Parker-Hannifin 10-Q 2022-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

OR

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

For the transition period from to

Commission File number 1-4982

PARKER-HANNIFIN CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

Yes ☐ No ☒

Number of Common Shares outstanding at September 30, 2022: 128,405,731

PART I - FINANCIAL INFORMATION

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

			Three Months Ended
			September 30,
			2022						2021*
Net sales			$	4,232,775					$	3,762,809
Cost of sales			2,795,456						2,504,382
Selling, general and administrative expenses			835,804						626,749
Interest expense			117,794						59,350
Other (income) expense, net			(19,624)						583
Income before income taxes			503,345						571,745
Income taxes			115,308						120,282
Net income			388,037						451,463
Less: Noncontrolling interest in subsidiaries' earnings			183						306
Net income attributable to common shareholders			$	387,854					$	451,157
Earnings per share attributable to common shareholders:
Basic			$	3.02					$	3.50
Diluted			$	2.98					$	3.45
*Prior period amounts have been reclassified to reflect the income statement reclassification as described in Note 1.

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

			Three Months Ended
			September 30,
			2022						2021
Net income			$	388,037					$	451,463
Less: Noncontrolling interests in subsidiaries' earnings			183						306
Net income attributable to common shareholders			387,854						451,157
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment			(306,483)						(68,324)
Retirement benefits plan activity			4,771						29,022
Other comprehensive (loss)			(301,712)						(39,302)
Less: Other comprehensive (loss) for noncontrolling interests			(1,130)						(539)
Other comprehensive (loss) attributable to common shareholders			(300,582)						(38,763)
Total comprehensive income attributable to common shareholders			$	87,272					$	412,394

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

(Unaudited)

			September 30, 2022						June 30, 2022
ASSETS
Current assets:
Cash and cash equivalents			$	502,307					$	535,799
Marketable securities and other investments			19,504						27,862
Trade accounts receivable, net			2,649,166						2,341,504
Non-trade and notes receivable			374,177						543,757
Inventories			3,130,182						2,214,553
Prepaid expenses and other			492,491						6,383,169
Total current assets			7,167,827						12,046,644
Property, plant and equipment			6,488,563						5,897,955
Less: Accumulated depreciation			3,734,956						3,775,197
Property, plant and equipment, net			2,753,607						2,122,758
Deferred income taxes			125,604						110,585
Investments and other assets			1,135,728						788,057
Intangible assets, net			8,388,011						3,135,817
Goodwill			10,384,130						7,740,082
Total assets			$	29,954,907					$	25,943,943
LIABILITIES
Current liabilities:
Notes payable and long-term debt payable within one year			$	1,725,077					$	1,724,310
Accounts payable, trade			2,018,209						1,731,925
Accrued payrolls and other compensation			462,075						470,132
Accrued domestic and foreign taxes			230,899						250,292
Other accrued liabilities			1,062,448						1,682,659
Total current liabilities			5,498,708						5,859,318
Long-term debt			12,238,900						9,755,825
Pensions and other postretirement benefits			770,032						639,939
Deferred income taxes			1,778,074						307,044
Other liabilities			895,789						521,897
Total liabilities			21,181,503						17,084,023
EQUITY
Shareholders’ equity:
Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued			—						—
Common stock, $.50 par value; authorized 600,000,000 shares; issued 181,046,128 shares at September 30 and June 30			90,523						90,523
Additional capital			360,443						327,307
Retained earnings			15,878,565						15,661,808
Accumulated other comprehensive (loss)			(1,843,780)						(1,543,198)

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022

AND COMPARABLE PERIOD ENDED SEPTEMBER 30, 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.

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Despite disruption within the aerospace industry commercial aerospace demand is recovering. We are managing the challenging supply chain environment through our "local for local" manufacturing strategy, ongoing supplier management process, and broadened supply base. We are also managing the impact of the inflationary cost environment through a variety of cost and pricing measures, including continuous improvement and lean initiatives. Additionally, we are strategically managing our workforce and discretionary spending. At the same time, we are appropriately addressing the ongoing needs of our business so that we may continue to serve our customers.

Over the long term, the extent to which our business and results of operations will be impacted by the 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. Additionally, as these events and other global economic factors have led to an increased inflationary environment, we continue to monitor and manage the effects of inflation with the goal of minimizing its impact on our business, operations, and financial results.

As previously announced, on March 14, 2022, we detected that an unauthorized party gained access to our systems. After securing our network and concluding our investigation, we found that the data exfiltrated during the incident included personal information of our team members. We have notified individuals whose personal information was involved and offered them credit monitoring services. We have also provided notification regarding the incident to the appropriate regulatory authorities. A consolidated class action lawsuit has been filed in the United States District Court for the Northern District of Ohio against the Company over the incident. 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
						September 30,
(dollars in millions)						2022						2021*
Net sales						$	4,233					$	3,763
Gross profit margin						34.0		%				33.4		%
Selling, general and administrative expenses						$	836					$	627
Selling, general and administrative expenses, as a percent of sales						19.7		%				16.7		%
Interest expense						$	118					$	59
Other (income) expense, net						$	(20)					$	1
Effective tax rate						22.9		%				21.0		%
Net income						$	388					$	451
Net income, as a percent of sales						9.2		%				12.0		%
*Prior period amounts have been reclassified to reflect the income statement reclassification as described in Note 1 to the Consolidated Financial Statements.

Net sales increased for the current-year quarter when compared to the prior-year quarter 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 $203 million, of which approximately $196 million is attributable to the Diversified Industrial International businesses, while the remainder of the change is split evenly between the Diversified Industrial North American businesses and the Aerospace Systems Segment. Acquisitions and divestitures completed within the last 12 months impacted sales by approximately $143 million and $3 million, respectively, during the current-year quarter.

Gross profit margin (calculated as net sales minus cost of sales, divided by net sales) increased in the current-year quarter primarily due to higher margins in the Diversified Industrial Segment. The increase in gross profit margin is primarily due to higher sales volume and benefits from cost management, as well as price increases. These increases were partially offset by lower margins in the Aerospace Systems Segment and increased operating costs, including higher freight, material, and labor costs resulting from the ongoing inflationary environment affecting both segments.

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Cost of sales also included business realignment and acquisition integration charges of $3 million and $0.3 million for the current-year and prior-year quarter, respectively.

Selling, general and administrative expenses ("SG&A") increased during the current-year quarter primarily due to acquisition-related transaction costs of $109 million as well as higher stock compensation, professional fees, and research and development expenses. SG&A also included business realignment and acquisition integration charges of $13 million and $4 million for the current-year and prior-year quarter, respectively,

Interest expense for the current-year quarter increased primarily due to higher average debt outstanding.

Other (income) expense, net included the following:

						Three Months Ended
(dollars in millions)						September 30,
Expense (income)						2022						2021*
Foreign currency transaction loss (gain)						$	36					$	(9)
Income related to equity method investments						(28)						(18)
Non-service components of retirement benefit cost						(13)						(1)
Gain on disposal of assets and divestitures						(377)						—
Interest income						(26)						(1)
Acquisition-related financing fees						—						39
Loss on deal-contingent forward contracts						390						—
Other items, net						(2)						(9)
						$	(20)					$	1
*Prior period amounts have been reclassified to reflect the income statement reclassification as described in Note 1 to the Consolidated Financial Statements.

Foreign currency transaction loss (gain) primarily relates to the impact of exchange rates on cash, marketable securities and other investments, forward contracts and intercompany transactions. During the current-year quarter, it also includes foreign currency transaction loss associated with completing the acquisition (the "Acquisition") of Meggitt plc ("Meggitt").

Gain on disposal of assets and divestitures for the current-year quarter includes a gain on the sale of the aircraft wheel and brake business within the Aerospace Systems Segment of $373 million. Refer to Note 4 of the Consolidated Financial Statements for further discussion.

Acquisition-related financing fees relate to the bridge credit agreement (the "Bridge Credit Agreement") fees associated with the Acquisition. Refer to Note 14 of the Consolidated Financial Statements for further discussion.

Loss on deal-contingent forward contracts includes a loss on the deal-contingent forward contracts related to the Acquisition. Refer to Note 16 to the Consolidated Financial Statements for further discussion.

Effective tax rate for the current-year quarter was higher than the comparable prior-year period primarily due to an overall decrease in discrete tax benefits as well as an increase on taxes related to international activities. The fiscal 2023 effective tax rate is expected to be approximately 23 percent.

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BUSINESS SEGMENT INFORMATION

Diversified Industrial Segment

						Three Months Ended
						September 30,
(dollars in millions)						2022						2021
Net sales
North America						$	2,132					$	1,794
International						1,355						1,376
Operating income
North America						453						334
International						$	294					$	291
Operating margin
North America						21.2		%				18.6		%
International						21.7		%				21.2		%
Backlog						$	4,901					$	3,583

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

						Period Ending September 30, 2022
						Three Months
Diversified Industrial North America – as reported						18.8		%
Acquisitions						1.2		%
Currency						(0.3)		%
Diversified Industrial North America – without acquisitions and currency1						17.9		%
Diversified Industrial International – as reported						(1.6)		%
Acquisitions						0.5		%
Currency						(14.3)		%
Diversified Industrial International – without acquisitions and currency1						12.2		%
Total Diversified Industrial Segment – as reported						10.0		%
Acquisitions						0.9		%
Currency						(6.3)		%
Total Diversified Industrial Segment – without acquisitions and currency1						15.4		%

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 acquisitions made within the last 12 months as well as currency exchange rates (a non-GAAP measure). The effects of acquisitions and 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 18.8 percent during the current-year quarter compared to the same prior-year period. The effect of acquisitions increased sales by approximately $21 million in the current-year quarter. Currency exchange rates did not materially impact sales in the current-year quarter. Excluding the effects of acquisitions and changes in the currency exchange rates, sales in the Diversified Industrial North American businesses increased 17.9 percent in the current-year quarter when compared to prior-year levels primarily due to higher demand from distributors and end users across most markets, including farm and agriculture, cars and light trucks, construction equipment, refrigeration, lawn and turf, heavy-duty trucks, semiconductors, metal fabrication, and engine markets, partially offset by lower end-user demand in the life sciences market.

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Diversified Industrial International - Sales decreased 1.6 percent from the prior-year quarter. The effect of acquisitions increased sales by approximately $6 million in the current-year quarter. The effect of currency exchange rates decreased sales by approximately $196 million in the current-year quarter. Excluding the effects of acquisitions and changes in the currency exchange rates, Diversified Industrial International sales increased 12.2 percent in the current-year quarter from prior-year levels. Europe accounted for approximately 50 percent of the increase in sales during the current-year quarter, while the Asia Pacific region and Latin America comprised approximately 45 percent and five percent of the increase in sales, respectively.

Within Europe, sales in the current-year quarter increased primarily due to higher demand from distributors and end users across most markets, including the construction equipment, heavy-duty truck, life sciences, industrial machinery, cars and light truck, farm and agriculture, engines, refrigeration, and mining markets, partially offset by lower end-user demand in the power generation market.

Within the Asia Pacific region, sales in the current-year quarter increased primarily due to an increase in demand from distributors and end users in the cars and light truck, construction equipment, semiconductor, telecommunications, mining, marine, heavy-duty truck, and metal fabrication markets, partially offset by lower end-user demand in the life sciences market.

Within Latin America, sales in the current-year quarter increased primarily due to higher demand from distributors and end users in the cars and light truck, farm and agriculture, metal fabrication, heavy-duty truck, industrial machinery, oil and gas, mining, and construction equipment markets, partially offset by lower end-user demand in the life sciences market.

Operating Margin

Diversified Industrial Segment operating margin increased in the current-year quarter within both the North American and International businesses primarily due to higher sales volume and benefits from cost management, 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 inflationary environment.

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
						September 30,
(dollars in millions)						2022						2021
Diversified Industrial North America						$	—					$	1
Diversified Industrial International						2						3

The business realignment charges primarily consist of severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity, as well as plant closures. Acquisition integration charges in the current-year relate to the acquisition of Meggitt, and prior-year 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 three months of fiscal 2023 will not materially impact operating income in fiscal 2023 or 2024. 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 $40 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2023. However, continually changing business conditions could impact the ultimate costs we incur.

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Backlog

Diversified Industrial Segment backlog as of September 30, 2022 increased from the prior-year quarter primarily due to orders exceeding shipments in both the North American and International businesses as well as the addition of Meggitt backlog in the current-year quarter. Excluding the impact of Meggitt, backlog in the North American and International businesses accounted for approximately 80 percent and 20 percent of the change, respectively. Within the International businesses, the Asia Pacific region, Europe and Latin America accounted for approximately 70 percent, 16 percent and 14 percent of the change, respectively.

As of September 30, 2022, Diversified Industrial Segment backlog increased compared to the June 30, 2022 amount of $4.5 billion primarily due to the addition of Meggitt backlog during the current-year quarter, partially offset by shipments exceeding orders in both the North American and International businesses. Excluding the impact of Meggitt, Industrial Segment backlog decreased from the June 30, 2022 amount, with the North American and International businesses comprising approximately five percent and 95 percent of the decrease, respectively. Within the International businesses, the decrease was primarily due to shipments exceeding orders in both Europe and the Asia Pacific region, partially offset by orders exceeding shipments in Latin America.

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
						September 30,
(dollars in millions)						2022						2021
Net sales						$	746					$	593
Operating income						$	92					$	118
Operating margin						12.4		%				20.0		%
Backlog						$	5,346					$	3,200

Net Sales

Aerospace Systems Segment sales for the current-year quarter increased compared to the same prior-year period primarily due to higher volume in the commercial original equipment manufacturer ("OEM") and aftermarket businesses, partially offset by lower military OEM and aftermarket volume. Meggitt also contributed $115 million in sales during the current-year quarter.

Operating Margin

Aerospace Systems Segment operating margin decreased during the current-year quarter primarily due to higher commercial OEM volume, an increase in contract loss reserves related to certain commercial OEM programs, and acquisition-related expenses, including higher estimated amortization and depreciation expense associated with the preliminary fair value estimates of intangible assets, plant and equipment, and inventory, as well as acquisition integration charges. Challenges created by the disruption within the supply chain and labor markets also contributed to the lower operating margin. These factors were partially offset by higher commercial aftermarket volume, and higher aftermarket profitability.

Business Realignment

We expect to incur approximately $46 million of additional business realignment and acquisition integration charges in the remainder of fiscal 2023. However, continually changing business conditions could impact the ultimate costs we incur.

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Backlog

Aerospace Systems Segment backlog as of September 30, 2022 increased from both the prior-year quarter and June 30, 2022 amount of $3.3 billion primarily due to the addition of the Meggitt backlog in the first three months of fiscal 2023.

Backlog also increased from the prior-year quarter due to orders exceeding shipments within the commercial OEM and aftermarket businesses, partially offset by shipments exceeding orders in the military OEM and aftermarket businesses.

The increase in backlog from June 30, 2022 is also due to orders exceeding shipments within the commercial OEM and commercial and military aftermarket businesses, partially offset by shipments exceeding orders in the military OEM business.

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

Corporate general & administrative expenses

						Three Months Ended
(dollars in millions)						September 30,
Expense						2022						2021
Corporate general and administrative expense						$	52					$	49
Corporate general and administrative expense, as a percent of sales						1.2		%				1.3		%

Corporate general and administrative expenses increased in the current-year quarter primarily due to higher net expense from the Company's deferred compensation plan and related investments, partially offset by lower incentive compensation.

Other expense (in Business Segments) included the following:

						Three Months Ended
(dollars in millions)						September 30,
Expense (income)						2022						2021
Foreign currency transaction loss (gain)						$	36					$	(9)
Stock-based compensation						50						37
Pensions						(13)						(5)
Acquisition-related expenses						108						52
Loss on deal-contingent forward contracts						390						—
Gain on disposal of assets and divestitures						(377)						—
Interest income						(26)						(1)
Other items, net						(2)						(11)
						$	166					$	63

Foreign currency transaction loss (gain) primarily relates to the impact of exchange rates on cash, marketable securities and other investments, forward contracts and intercompany transactions. During the current-year quarter, it also includes foreign currency transaction loss associated with completing the Acquisition.

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

Loss on deal-contingent forward contracts includes a loss on the deal-contingent forward contracts related to the Acquisition. Refer to Note 16 to the Consolidated Financial Statements for further discussion.

Gain on disposal of assets and divestitures includes a gain on the sale of the aircraft wheel and brake business within the Aerospace Systems Segment of approximately $373 million. Refer to Note 4 of the Consolidated Financial Statements for further discussion.

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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:

						Three Months Ended
						September 30,
(dollars in millions)						2022						2021
Cash provided by (used in):
Operating activities						$	457					$	424
Investing activities						(7,927)						(42)
Financing activities						1,340						(421)
Effect of exchange rates						(16)						(1)
Net decrease in cash, cash equivalents and restricted cash						$	(6,146)					$	(40)

Cash flows from operating activities for the first three months of fiscal 2023 were $457 million compared to $424 million for the first three months of fiscal 2022. This increase of $33 million was primarily related to cash provided by working capital items, which increased by $216 million, partially offset by net income, which decreased by $63 million in fiscal 2023 compared to the same prior-year period. Additionally, cash flows from operating activities were negatively impacted by acquisition transaction expenses.

We believe that for a more meaningful evaluation of cash flows from operating activities, the impact of the the deal-contingent forward contracts should be removed from net income and working capital items, as the cash outflow is presented within cash flows from investing activities. The impact of the deal-contingent forward contracts decreased net income by $295 million and increased cash provided by working capital items by $390 million. After such consideration of the deal-contingent forward contracts activity, cash flow from operations increased primarily due to an increase in net income of $232 million, partially offset by a decrease in cash provided by working capital items of $174 million in fiscal 2023 compared to the same prior-year period.

• Days sales outstanding relating to trade accounts receivable was 58 days at September 30, 2022, 51 days at June 30, 2022 and 51 days at September 30, 2021. The increase in days sales outstanding at September 30, 2022 is due to including receivables acquired in the Acquisition.

• Days supply of inventory on hand was 94 days at September 30, 2022, 77 days at June 30, 2022 and 86 days at September 30, 2021.

Cash flows from investing activities for the first three months of fiscal 2023 and 2022 were impacted by the following factors:

• Payment for the Acquisition net of cash acquired of $7.1 billion in fiscal 2023.

• Payments to settle the deal contingent forward contracts of $1.4 billion in fiscal 2023.

• Net proceeds from the sale of the aircraft wheel and brake business of approximately $441 million in fiscal 2023.

• Cash collateral received of $250 million in fiscal 2023 per the credit support annex attached to the deal-contingent forward contracts.

• Capital expenditures of $84 million in fiscal 2023 compared to $48 million in the same prior-year period.

• Net maturities of marketable securities of $9 million in fiscal 2023 compared to $2 million in fiscal 2022.

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Cash flows from financing activities for the first three months of fiscal 2023 and 2022 were impacted by the following factors:

• Proceeds of $2 billion from borrowings under the term loan facility ("Term Loan Facility") in fiscal 2023.

• Payments related to maturity of $300 million aggregate principal amount of medium term notes in fiscal 2023.

• Repurchases of 0.2 million common shares for $50 million during fiscal 2023 compared to repurchases of 0.8 million common shares for $230 million during fiscal 2022.

• Net commercial paper repayments of $112 million in fiscal 2023.

Cash Requirements

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

Dividends

We declared a quarterly dividend of $1.33 per share on August 18, 2022, which was paid on September 9, 2022. Dividends have been paid for 289 consecutive quarters, including a yearly increase in dividends for the last 66 years. Additionally, we declared a quarterly dividend of $1.33 on October 26, 2022, payable on December 2, 2022.

Share Repurchases

The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized to repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a year. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. Refer to Note 6 to the Consolidated Financial Statements for further discussion of share repurchases.

Liquidity

Cash, comprised of cash and cash equivalents and marketable securities and other investments, includes $428 million and $465 million held by the Company's foreign subsidiaries at September 30, 2022 and June 30, 2022, 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 $3.0 billion of short-term commercial paper notes. As of September 30, 2022, $1.3 billion of commercial paper notes were outstanding, and the largest amount of commercial paper notes outstanding during the current-year quarter was $2.2 billion.

The Company has a line of credit totaling $3.0 billion through a multi-currency revolving credit agreement with a group of banks, of which $1.7 billion was available as of September 30, 2022. 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.

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. In October 2022, we paid off $300 million aggregate principal amount of private placement notes in two tranches, with fixed interest rates of 2.78 percent and 3.00 percent and maturity dates of November 2023 and November 2025, respectively, pursuant to an offer to noteholders according to change in control provisions. Refer to the Cash flows from financing activities section above and Notes 4 and 14 to the Consolidated Financial Statements for further discussion.

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The Company’s credit agreement 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 September 30, 2022, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At September 30, 2022, the Company's debt to debt-shareholders' equity ratio was 0.62 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 September 30, 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+

Supply Chain Financing

We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers. We currently have supply chain financing programs ("SCF") with financial intermediaries, which provide certain suppliers the option to be paid by the financial intermediaries earlier than the due date on the applicable invoice. We are not a party to the agreements between the participating financial intermediaries and the suppliers in connection with the programs. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the programs. We do not reimburse suppliers for any costs they incur for participation in the programs and their participation is completely voluntary. Amounts due to our suppliers that elected to participate in the SCF programs are included in accounts payable on the Consolidated Balance Sheet. Accounts payable included approximately $85 million and $46 million payable to suppliers who have elected to participate in the SCF programs as of September 30, 2022 and June 30, 2022, respectively. The increase in the amount outstanding in the programs from the June 30, 2022 balance is due to the addition of Meggitt's SCF programs. The amounts settled through the SCF programs and paid to participating financial intermediaries totaled $37 million during the first three months of fiscal 2023. We account for payments made under the programs in the same manner as our other accounts payable, which is a reduction to our cash flows from operations. We do not believe that changes in the availability of supply chain financing will have a significant impact on our liquidity.

Strategic Acquisitions

Upon announcing the Acquisition on August 2, 2021, the Company entered into the Bridge Credit Agreement where lenders committed to provide senior, unsecured financing in the aggregate principal amount of £6.5 billion. In July 2022, after consideration of an escrow balance designated for the Acquisition and funds available under the $2.0 billion Term Loan Facility, we reduced the aggregate committed principal amount of the Bridge Credit Agreement to zero, and the Bridge Credit Agreement was terminated.

During September 2022, the Company fully drew against the $2.0 billion Term Loan Facility, which will mature in its entirety in September 2025, to finance a portion of the Acquisition. Refer to Note 14 of the Consolidated Financial Statements for further discussion.

On September 12, 2022, we completed the acquisition of all of the outstanding ordinary shares of Meggitt for 800 pence per share, resulting in an aggregate cash purchase price of $7.2 billion, including the assumption of debt. We funded the purchase using cash and net proceeds from the issuance of senior notes and commercial paper and the Term Loan Facility, which were accumulated in an escrow account designated for the Acquisition. Refer to Note 4 of the Consolidated Financial Statements for further discussion.

Upon closing the Acquisition, we settled the deal-contingent forward contracts entered into during October 2021 to mitigate the risk of appreciation in the GBP-denominated purchase price. These deal-contingent forward contracts had an aggregate notional amount of £6.4 billion. Refer to the Cash Flows section above and Note 16 to the Consolidated Financial Statements for further discussion.

On April 11, 2022, the European Commission cleared the Acquisition, conditional on full compliance with commitments offered by Parker, including a commitment to divest its aircraft wheel and brake business within the Aerospace Systems Segment. In accordance with these commitments, we sold the aircraft wheel and brake business in September 2022 for proceeds of $441 million. Refer to Note 4 of the Consolidated Financial Statements for further discussion.

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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:

• 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;

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

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

• 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 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 labor disruptions or 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 pandemics, floods, earthquakes, hurricanes or other natural phenomena that may be related to climate change;

• increased cyber security 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 September 30, 2022, and undertakes no obligation to update them unless otherwise required by law.

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A substantial portion of our operations are conducted by our subsidiaries outside of the U.S. in currencies other than the U.S. dollar. Most of our non-U.S. subsidiaries conduct their business primarily in their local currencies, which are also their functional currencies. Foreign currency exposures arise from translation of foreign-denominated assets and liabilities into U.S. dollars and from transactions denominated in a currency other than the subsidiary’s functional currency. Although the amount of this activity has increased with the Acquisition, we expect to continue to manage the associated foreign currency transaction and translation risk using existing processes.

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

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

The Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. Our objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting our exposure to changes in near-term interest rates. At September 30, 2022, our debt portfolio included $2 billion of variable rate debt, exclusive of commercial paper borrowings. A 100 basis point increase in near-term interest rates would increase annual interest expense on variable rate debt, including weighted-average commercial paper borrowings for the three months ended September 30, 2022, by approximately $37 million.

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

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2022. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of September 30, 2022, the Company’s disclosure controls and procedures were effective.

In response to the COVID-19 pandemic, some of our team members have been working remotely at times. While there were no material changes in our internal control over financial reporting during the quarter ended September 30, 2022, we are continually monitoring and assessing the changing business environment resulting from the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.

The Company acquired Meggitt on September 12, 2022. As a result of the Acquisition, management is in the process of integrating, evaluating and, where necessary, implementing changes in controls and procedures. Other than with respect to the Acquisition, there have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PARKER-HANNIFIN CORPORATION

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

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

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

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

(b)Use of Proceeds. Not applicable.

(c)Issuer Purchases of Equity Securities.

Period						(a) Total Number of Shares Purchased						(b) Average Price Paid Per Share						(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)						(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2022 through July 31, 2022						61,039						$	253.27					61,039						8,354,123
August 1, 2022 through August 31, 2022						62,100						$	291.83					62,100						8,292,023
September 1, 2022 through September 30, 2022						62,627						$	262.09					62,627						8,229,396
Total:						185,766												185,766

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

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

Exhibit No.						Description of Exhibit
10(a)						Amendment One to the Parker-Hannifin Corporation Amended and Restated Defined Contribution Supplemental Executive Retirement Program, effective August 1, 2022.*
10(b)						Amendment Three to the Parker-Hannifin Corporation Amended and Restated Executive Deferral Plan, effective August 1, 2022.*
10(c)						Amendment One to the Parker-Hannifin Corporation Amended and Restated Savings Restoration Plan, effective August 1, 2022.*
10(d)						Amendment One to the Amended and Restated Deferred Compensation Plan for Directors of Parker-Hannifin Corporation, effective August 1, 2022.*
10(e)						Parker-Hannifin Corporation Annual Cash Incentive Plan, effective July 1, 2022.*
10(f)						Parker-Hannifin Corporation Deferred Compensation Plan, effective January 1, 2023.*
10(g)						Parker-Hannifin Corporation Deferred Compensation Plan Adoption Agreement, effective January 1, 2023.*
10(h)						Retirement and Release Agreement, dated July 25, 2022, between Andrew M. Weeks and Parker-Hannifin Corporation.*
31(a)						Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
31(b)						Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
32						Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.*
101.INS						Inline XBRL Instance Document.*
101.SCH						Inline XBRL Taxonomy Extension Schema Document.*
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document. *
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104						Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

*			Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three months ended September 30, 2022 and 2021, (ii) Consolidated Statement of Comprehensive Income for the three months ended September 30, 2022 and 2021, (iii) Consolidated Balance Sheet at September 30, 2022 and June 30, 2022, (iv) Consolidated Statement of Cash Flows for the three months ended September 30, 2022 and 2021, and (v) Notes to Consolidated Financial Statements for the three months ended September 30, 2022.

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SIGNATURE

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

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

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