filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022* | 2023 | 2022* | ||||||||||||||||||||
| Net sales | $ | 5,061,665 | $ | 4,086,387 | $ | 13,969,251 | $ | 11,673,776 | |||||||||||||||
| Cost of sales | 3,340,764 | 2,709,407 | 9,373,032 | 7,781,384 | |||||||||||||||||||
| Selling, general and administrative expenses | 868,393 | 640,498 | 2,519,163 | 1,853,105 | |||||||||||||||||||
| Interest expense | 151,993 | 63,272 | 416,718 | 183,982 | |||||||||||||||||||
| Other (income) expense, net | (55,866) | 239,221 | (116,131) | 359,247 | |||||||||||||||||||
| Income before income taxes | 756,381 | 433,989 | 1,776,469 | 1,496,058 | |||||||||||||||||||
| Income taxes | 165,421 | 85,901 | 402,011 | 308,778 | |||||||||||||||||||
| Net income | 590,960 | 348,088 | 1,374,458 | 1,187,280 | |||||||||||||||||||
| Less: Noncontrolling interest in subsidiaries' earnings | 71 | 71 | 478 | 506 | |||||||||||||||||||
| Net income attributable to common shareholders | $ | 590,889 | $ | 348,017 | $ | 1,373,980 | $ | 1,186,774 | |||||||||||||||
| Earnings per share attributable to common shareholders: | |||||||||||||||||||||||
| Basic | $ | 4.61 | $ | 2.71 | $ | 10.71 | $ | 9.23 | |||||||||||||||
| Diluted | $ | 4.54 | $ | 2.67 | $ | 10.58 | $ | 9.10 | |||||||||||||||
| *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 | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 590,960 | $ | 348,088 | $ | 1,374,458 | $ | 1,187,280 | |||||||||||||||
| Less: Noncontrolling interests in subsidiaries' earnings | 71 | 71 | 478 | 506 | |||||||||||||||||||
| Net income attributable to common shareholders | 590,889 | 348,017 | 1,373,980 | 1,186,774 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustment | 92,106 | (16,898) | 145,997 | (56,730) | |||||||||||||||||||
| Retirement benefits plan activity | (1,364) | 30,455 | 8,397 | 91,335 | |||||||||||||||||||
| Other comprehensive income | 90,742 | 13,557 | 154,394 | 34,605 | |||||||||||||||||||
| Less: Other comprehensive (loss) for noncontrolling interests | (299) | (276) | (176) | (862) | |||||||||||||||||||
| Other comprehensive income attributable to common shareholders | 91,041 | 13,833 | 154,570 | 35,467 | |||||||||||||||||||
| Total comprehensive income attributable to common shareholders | $ | 681,930 | $ | 361,850 | $ | 1,528,550 | $ | 1,222,241 | |||||||||||||||
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
| March 31, 2023 | June 30, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 534,831 | $ | 535,799 | |||||||
| Marketable securities and other investments | 23,466 | 27,862 | |||||||||
| Trade accounts receivable, net | 2,881,534 | 2,341,504 | |||||||||
| Non-trade and notes receivable | 349,903 | 543,757 | |||||||||
| Inventories | 3,067,614 | 2,214,553 | |||||||||
| Prepaid expenses and other | 376,066 | 6,383,169 | |||||||||
| Total current assets | 7,233,414 | 12,046,644 | |||||||||
| Property, plant and equipment | 6,807,734 | 5,897,955 | |||||||||
| Less: Accumulated depreciation | 3,963,939 | 3,775,197 | |||||||||
| Property, plant and equipment, net | 2,843,795 | 2,122,758 | |||||||||
| Deferred income taxes | 131,782 | 110,585 | |||||||||
| Investments and other assets | 1,188,671 | 788,057 | |||||||||
| Intangible assets, net | 8,287,517 | 3,135,817 | |||||||||
| Goodwill | 10,830,548 | 7,740,082 | |||||||||
| Total assets | $ | 30,515,727 | $ | 25,943,943 | |||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Notes payable and long-term debt payable within one year | $ | 1,992,919 | $ | 1,724,310 | |||||||
| Accounts payable, trade | 2,080,147 | 1,731,925 | |||||||||
| Accrued payrolls and other compensation | 543,527 | 470,132 | |||||||||
| Accrued domestic and foreign taxes | 270,807 | 250,292 | |||||||||
| Other accrued liabilities | 900,769 | 1,682,659 | |||||||||
| Total current liabilities | 5,788,169 | 5,859,318 | |||||||||
| Long-term debt | 11,412,304 | 9,755,825 | |||||||||
| Pensions and other postretirement benefits | 781,139 | 639,939 | |||||||||
| Deferred income taxes | 1,780,533 | 307,044 | |||||||||
| Other liabilities | 960,417 | 521,897 | |||||||||
| Total liabilities | 20,722,562 | 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 March 31 and June 30 | 90,523 | 90,523 | |||||||||
| Additional capital | 355,754 | 327,307 | |||||||||
| Retained earnings | 16,522,900 | 15,661,808 | |||||||||
| Accumulated other comprehensive (loss) | (1,388,628) | (1,543,198) | |||||||||
| Treasury shares, at cost; 52,750,023 shares at March 31 and 52,594,956 shares at June 30 | (5,799,252) | (5,688,429) | |||||||||
| Total shareholders’ equity | 9,781,297 | 8,848,011 | |||||||||
| Noncontrolling interests | 11,868 | 11,909 | |||||||||
| Total equity | 9,793,165 | 8,859,920 | |||||||||
| Total liabilities and equity | $ | 30,515,727 | $ | 25,943,943 |
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 1,374,458 | $ | 1,187,280 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 234,649 | 194,945 | |||||||||
| Amortization | 374,417 | 237,377 | |||||||||
| Share incentive plan compensation | 117,536 | 109,781 | |||||||||
| Deferred income taxes | 89,805 | (174,270) | |||||||||
| Foreign currency transaction loss (gain) | 54,927 | (26,970) | |||||||||
| Gain on disposal of property, plant and equipment | (1,270) | (6,782) | |||||||||
| Gain on sale of businesses | (366,345) | (1,472) | |||||||||
| (Gain) loss on marketable securities | (1,391) | 2,280 | |||||||||
| Gain on investments | (4,341) | (2,024) | |||||||||
| Other | 18,890 | 66,386 | |||||||||
| Changes in assets and liabilities, net of effect of acquisitions and divestitures: | |||||||||||
| Accounts receivable, net | (110,317) | (163,900) | |||||||||
| Inventories | (27,491) | (274,717) | |||||||||
| Prepaid expenses and other | (64,350) | 24,061 | |||||||||
| Other assets | (194,069) | (17,317) | |||||||||
| Accounts payable, trade | 118,756 | 91,531 | |||||||||
| Accrued payrolls and other compensation | (19,357) | (80,483) | |||||||||
| Accrued domestic and foreign taxes | 36,208 | 44,266 | |||||||||
| Other accrued liabilities | 141,891 | 372,491 | |||||||||
| Pensions and other postretirement benefits | 46,681 | (20,460) | |||||||||
| Other liabilities | (24,393) | (13,565) | |||||||||
| Net cash provided by operating activities | 1,794,894 | 1,548,438 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Acquisitions (net of cash of $89,704 in 2023) | (7,146,110) | — | |||||||||
| Capital expenditures | (272,603) | (158,864) | |||||||||
| Proceeds from sale of property, plant and equipment | 11,821 | 29,320 | |||||||||
| Proceeds from sale of businesses | 471,720 | 3,366 | |||||||||
| Purchases of marketable securities and other investments | (31,275) | (20,012) | |||||||||
| Maturities and sales of marketable securities and other investments | 35,075 | 17,662 | |||||||||
| Payments of deal-contingent forward contracts | (1,405,418) | — | |||||||||
| Other | 251,875 | 2,766 | |||||||||
| Net cash used in investing activities | (8,084,915) | (125,762) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from exercise of stock options | 2,820 | 2,566 | |||||||||
| Payments for common shares | (202,731) | (374,996) | |||||||||
| Proceeds from notes payable, net | 258,458 | 1,621,483 | |||||||||
| Proceeds from long-term borrowings | 2,011,949 | 10,667 | |||||||||
| Payments for long-term borrowings | (1,363,596) | (9,708) | |||||||||
| Financing fees paid | (8,911) | (52,655) | |||||||||
| Dividends paid | (513,232) | (398,099) | |||||||||
| Net cash provided by financing activities | 184,757 | 799,258 | |||||||||
| Effect of exchange rate changes on cash | (7,781) | 106 | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (6,113,045) | 2,222,040 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 6,647,876 | 733,117 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 534,831 | $ | 2,955,157 | |||||||
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts or as otherwise noted)
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Company", "Parker", "we" or "us" refer to Parker-Hannifin Corporation and its subsidiaries.
1. Management representation
In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of March 31, 2023, the results of operations for the three and nine months ended March 31, 2023 and 2022 and cash flows for the nine months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2022 Annual Report on Form 10-K.
The future impacts of the Russia-Ukraine war and the novel coronavirus ("COVID-19") pandemic and their residual effects, including economic uncertainty, inflationary environment and disruption within the global supply chain, labor markets and aerospace industry, on our business remain uncertain. Therefore, accounting estimates and assumptions may change over time in response to these impacts. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.
Reclassification
Certain prior-year amounts in the Consolidated Statement of Income have been reclassified to conform to the current-year presentation. Effective July 1, 2022, we began classifying certain expenses, previously classified as cost of sales, as selling, general and administrative expenses ("SG&A") or within other (income) expense, net. During the integration of recently acquired businesses, the Company has seen diversity in practice of the classification of certain expenses, and the reclassification was made to better align the presentation of expenses on the Consolidated Statement of Income with management’s internal reporting. The expenses reclassified from cost of sales to SG&A relate to certain administrative activities conducted in production facilities and research and development. Foreign currency transaction expense was also reclassified from cost of sales to other (income) expense, net on the Consolidated Statement of Income. These reclassifications had no impact on net income, earnings per share, cash flows, segment reporting or the financial position of the Company.
During the three months ended March 31, 2022, the reclassifications resulted in a $219 million decrease to cost of sales, a $228 million increase to SG&A and a $9 million decrease to other (income) expense, net. During the nine months ended March 31, 2022, the reclassifications resulted in a $625 million decrease to cost of sales, a $652 million increase to SG&A and a $27 million decrease to other (income) expense, net.
Subsequent Events
The Company has evaluated subsequent events that occurred through the date these financial statements were issued. On May 4, 2023, the Company called $600 million aggregate principal amount of private placement notes assumed in the acquisition ("Acquisition") of Meggitt plc ("Meggitt") and will redeem them at par plus accrued and unpaid interest in June 2023.
2. New accounting pronouncements
In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, "Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance," which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new guidance is effective for all entities for annual reporting periods beginning after December 15, 2021; however, early adoption is permitted. The guidance may be applied either prospectively to all in-scope transactions that are reflected in the financial statements at the date of initial application and to new transactions that are entered into after the date of initial application, or retrospectively. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and does not expect it to be material.
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In September 2022, the FASB issued ASU 2022-04, "Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations," which requires a buyer in a supplier finance program to disclose information about the program’s nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs, including the outstanding amount under the program, the balance sheet presentation of the outstanding amount, and a rollforward of the obligations in the program. This ASU should be adopted retrospectively for each balance sheet period presented; however, the rollforward information should be provided prospectively. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and does not expect it to be material.
3. Revenue recognition
Revenue is derived primarily from the sale of products in a variety of mobile, industrial and aerospace markets. A majority of the Company’s revenues are recognized at a point in time. However, a portion of the Company’s revenues are recognized over time.
Diversified Industrial Segment revenues by technology platform:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Motion Systems | $ | 1,017,974 | $ | 895,839 | $ | 2,837,403 | $ | 2,568,166 | ||||||||||||||||||
| Flow and Process Control | 1,298,204 | 1,197,590 | 3,675,928 | 3,386,417 | ||||||||||||||||||||||
| Filtration and Engineered Materials | 1,550,927 | 1,360,643 | 4,378,931 | 3,875,843 | ||||||||||||||||||||||
| Total | $ | 3,867,105 | $ | 3,454,072 | $ | 10,892,262 | $ | 9,830,426 |
Aerospace Systems Segment revenues by primary market:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Commercial original equipment manufacturer ("OEM") | $ | 398,502 | $ | 226,976 | $ | 1,045,850 | $ | 649,631 | ||||||||||||||||||
| Commercial aftermarket | 381,883 | 128,486 | 938,129 | 367,530 | ||||||||||||||||||||||
| Military OEM | 244,451 | 176,242 | 649,179 | 531,348 | ||||||||||||||||||||||
| Military aftermarket | 169,724 | 100,611 | 443,831 | 294,841 | ||||||||||||||||||||||
| Total | $ | 1,194,560 | $ | 632,315 | $ | 3,076,989 | $ | 1,843,350 |
Upon completing the Acquisition, we reviewed the disaggregation of revenue disclosure for the Aerospace Systems Segment and believe that disaggregation by primary market provides more meaningful information than disaggregation by product platform.
Total Company revenues by geographic region based on the Company's selling operation's location:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| North America | $ | 3,364,157 | $ | 2,645,106 | $ | 9,278,815 | $ | 7,451,153 | ||||||||||||||||||
| Europe | 1,054,157 | 829,392 | 2,750,159 | 2,344,533 | ||||||||||||||||||||||
| Asia Pacific | 590,017 | 560,250 | 1,777,550 | 1,735,574 | ||||||||||||||||||||||
| Latin America | 53,334 | 51,639 | 162,727 | 142,516 | ||||||||||||||||||||||
| Total | $ | 5,061,665 | $ | 4,086,387 | $ | 13,969,251 | $ | 11,673,776 |
The majority of revenues from the Aerospace Systems Segment are generated from sales to customers within North America.
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Contract balances
Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms established in the contract with the customer.
Total contract assets and contract liabilities are as follows:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Contract assets, current (included within Prepaid expenses and other) | $ | 116,516 | $ | 28,546 | ||||||||||
| Contract assets, noncurrent (included within Investments and other assets) | 25,800 | 794 | ||||||||||||
| Total contract assets | 142,316 | 29,340 | ||||||||||||
| Contract liabilities, current (included within Other accrued liabilities) | (235,206) | (60,472) | ||||||||||||
| Contract liabilities, noncurrent (included within Other liabilities) | (105,195) | (2,225) | ||||||||||||
| Total contract liabilities | (340,401) | (62,697) | ||||||||||||
| Net contract liabilities | $ | (198,085) | $ | (33,357) |
Net contract liabilities at March 31, 2023 increased from the June 30, 2022 amount primarily due to timing differences between when revenue was recognized and the receipt of advance payments as well as acquiring Meggitt's contract liabilities in excess of Meggitt's contract assets. During the nine months ended March 31, 2023, approximately $39 million of revenue was recognized that was included in the contract liabilities at June 30, 2022.
Remaining performance obligations
Our backlog represents written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release has been agreed to with the customer. We believe our backlog represents our unsatisfied or partially unsatisfied performance obligations. Backlog at March 31, 2023 was $10.9 billion, of which approximately 84 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.
4. Acquisitions and divestitures
Acquisitions
On September 12, 2022, we completed the Acquisition of all 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.
Meggitt is a leader in design, manufacturing and aftermarket support of technologically differentiated systems and equipment in aerospace, defense and selected energy markets with annual sales of approximately $2.1 billion for the year ended December 31, 2021. For segment reporting purposes, approximately 82 percent of Meggitt's sales are included in the Aerospace Systems Segment, while the remaining 18 percent are included in the Diversified Industrial Segment.
Assets acquired and liabilities assumed are recognized at their respective fair values as of the Acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The following table presents the preliminary estimated fair values of Meggitt's assets acquired and liabilities assumed on the Acquisition date. These preliminary estimates are based on available information and will be revised during the measurement period, not to exceed 12 months from the Acquisition date, as third-party valuations are finalized, additional information becomes available and as additional analysis is performed. Such revisions may have a material impact on our results of operations and financial position within the measurement period. During the current-year quarter and nine months ended March 31, 2023, these revisions did not have a material impact on the Consolidated Statement of Income.
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| September 12, 2022 (previously reported) | Measurement Period Adjustments | September 12, 2022 (revised) | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 89,704 | $ | — | $ | 89,704 | |||||||||||
| Accounts receivable | 427,255 | (10,687) | 416,568 | ||||||||||||||
| Inventories | 833,602 | (16,472) | 817,130 | ||||||||||||||
| Prepaid expenses and other | 125,763 | (1,525) | 124,238 | ||||||||||||||
| Property, plant and equipment | 675,232 | (10,071) | 665,161 | ||||||||||||||
| Deferred income taxes | 5,720 | 27,022 | 32,742 | ||||||||||||||
| Other assets | 219,472 | (52,072) | 167,400 | ||||||||||||||
| Intangible assets | 5,418,795 | 27,305 | 5,446,100 | ||||||||||||||
| Goodwill | 2,830,845 | 185,440 | 3,016,285 | ||||||||||||||
| Total assets acquired | $ | 10,626,388 | $ | 148,940 | $ | 10,775,328 | |||||||||||
| Liabilities: | |||||||||||||||||
| Notes payable and long-term debt payable within one year | $ | 306,266 | $ | 3,288 | $ | 309,554 | |||||||||||
| Accounts payable, trade | 219,780 | (17) | 219,763 | ||||||||||||||
| Accrued payrolls and other compensation | 89,226 | (2,204) | 87,022 | ||||||||||||||
| Other accrued liabilities | 367,605 | (60,339) | 307,266 | ||||||||||||||
| Long-term debt | 669,321 | 40,042 | 709,363 | ||||||||||||||
| Pensions and other postretirement benefits | 85,899 | 12,827 | 98,726 | ||||||||||||||
| Deferred income taxes | 1,274,726 | 95,626 | 1,370,352 | ||||||||||||||
| Other liabilities | 377,751 | 59,717 | 437,468 | ||||||||||||||
| Total liabilities assumed | 3,390,574 | 148,940 | 3,539,514 | ||||||||||||||
| Net assets acquired | $ | 7,235,814 | $ | — | $ | 7,235,814 |
Goodwill is calculated as the excess of the purchase price over the net assets acquired and represents cost synergies and enhancements to our existing technologies. For tax purposes, Meggitt's goodwill is not deductible. Based upon a preliminary acquisition valuation, we acquired $4.0 billion of customer-related intangible assets, $1.1 billion of patents and technology and $332 million of trademarks, each with estimated useful lives of 20 years.
The fair value of the assets acquired includes $89 million and $86 million of operating and finance lease right-of-use assets, respectively. The fair value of liabilities assumed includes $145 million and $89 million of operating and finance lease liabilities, respectively, of which, $19 million and $3 million of operating and finance lease liabilities, respectively, are current liabilities.
Long-term debt assumed includes $900 million aggregate principal amount of private placement notes with fixed interest rates ranging from 2.78 percent to 3.60 percent, and maturity dates ranging from July 2023 to July 2026. In October 2022, we paid off $300 million aggregate principal amount of private placement notes in two tranches pursuant to an offer to noteholders according to change in control provisions. These notes carried fixed interest rates of 2.78 percent and 3.00 percent and had maturity dates of November 2023 and November 2025, respectively.
Upon acquiring Meggitt, we also assumed $127 million of liabilities associated with environmental matters. The environmental matters primarily relate to known exposures arising from environmental litigation, investigations and remediation of certain sites for which Meggitt has been identified as a potentially responsible party. The liabilities are based on outcomes of litigation and estimates of the level and timing of remediation costs, including the period of operating and monitoring activities required.
Our consolidated financial statements for the three and nine months ended March 31, 2023 include the results of operations of Meggitt from the date of acquisition through March 31, 2023. Net sales and segment operating loss attributable to Meggitt during the three months ended March 31, 2023 was $624 million and $4 million, respectively. Net sales and segment operating loss attributable to Meggitt during the nine months ended March 31, 2023 was $1.4 billion and $120 million, respectively. Segment operating loss attributable to Meggitt includes 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. Refer to Note 10 for further discussion of acquisition integration charges.
Acquisition-related transaction costs totaled $112 million for the nine months ended March 31, 2023. These costs are included in SG&A in the Consolidated Statement of Income.
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The following table presents unaudited pro forma information for the three and nine months ended March 31, 2023 and 2022 as if the Acquisition had occurred on July 1, 2021.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (Unaudited) | March 31, | March 31, | |||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales | $ | 5,061,665 | $ | 4,549,854 | $ | 14,350,581 | $ | 13,189,507 | |||||||||||||||
| Net income attributable to common shareholders | 612,049 | 424,025 | 1,244,907 | 977,102 |
The historical consolidated financial information of Parker and Meggitt has been adjusted in the pro forma information in the table above to give effect to events that are directly attributable to the Acquisition and factually supportable. To reflect the occurrence of the Acquisition on July 1, 2021, the unaudited pro forma information includes adjustments for the amortization of the step-up inventory to fair value and incremental depreciation and amortization expense resulting from the fair value adjustments to property, plant and equipment and intangible assets. These adjustments were based upon a preliminary purchase price allocation. Additionally, adjustments to financing costs and income tax expense were also made to reflect the capital structure and anticipated effective tax rate of the combined entity. Additionally, the pro forma information includes adjustments for nonrecurring transactions directly related to the Acquisition, including the gain on the divestiture of the aircraft wheel and brake business, loss on deal-contingent forward contracts, and transaction costs. These non-recurring adjustments totaled $(1) million and $196 million during the three months ended March 31, 2023 and 2022, respectively, and $197 million and $177 million during the nine months ended March 31, 2023 and 2022, respectively. The resulting pro forma amounts are not necessarily indicative of the results that would have been obtained if the Acquisition had occurred as of the beginning of the period presented or that may occur in the future, and do not reflect future synergies, integration costs or other such costs or savings.
Divestitures
During September 2022, we divested our aircraft wheel and brake business, which was part of the Aerospace Systems Segment, for proceeds of $443 million. The resulting pre-tax gain of $374 million is included in other (income) expense, net in the Consolidated Statement of Income. The operating results and net assets of the aircraft wheel and brake business were immaterial to the Company's consolidated results of operations and financial position. As of June 30, 2022, the aggregate carrying amount of aircraft wheel and brake assets held for sale was $66 million. These assets primarily included goodwill and inventory and were recorded within prepaid expenses and other assets in the Consolidated Balance Sheet. Goodwill was allocated to the aircraft wheel and brake business using the relative fair value method.
During March 2023, we divested a French aerospace business, which was part of the Aerospace Systems Segment, for proceeds of $27 million. The resulting pre-tax loss of $12 million is included in other (income) expense, net in the Consolidated Statement of Income. The operating results and net assets of the French aerospace business were immaterial to the Company's consolidated results of operations and financial position.
Restricted Cash
At June 30, 2022, prepaid expenses and other in the Consolidated Balance Sheet included a $6.1 billion balance in an escrow account restricted to payments for the Acquisition. These funds were used to finance a portion of the Acquisition, and there was no restricted cash at March 31, 2023.
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5. Earnings per share
The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and nine months ended March 31, 2023 and 2022.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 590,889 | $ | 348,017 | $ | 1,373,980 | $ | 1,186,774 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic - weighted average common shares | 128,293,039 | 128,426,675 | 128,343,788 | 128,549,040 | |||||||||||||||||||
| Increase in weighted average common shares from dilutive effect of equity-based awards | 1,858,448 | 1,916,906 | 1,488,201 | 1,889,553 | |||||||||||||||||||
| Diluted - weighted average common shares, assuming exercise of equity-based awards | 130,151,487 | 130,343,581 | 129,831,989 | 130,438,593 | |||||||||||||||||||
| Basic earnings per share | $ | 4.61 | $ | 2.71 | $ | 10.71 | $ | 9.23 | |||||||||||||||
| Diluted earnings per share | $ | 4.54 | $ | 2.67 | $ | 10.58 | $ | 9.10 | |||||||||||||||
For the three months ended March 31, 2023 and 2022, 124,025 and 493,609 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
For the nine months ended March 31, 2023 and 2022, 1,011,006 and 384,955 common shares subject to equity-based awards, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
6. Share repurchase program
The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized for repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a fiscal year. There is no expiration date for this program. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. During the three months ended March 31, 2023, we repurchased 152,388 shares at an average price, including commissions, of $328.11 per share. During the nine months ended March 31, 2023, we repurchased 514,612 shares at an average price, including commissions, of $291.48 per share.
7. Trade accounts receivable, net
Trade accounts receivable are initially recorded at their net collectible amount and are generally recorded at the time the revenue from the sales transaction is recorded. We evaluate the collectibility of our receivables based on historical experience and current and forecasted economic conditions based on management's judgment. Additionally, receivables are written off to bad debt when management makes a final determination of uncollectibility. Allowance for credit losses was $33 million and $10 million at March 31, 2023 and June 30, 2022, respectively. The increase in the allowance for credit losses from the June 30, 2022 amount is primarily due to the Acquisition.
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8. Non-trade and notes receivable
The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Notes receivable | $ | 112,585 | $ | 103,558 | ||||||||||
| Cash collateral receivable(a) | — | 250,000 | ||||||||||||
| Accounts receivable, other | 237,318 | 190,199 | ||||||||||||
| Total | $ | 349,903 | $ | 543,757 | ||||||||||
| (a) The cash collateral receivable at June 30, 2022 related to the deal-contingent forward contracts settled in the first three months of fiscal 2023. |
9. Inventories
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Finished products | $ | 831,620 | $ | 811,702 | ||||||||||
| Work in process | 1,569,885 | 1,128,501 | ||||||||||||
| Raw materials | 666,109 | 274,350 | ||||||||||||
| Total | $ | 3,067,614 | $ | 2,214,553 |
10. Business realignment and acquisition integration charges
We incurred business realignment and acquisition integration charges in the first nine months of fiscal 2023 and 2022. In both the first nine months of fiscal 2023 and 2022, 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. In fiscal 2023, a majority of the business realignment charges were incurred in Europe. In fiscal 2022, a majority of the business realignment charges were incurred in North America and Europe. We believe the realignment actions will positively impact future results of operations, but will not have a material effect on liquidity and sources and uses of capital.
Business realignment charges by business segment are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Diversified Industrial | $ | 8,075 | $ | 2,771 | $ | 14,464 | $ | 8,835 | |||||||||||||||
| Aerospace Systems | 166 | 318 | 3,016 | 913 | |||||||||||||||||||
| Other (income) expense, net | — | 63 | — | 63 |
Reductions to our workforce made in connection with such business realignment charges by business segment are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Diversified Industrial | 282 | 50 | 499 | 133 | |||||||||||||||||||
| Aerospace Systems | 14 | 4 | 30 | 9 | |||||||||||||||||||
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The business realignment charges are presented in the Consolidated Statement of Income as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022* | 2023 | 2022* | ||||||||||||||||||||
| Cost of sales | $ | 5,033 | $ | 1,178 | $ | 10,746 | $ | 2,311 | |||||||||||||||
| Selling, general and administrative expenses | 3,208 | 1,911 | 6,734 | 7,437 | |||||||||||||||||||
| Other (income) expense, net | — | 63 | — | 63 | |||||||||||||||||||
| *Prior period amounts have been reclassified to reflect the income statement reclassification as described in Note 1. |
During the first nine months of fiscal 2023, approximately $15 million in payments were made relating to business realignment charges. Remaining payments related to business realignment actions of approximately $11 million, a majority of which are expected to be paid by December 31, 2023, are primarily reflected within the other accrued liabilities caption in the Consolidated Balance Sheet. Additional charges may be recognized in future periods related to the business realignment actions described above, the timing and amount of which are not known at this time.
In addition to the business realignment charges discussed above, we also incurred $20 million of expense in the prior-year quarter and first nine months of fiscal 2022 as a result of our exit of business operations in Russia. These charges primarily consisted of write-downs of inventory and other working capital items and $8 million of foreign currency translation expense reclassified from accumulated other comprehensive income. Within the business segment information in Note 17, $7 million of expense was recorded in the other (income) expense, net caption, while the remainder of the charge was split evenly between the Aerospace Systems Segment and the Diversified Industrial International businesses.
We also incurred the following acquisition integration charges:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Diversified Industrial | $ | 5,395 | $ | 933 | $ | 7,276 | $ | 2,942 | |||||||||||||||
| Aerospace Systems | 25,849 | — | 69,377 | — |
Charges incurred in fiscal 2023 and 2022 relate to the acquisitions of Meggitt and LORD Corporation, respectively. In both fiscal 2023 and 2022, these charges were primarily included in SG&A within the Consolidated Statement of Income.
11. Equity
Changes in equity for the three months ended March 31, 2023 and 2022 are as follows:
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 90,523 | $ | 377,871 | $ | 16,102,883 | $ | (1,479,669) | $ | (5,769,228) | $ | 12,096 | $ | 9,334,476 | |||||||||||||||||||||||||||
| Net income | 590,889 | 71 | 590,960 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 91,041 | (299) | 90,742 | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($1.33 per share) | (170,872) | (170,872) | |||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | (22,117) | 19,976 | (2,141) | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | 90,523 | $ | 355,754 | $ | 16,522,900 | $ | (1,388,628) | $ | (5,799,252) | $ | 11,868 | $ | 9,793,165 |
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| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 90,523 | $ | 344,312 | $ | 15,488,764 | $ | (1,545,093) | $ | (5,623,424) | $ | 13,198 | $ | 8,768,280 | |||||||||||||||||||||||||||
| Net income | 348,017 | 71 | 348,088 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 13,833 | (276) | 13,557 | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($1.03 per share) | (132,543) | (132,543) | |||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | 19,055 | 6,422 | 25,477 | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 90,523 | $ | 363,367 | $ | 15,704,238 | $ | (1,531,260) | $ | (5,667,002) | $ | 12,993 | $ | 8,972,859 |
Changes in equity for the nine months ended March 31, 2023 and 2022 are as follows:
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 90,523 | $ | 327,307 | $ | 15,661,808 | $ | (1,543,198) | $ | (5,688,429) | $ | 11,909 | $ | 8,859,920 | |||||||||||||||||||||||||||
| Net income | 1,373,980 | 478 | 1,374,458 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 154,570 | (176) | 154,394 | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($3.99 per share) | (512,888) | (343) | (513,231) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | 28,447 | 39,177 | 67,624 | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (150,000) | (150,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | 90,523 | $ | 355,754 | $ | 16,522,900 | $ | (1,388,628) | $ | (5,799,252) | $ | 11,868 | $ | 9,793,165 |
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Treasury Shares | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 90,523 | $ | 329,619 | $ | 14,915,497 | $ | (1,566,727) | $ | (5,370,605) | $ | 15,363 | $ | 8,413,670 | |||||||||||||||||||||||||||
| Net income | 1,186,774 | 506 | 1,187,280 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 35,467 | (862) | 34,605 | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($3.09 per share) | (398,033) | (66) | (398,099) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | 33,748 | 33,937 | 67,685 | ||||||||||||||||||||||||||||||||||||||
| Liquidation activity | (1,948) | (1,948) | |||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (330,334) | (330,334) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 90,523 | $ | 363,367 | $ | 15,704,238 | $ | (1,531,260) | $ | (5,667,002) | $ | 12,993 | $ | 8,972,859 | |||||||||||||||||||||||||||
Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the nine months ended March 31, 2023 and 2022 are as follows:
| Foreign Currency Translation Adjustment | Retirement Benefit Plans | Total | |||||||||||||||
| Balance at June 30, 2022 | $ | (1,149,071) | $ | (394,127) | $ | (1,543,198) | |||||||||||
| Other comprehensive income before reclassifications | 146,173 | — | 146,173 | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive (loss) | — | 8,397 | 8,397 | ||||||||||||||
| Balance at March 31, 2023 | $ | (1,002,898) | $ | (385,730) | $ | (1,388,628) |
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| Foreign Currency Translation Adjustment | Retirement Benefit Plans | Total | |||||||||||||||
| Balance at June 30, 2021 | $ | (865,865) | $ | (700,862) | $ | (1,566,727) | |||||||||||
| Other comprehensive (loss) before reclassifications | (63,515) | — | (63,515) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive (loss) | 7,647 | 91,335 | 98,982 | ||||||||||||||
| Balance at March 31, 2022 | $ | (921,733) | $ | (609,527) | $ | (1,531,260) |
Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three and nine months ended March 31, 2023 and 2022 are as follows:
| Details about Accumulated Other Comprehensive (Loss) Components | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | Consolidated Statement of Income Classification | ||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| March 31, 2023 | March 31, 2023 | |||||||||||||||||||
| Retirement benefit plans | ||||||||||||||||||||
| Amortization of prior service cost and initial net obligation | $ | (227) | $ | (679) | Other (income) expense, net | |||||||||||||||
| Recognized actuarial gain (loss) | 1,057 | (11,422) | Other (income) expense, net | |||||||||||||||||
| Divestiture activity | 587 | 587 | Other (income) expense, net | |||||||||||||||||
| Total before tax | 1,417 | (11,514) | ||||||||||||||||||
| Tax benefit | (53) | 3,117 | ||||||||||||||||||
| Net of tax | $ | 1,364 | $ | (8,397) |
| Details about Accumulated Other Comprehensive (Loss) Components | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | Consolidated Statement of Income Classification | ||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| March 31, 2022 | March 31, 2022 | |||||||||||||||||||
| Retirement benefit plans | ||||||||||||||||||||
| Amortization of prior service cost and initial net obligation | $ | (1,030) | $ | (3,090) | Other (income) expense, net | |||||||||||||||
| Recognized actuarial loss | (39,292) | (117,852) | Other (income) expense, net | |||||||||||||||||
| Total before tax | (40,322) | (120,942) | ||||||||||||||||||
| Tax benefit | 9,867 | 29,607 | ||||||||||||||||||
| Net of tax | $ | (30,455) | $ | (91,335) |
12. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the nine months ended March 31, 2023 are as follows:
| Diversified Industrial Segment | Aerospace Systems Segment | Total | |||||||||||||||
| Balance at June 30, 2022 | $ | 7,185,981 | $ | 554,101 | $ | 7,740,082 | |||||||||||
| Acquisition | 30,329 | 2,985,956 | 3,016,285 | ||||||||||||||
| Divestitures | (1,064) | (2,232) | (3,296) | ||||||||||||||
| Foreign currency translation | 30,297 | 47,180 | 77,477 | ||||||||||||||
| Balance at March 31, 2023 | $ | 7,245,543 | $ | 3,585,005 | $ | 10,830,548 |
Acquisition represents goodwill resulting from the preliminary purchase price allocation for the Acquisition during the measurement period. Divestitures represent goodwill associated with the sale of businesses. Refer to Note 4 for further discussion.
Goodwill is tested for impairment at the reporting unit level annually and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. At December 31, 2022, the Company performed its fiscal 2023 annual goodwill impairment test, which indicated no impairment existed.
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Intangible assets are amortized using the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:
| March 31, 2023 | June 30, 2022 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Patents and technology | $ | 2,107,573 | $ | 326,954 | $ | 990,775 | $ | 259,587 | |||||||||||||||
| Trademarks | 1,068,997 | 376,099 | 727,820 | 339,244 | |||||||||||||||||||
| Customer lists and other | 7,815,973 | 2,001,973 | 3,735,042 | 1,718,989 | |||||||||||||||||||
| Total | $ | 10,992,543 | $ | 2,705,026 | $ | 5,453,637 | $ | 2,317,820 |
Total intangible amortization expense for the nine months ended March 31, 2023 and 2022 was $374 million and $237 million, respectively. The estimated amortization expense for the five years ending June 30, 2023 through 2027 is $520 million, $564 million, $556 million, $551 million and $545 million, respectively.
Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No material intangible asset impairments occurred during the nine months ended March 31, 2023 and 2022.
13. Retirement benefits
Net pension benefit expense recognized included the following components:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Service cost | $ | 14,599 | $ | 18,238 | $ | 42,534 | $ | 57,599 | |||||||||||||||
| Interest cost | 59,021 | 27,953 | 166,456 | 82,941 | |||||||||||||||||||
| Expected return on plan assets | (80,137) | (67,024) | (228,695) | (201,487) | |||||||||||||||||||
| Amortization of prior service cost | 227 | 1,028 | 679 | 3,084 | |||||||||||||||||||
| Amortization of net actuarial (gain) loss | (657) | 39,570 | 12,625 | 118,186 | |||||||||||||||||||
| Amortization of initial net obligation | — | 2 | — | 6 | |||||||||||||||||||
| Net pension benefit expense | $ | (6,947) | $ | 19,767 | $ | (6,401) | $ | 60,329 |
We recognized $0.5 million and $0.1 million in expense related to other postretirement benefits during the three months ended March 31, 2023 and 2022, respectively. During the nine months ended March 31, 2023 and 2022, we recognized $1.2 million and $0.7 million, respectively, in expense related to other postretirement benefits. Components of retirement benefits expense, other than service cost, are included in other (income) expense, net in the Consolidated Statement of Income.
14. Debt
In connection with the Acquisition, the Company entered into a bridge credit agreement on August 2, 2021 (the "Bridge Credit Agreement"). Under the Bridge Credit Agreement, the lenders committed to provide senior, unsecured financing in the aggregate principal amount of £6.5 billion at August 2, 2021. In July 2022, after consideration of the escrow balance and funds available under the delayed-draw term loan facility (the “Term Loan Facility”), we reduced the aggregate committed principal amount of the Bridge Credit Agreement to zero, and the Bridge Credit Agreement was terminated.
In September 2022, the Company fully drew against the $2.0 billion delayed-draw Term Loan Facility, which will mature in its entirety in September 2025. We used the proceeds of the Term Loan Facility to finance a portion of the Acquisition. At March 31, 2023, the Term Loan Facility had an interest rate of LIBOR plus 112.5 bps. Interest payments are made at the interest reset dates, which are either one, three or six months at the discretion of the Company. Additionally, the provisions of the Term Loan Facility allow for prepayments at the Company's discretion. During the nine months ended March 31, 2023, we made principal payments totaling $750 million related to the Term Loan Facility.
In September 2022, $300 million aggregate principal amount of medium-term notes matured. We also assumed debt associated with the Acquisition. Refer to Note 4 for further discussion of assumed debt.
Commercial paper notes outstanding at March 31, 2023 and June 30, 2022 were $1.7 billion and $1.4 billion, respectively.
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Based on the Company’s rating level at March 31, 2023, 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, 2023, our debt to debt-shareholders' equity ratio was 0.58 to 1.0. We are in compliance, and expect to remain in compliance, with all covenants set forth in the credit agreement and indentures.
15. Income taxes
On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Act of 2022. The bill includes numerous tax provisions, including a 15 percent corporate minimum tax as well as a one percent excise tax on share repurchases. The income tax provisions are effective for fiscal years beginning after December 31, 2022. The one percent excise tax on share repurchases is effective as of January 1, 2023. Based on our current analysis of the provisions, the legislation will not have a material impact on our consolidated financial statements.
We file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world. We are open to assessment on our U.S. federal income tax returns by the Internal Revenue Service for fiscal years after 2013, and our state and local returns for fiscal years after 2016. We are also open to assessment for significant foreign jurisdictions for fiscal years after 2011. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements.
As of March 31, 2023, we had gross unrecognized tax benefits of $113 million, all of which, if recognized, would impact the effective tax rate. The accrued interest and accrued penalties related to the gross unrecognized tax benefits, excluded from the amount above, is $22 million and $7 million, respectively. It is reasonably possible that within the next 12 months the amount of gross unrecognized tax benefits could be reduced by up to approximately $50 million as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of gross unrecognized tax benefits within the next 12 months is expected to be insignificant.
16. Financial instruments
Our financial instruments consist primarily of cash and cash equivalents, marketable securities and other investments, accounts receivable and long-term investments, as well as obligations under accounts payable, trade, notes payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable, accounts payable, trade and notes payable approximate fair value.
Marketable securities and other investments include deposits and equity investments. Deposits are recorded at cost, and equity investments are recorded at fair value. Changes in fair value related to equity investments are recorded in net income. Unrealized gains and losses related to equity investments were not material as of March 31, 2023 and 2022.
The carrying value of long-term debt, which excludes the impact of net unamortized debt issuance costs, and estimated fair value of long-term debt are as follows:
| March 31, 2023 | June 30, 2022 | |||||||||||||
| Carrying value of long-term debt | $ | 11,794,606 | $ | 10,145,077 | ||||||||||
| Estimated fair value of long-term debt | 11,375,743 | 9,709,407 |
The fair value of long-term debt is classified within level 2 of the fair value hierarchy.
We utilize derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign currency denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. Additionally, we acquired forward exchange contracts and cross-currency swap contracts in connection with the Acquisition. The derivative financial instrument contracts are with major investment grade financial institutions, and we do not anticipate any material non-performance by any of the counterparties. We do not hold or issue derivative financial instruments for trading purposes.
The Company’s €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.
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In connection with closing the Acquisition, the Company settled its deal-contingent forward contracts, which had an aggregate notional amount of £6.4 billion, during September 2022. In July 2022, the Company received, and subsequently deposited into the escrow account, the $250 million cash collateral previously posted in accordance with the credit support annex attached to the deal-contingent forward contracts. The cash flows associated with this activity are reflected within cash flows from investing activities on the Consolidated Statement of Cash Flows.
Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value.
The location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet are as follows:
| Balance Sheet Caption | March 31, 2023 | June 30, 2022 | ||||||||||||||||||
| Net investment hedges | ||||||||||||||||||||
| Cross-currency swap contracts | Investments and other assets | $ | 45,552 | $ | 21,444 | |||||||||||||||
| Other derivative contracts | ||||||||||||||||||||
| Forward exchange contracts | Non-trade and notes receivable | 12,076 | 20,976 | |||||||||||||||||
| Forward exchange contracts | Other accrued liabilities | 12,932 | 5,651 | |||||||||||||||||
| Forward exchange contracts | Other liabilities | 1,797 | — | |||||||||||||||||
| Deal-contingent forward contracts | Other accrued liabilities | — | 1,015,426 | |||||||||||||||||
| Costless collar contracts | Non-trade and notes receivable | 6,861 | 351 | |||||||||||||||||
| Costless collar contracts | Other accrued liabilities | 1,202 | 1,578 | |||||||||||||||||
The cross-currency swap, forward exchange, deal-contingent forward and costless collar contracts are reflected on a gross basis in the Consolidated Balance Sheet. We have not entered into any master netting arrangements.
The €69 million, €290 million and ¥2,149 million of cross-currency swap contracts have been designated as hedging instruments. The forward exchange, deal-contingent forward and costless collar contracts, as well as cross-currency swap contracts acquired as part of the Acquisition, have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.
The forward exchange, costless collar contracts, and deal-contingent forward contracts, as well as cross-currency swap contracts acquired as part of the Acquisition, are adjusted to fair value by recording gains and losses through the other (income) expense, net caption in the Consolidated Statement of Income.
Derivatives designated as hedges are adjusted to fair value by recording gains and losses through accumulated other comprehensive (loss) on the Consolidated Balance Sheet until the hedged item is recognized in earnings. We assess the effectiveness of the €69 million, €290 million and ¥2,149 million of cross-currency swap contracts designated as hedging instruments using the spot method. Under this method, the periodic interest settlements are recognized directly in earnings through interest expense.
Gains (losses) on derivative financial instruments were recorded in the Consolidated Statement of Income as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Deal-contingent forward contracts | $ | — | $ | (246,983) | $ | (389,992) | $ | (396,365) | |||||||||||||||
| Forward exchange contracts | 7,378 | 24,201 | (7,425) | 46,953 | |||||||||||||||||||
| Costless collar contracts | 4,308 | (1,751) | 9,632 | (4,625) | |||||||||||||||||||
| Cross-currency swap contracts | (2,976) | — | (18,739) | — |
Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive (loss) on the Consolidated Balance Sheet are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Cross-currency swap contracts | $ | 16,085 | $ | 887 | $ | 17,196 | $ | 30,205 | |||||||||||||||
| Foreign currency denominated debt | (7,391) | 16,194 | (18,880) | 41,843 |
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During the nine months ended March 31, 2023 and 2022, the periodic interest settlements related to the cross-currency swap contracts were not material.
A summary of financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2023 and June 30, 2022 are as follows:
| Quoted Prices | Significant Other | Significant | ||||||||||||||||||||||||
| Fair | In Active | Observable | Unobservable | |||||||||||||||||||||||
| Value at | Markets | Inputs | Inputs | |||||||||||||||||||||||
| March 31, 2023 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Derivatives | $ | 64,489 | $ | — | $ | 64,489 | $ | — | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivatives | 15,931 | — | 15,931 | — |
| Quoted Prices | Significant Other | Significant | ||||||||||||||||||||||||
| Fair | In Active | Observable | Unobservable | |||||||||||||||||||||||
| Value at | Markets | Inputs | Inputs | |||||||||||||||||||||||
| June 30, 2022 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Equity securities | $ | 13,038 | $ | 13,038 | $ | — | $ | — | ||||||||||||||||||
| Derivatives | 42,771 | — | 42,771 | — | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivatives | 1,022,655 | — | 1,022,655 | — |
The fair values of the equity securities are determined using the closing market price reported in the active market in which the fund is traded.
Derivatives consist of forward exchange, deal-contingent forward, costless collar and cross-currency swap contracts, the fair values of which are calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The calculation of the fair value of the cross-currency swap contracts also utilizes a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.
The primary investment objective for all investments is the preservation of principal and liquidity while earning income.
There are no other financial assets or financial liabilities that are marked to market on a recurring basis.
17. Business segment information
The Company operates in two reportable business segments: Diversified Industrial and Aerospace Systems. Both segments utilize eight core technologies, including hydraulics, pneumatics, electromechanical, filtration, fluid and gas handling, process control, engineered materials and climate control, to drive superior customer problem solving and value creation.
Diversified Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural, and military machinery and equipment and has significant international operations. Sales are made directly to major OEMs and through a broad distribution network to smaller OEMs and the aftermarket.
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Aerospace Systems - This segment designs and manufactures products and provides aftermarket support for commercial and regional transport, business jet, military, and helicopter markets. The Aerospace Systems Segment provides a full range of systems and components for hydraulic, pneumatic, fuel, oil, actuation, sensing, braking, thermal management, and electric power applications.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| March 31, | March 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| Diversified Industrial: | ||||||||||||||||||||||||||
| North America | $ | 2,342,590 | $ | 2,014,715 | $ | 6,615,035 | $ | 5,615,454 | ||||||||||||||||||
| International | 1,524,515 | 1,439,357 | 4,277,227 | 4,214,972 | ||||||||||||||||||||||
| Aerospace Systems | 1,194,560 | 632,315 | 3,076,989 | 1,843,350 | ||||||||||||||||||||||
| Total net sales | $ | 5,061,665 | $ | 4,086,387 | $ | 13,969,251 | $ | 11,673,776 | ||||||||||||||||||
| Segment operating income | ||||||||||||||||||||||||||
| Diversified Industrial: | ||||||||||||||||||||||||||
| North America | $ | 489,349 | $ | 413,998 | $ | 1,362,256 | $ | 1,085,117 | ||||||||||||||||||
| International | 329,498 | 298,475 | 908,958 | 881,206 | ||||||||||||||||||||||
| Aerospace Systems | 133,905 | 119,016 | 234,849 | 352,063 | ||||||||||||||||||||||
| Total segment operating income | 952,752 | 831,489 | 2,506,063 | 2,318,386 | ||||||||||||||||||||||
| Corporate general and administrative expenses | 45,780 | 57,405 | 146,341 | 149,064 | ||||||||||||||||||||||
| Income before interest expense and other expense | 906,972 | 774,084 | 2,359,722 | 2,169,322 | ||||||||||||||||||||||
| Interest expense | 151,993 | 63,272 | 416,718 | 183,982 | ||||||||||||||||||||||
| Other (income) expense, net | (1,402) | 276,823 | 166,535 | 489,282 | ||||||||||||||||||||||
| Income before income taxes | $ | 756,381 | $ | 433,989 | $ | 1,776,469 | $ | 1,496,058 | ||||||||||||||||||
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PARKER-HANNIFIN CORPORATION
FORM 10-Q
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