		396		—
Loss (gain) on disposal of assets and divestitures	1		(6)		(8)		(108)

Russia liquidation	7		—		7		—
Other items, net	13		4		(6)		(10)
	$	277	$	5	$	489	$	(55)

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

- 25 -

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:


	Nine Months Ended
	March 31,
(dollars in millions)	2022		2021
Cash provided by (used in):
Operating activities	$	1,548	$	1,881
Investing activities	(126)		51
Financing activities	799		(2,216)
Effect of exchange rates	1		88
Net increase (decrease) in cash, cash equivalents and restricted cash	$	2,222	$	(196)

Cash flows from operating activities for the first nine months of fiscal 2022 were $1,548 million compared to $1,881 million for the first nine months of fiscal 2021. This decrease of $333 million was primarily driven by increased working capital requirements of $157 million and a decrease in net income of $55 million in fiscal 2022 compared to the same prior-year period.

Days sales outstanding relating to trade accounts receivable was 53 days at March 31, 2022, 50 days at June 30, 2021 and 52 days at March 31, 2021.
Days supply of inventory on hand was 81 days at March 31, 2022, 75 days at June 30, 2021 and 77 days at March 31, 2021.

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

Net purchases of marketable securities of $2 million in fiscal 2022 compared to net maturities of marketable securities of $41 million in fiscal 2021.
Capital expenditures of $159 million in fiscal 2022 compared to $136 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 nine months of fiscal 2022 and 2021 were impacted by the following factors:

Repurchases of 1.1 million common shares for $330 million during fiscal 2022.
Term loan repayments of $1,210 million in fiscal 2021.
Net commercial paper borrowings of $1,621 million in fiscal 2022 compared to net commercial paper repayments of $540 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.

- 26 -

Dividends

We declared a quarterly dividend of $1.03 per share on January 27, 2022, which was paid on March 4, 2022. Dividends have been paid for 287 consecutive quarters. Additionally, we declared a quarterly dividend of $1.33 on April 28, 2022, payable on June 3, 2022, increasing our annual dividend per share paid to shareholders for 66 consecutive fiscal years.

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 $435 million and $467 million held by the Company's foreign subsidiaries at March 31, 2022 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 March 31, 2022, $1,621 million of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $2,150 million.

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 March 31, 2022, $1,379 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 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, the Company's 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 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 March 31, 2022, 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+

- 27 -

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 £6,263 million based on issued share capital at March 31, 2022. We intend to fund the proposed Acquisition with cash and new debt. 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.

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 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.

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 March 31, 2022, 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.

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;

- 28 -

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, including the Russia-Ukraine war and its residual effects;
inability to obtain, or meet conditions imposed for, required governmental and regulatory approvals;
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 March 31, 2022, and undertakes no obligation to update them unless otherwise required by law.

Previous: Item 1. FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK