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 | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Net sales | $ | 4,847,488 | $ | 4,232,775 | |||||||||||||||||||
| Cost of sales | 3,097,349 | 2,795,456 | |||||||||||||||||||||
| Selling, general and administrative expenses | 873,691 | 835,804 | |||||||||||||||||||||
| Interest expense | 134,468 | 117,794 | |||||||||||||||||||||
| Other income, net | (78,455) | (19,624) | |||||||||||||||||||||
| Income before income taxes | 820,435 | 503,345 | |||||||||||||||||||||
| Income taxes | 169,363 | 115,308 | |||||||||||||||||||||
| Net income | 651,072 | 388,037 | |||||||||||||||||||||
| Less: Noncontrolling interest in subsidiaries' earnings | 245 | 183 | |||||||||||||||||||||
| Net income attributable to common shareholders | $ | 650,827 | $ | 387,854 | |||||||||||||||||||
| Earnings per share attributable to common shareholders: | |||||||||||||||||||||||
| Basic | $ | 5.07 | $ | 3.02 | |||||||||||||||||||
| Diluted | $ | 4.99 | $ | 2.98 | |||||||||||||||||||
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, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Net income | $ | 651,072 | $ | 388,037 | |||||||||||||||||||
| Less: Noncontrolling interests in subsidiaries' earnings | 245 | 183 | |||||||||||||||||||||
| Net income attributable to common shareholders | 650,827 | 387,854 | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustment | (222,532) | (306,483) | |||||||||||||||||||||
| Retirement benefits plan activity | 818 | 4,771 | |||||||||||||||||||||
| Other comprehensive (loss) | (221,714) | (301,712) | |||||||||||||||||||||
| Less: Other comprehensive income (loss) for noncontrolling interests | 361 | (1,130) | |||||||||||||||||||||
| Other comprehensive (loss) attributable to common shareholders | (222,075) | (300,582) | |||||||||||||||||||||
| Total comprehensive income attributable to common shareholders | $ | 428,752 | $ | 87,272 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
| September 30, 2023 | June 30, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 448,926 | $ | 475,182 | |||||||
| Marketable securities and other investments | 7,930 | 8,390 | |||||||||
| Trade accounts receivable, net | 2,740,420 | 2,827,297 | |||||||||
| Non-trade and notes receivable | 296,097 | 309,167 | |||||||||
| Inventories | 3,028,748 | 2,907,879 | |||||||||
| Prepaid expenses and other | 307,474 | 306,314 | |||||||||
| Total current assets | 6,829,595 | 6,834,229 | |||||||||
| Property, plant and equipment | 6,870,015 | 6,865,545 | |||||||||
| Less: Accumulated depreciation | 4,029,507 | 4,000,515 | |||||||||
| Property, plant and equipment, net | 2,840,508 | 2,865,030 | |||||||||
| Deferred income taxes | 72,457 | 81,429 | |||||||||
| Investments and other assets | 1,135,070 | 1,104,576 | |||||||||
| Intangible assets, net | 8,191,958 | 8,450,614 | |||||||||
| Goodwill | 10,523,129 | 10,628,594 | |||||||||
| Total assets | $ | 29,592,717 | $ | 29,964,472 | |||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Notes payable and long-term debt payable within one year | $ | 3,594,425 | $ | 3,763,175 | |||||||
| Accounts payable, trade | 2,036,752 | 2,050,934 | |||||||||
| Accrued payrolls and other compensation | 424,537 | 651,319 | |||||||||
| Accrued domestic and foreign taxes | 505,018 | 374,571 | |||||||||
| Other accrued liabilities | 1,106,324 | 895,371 | |||||||||
| Total current liabilities | 7,667,056 | 7,735,370 | |||||||||
| Long-term debt | 8,596,063 | 8,796,284 | |||||||||
| Pensions and other postretirement benefits | 493,278 | 551,510 | |||||||||
| Deferred income taxes | 1,589,833 | 1,649,674 | |||||||||
| Other liabilities | 671,537 | 893,355 | |||||||||
| Total liabilities | 19,017,767 | 19,626,193 | |||||||||
| 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 | 337,162 | 305,522 | |||||||||
| Retained earnings | 17,501,909 | 17,041,502 | |||||||||
| Accumulated other comprehensive (loss) | (1,514,947) | (1,292,872) | |||||||||
| Treasury shares, at cost; 52,570,304 shares at September 30 and 52,613,046 shares at June 30 | (5,849,265) | (5,817,787) | |||||||||
| Total shareholders’ equity | 10,565,382 | 10,326,888 | |||||||||
| Noncontrolling interests | 9,568 | 11,391 | |||||||||
| Total equity | 10,574,950 | 10,338,279 | |||||||||
| Total liabilities and equity | $ | 29,592,717 | $ | 29,964,472 |
See accompanying notes to consolidated financial statements.
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PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 651,072 | $ | 388,037 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 84,867 | 66,967 | |||||||||
| Amortization | 155,520 | 87,014 | |||||||||
| Stock incentive plan compensation | 77,894 | 65,018 | |||||||||
| Deferred income taxes | (56,027) | 193,620 | |||||||||
| Foreign currency transaction (gain) loss | (2,011) | 36,221 | |||||||||
| Loss (gain) on disposal of property, plant and equipment | 1,333 | (4,287) | |||||||||
| Gain on sale of businesses | (13,260) | (372,930) | |||||||||
| Gain on marketable securities | (18) | (1,361) | |||||||||
| Gain on investments | (1,384) | (1,957) | |||||||||
| Other | 6,944 | 7,437 | |||||||||
| Changes in assets and liabilities, net of effect of acquisitions and divestitures: | |||||||||||
| Accounts receivable, net | 63,947 | (1,228) | |||||||||
| Inventories | (137,995) | (137,143) | |||||||||
| Prepaid expenses and other | 16,915 | (186,579) | |||||||||
| Other assets | (38,589) | (95,135) | |||||||||
| Accounts payable, trade | 4,768 | 107,579 | |||||||||
| Accrued payrolls and other compensation | (220,336) | (89,455) | |||||||||
| Accrued domestic and foreign taxes | 136,916 | 8,047 | |||||||||
| Other accrued liabilities | 51,443 | 336,444 | |||||||||
| Pensions and other postretirement benefits | (53,086) | 49,378 | |||||||||
| Other liabilities | (78,954) | 1,671 | |||||||||
| Net cash provided by operating activities | 649,959 | 457,358 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Acquisitions (net of cash of $89,704 in 2022) | — | (7,146,110) | |||||||||
| Capital expenditures | (97,746) | (83,555) | |||||||||
| Proceeds from sale of property, plant and equipment | 710 | 11,107 | |||||||||
| Proceeds from sale of businesses | 36,691 | 441,340 | |||||||||
| Purchases of marketable securities and other investments | (4,477) | (7,687) | |||||||||
| Maturities and sales of marketable securities and other investments | 4,027 | 16,467 | |||||||||
| Payments of deal-contingent forward contracts | — | (1,405,418) | |||||||||
| Other | 4,801 | 246,438 | |||||||||
| Net cash used in investing activities | (55,994) | (7,927,418) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from exercise of stock options | 1,182 | 559 | |||||||||
| Payments for common shares | (79,330) | (67,241) | |||||||||
| Acquisition of noncontrolling interests | (2,883) | — | |||||||||
| Payments for notes payable, net | (169,785) | (112,430) | |||||||||
| Proceeds from long-term borrowings | — | 2,000,000 | |||||||||
| Payments for long-term borrowings | (176,626) | (301,389) | |||||||||
| Financing fees paid | — | (8,754) | |||||||||
| Dividends paid | (190,420) | (171,176) | |||||||||
| Net cash (used in) provided by financing activities | (617,862) | 1,339,569 | |||||||||
| Effect of exchange rate changes on cash | (2,359) | (15,078) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (26,256) | (6,145,569) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 475,182 | 6,647,876 | |||||||||
| Cash and cash equivalents at end of period | $ | 448,926 | $ | 502,307 | |||||||
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 September 30, 2023, the results of operations for the three months ended September 30, 2023 and 2022 and cash flows for the three months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2023 Annual Report on Form 10-K.
Subsequent Events
The Company has evaluated subsequent events that occurred through the date these financial statements were issued. No subsequent events have occurred that required adjustment to or disclosure in these financial statements.
2. New accounting pronouncements
In September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 adopted the guidance on July 1, 2023, except for the rollforward requirement, which becomes effective July 1, 2024. The adoption did not have a material impact on the Company's consolidated financial statements.
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 | ||||||||||||||||||||||||||
| September 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Motion Systems | $ | 942,314 | $ | 906,014 | ||||||||||||||||||||||
| Flow and Process Control | 1,181,461 | 1,204,464 | ||||||||||||||||||||||||
| Filtration and Engineered Materials | 1,494,753 | 1,376,295 | ||||||||||||||||||||||||
| Total | $ | 3,618,528 | $ | 3,486,773 |
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Aerospace Systems Segment revenues by primary market:
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Commercial original equipment manufacturer ("OEM") | $ | 418,616 | $ | 264,310 | ||||||||||||||||||||||
| Commercial aftermarket | 391,206 | 204,640 | ||||||||||||||||||||||||
| Military OEM | 263,065 | 170,671 | ||||||||||||||||||||||||
| Military aftermarket | 156,073 | 106,381 | ||||||||||||||||||||||||
| Total | $ | 1,228,960 | $ | 746,002 |
Total Company revenues by geographic region based on the Company's selling operation's location:
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| North America | $ | 3,293,091 | $ | 2,834,920 | ||||||||||||||||||||||
| Europe | 941,715 | 753,932 | ||||||||||||||||||||||||
| Asia Pacific | 554,405 | 588,398 | ||||||||||||||||||||||||
| Latin America | 58,277 | 55,525 | ||||||||||||||||||||||||
| Total | $ | 4,847,488 | $ | 4,232,775 |
The majority of revenues from the Aerospace Systems Segment are generated from sales to customers within North America.
Contract balances
Contract assets and contract liabilities are reported on a contract-by-contract basis. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. Payments from customers are received based on the terms established in the contract with the customer.
Total contract assets and contract liabilities are as follows:
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Contract assets, current (included within Prepaid expenses and other) | $ | 110,055 | $ | 123,705 | ||||||||||
| Contract assets, noncurrent (included within Investments and other assets) | 24,334 | 23,708 | ||||||||||||
| Total contract assets | 134,389 | 147,413 | ||||||||||||
| Contract liabilities, current (included within Other accrued liabilities) | (222,759) | (244,799) | ||||||||||||
| Contract liabilities, noncurrent (included within Other liabilities) | (53,854) | (78,239) | ||||||||||||
| Total contract liabilities | (276,613) | (323,038) | ||||||||||||
| Net contract liabilities | $ | (142,224) | $ | (175,625) |
Net contract liabilities at September 30, 2023 decreased from the June 30, 2023 amount primarily due to timing differences between when revenue was recognized and the receipt of advance payments. During the three months ended September 30, 2023, approximately $56 million of revenue was recognized that was included in the contract liabilities at June 30, 2023.
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 September 30, 2023 was $10.8 billion, of which approximately 81 percent is expected to be recognized as revenue within the next 12 months and the balance thereafter.
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4. Acquisitions and divestitures
Acquisitions
On September 12, 2022, we completed the acquisition (the "Acquisition") of all the outstanding ordinary shares of Meggitt plc ("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. During the three months ended September 30, 2023, measurement period adjustments did not have a material impact on the Consolidated Statement of Income. The following table presents the final estimated fair values of Meggitt's assets acquired and liabilities assumed on the Acquisition date.
| June 30, 2023 (previously reported) | Measurement Period Adjustments | September 12, 2022 (Final) | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 89,704 | $ | — | $ | 89,704 | |||||||||||
| Accounts receivable | 409,642 | 1,181 | 410,823 | ||||||||||||||
| Inventories | 739,304 | 13,580 | 752,884 | ||||||||||||||
| Prepaid expenses and other | 102,032 | 20,673 | 122,705 | ||||||||||||||
| Property, plant and equipment | 658,997 | (1,428) | 657,569 | ||||||||||||||
| Deferred income taxes | 34,198 | (18,730) | 15,468 | ||||||||||||||
| Other assets | 180,991 | (647) | 180,344 | ||||||||||||||
| Intangible assets | 5,679,200 | (28,000) | 5,651,200 | ||||||||||||||
| Goodwill | 2,789,080 | 10,891 | 2,799,971 | ||||||||||||||
| Total assets acquired | $ | 10,683,148 | $ | (2,480) | $ | 10,680,668 | |||||||||||
| Liabilities: | |||||||||||||||||
| Notes payable and long-term debt payable within one year | $ | 308,176 | $ | — | $ | 308,176 | |||||||||||
| Accounts payable, trade | 219,842 | (705) | 219,137 | ||||||||||||||
| Accrued payrolls and other compensation | 87,074 | (1) | 87,073 | ||||||||||||||
| Accrued domestic and foreign taxes | 21,068 | (818) | 20,250 | ||||||||||||||
| Other accrued liabilities | 322,040 | 158,137 | 480,177 | ||||||||||||||
| Long-term debt | 711,703 | — | 711,703 | ||||||||||||||
| Pensions and other postretirement benefits | 99,553 | (2,028) | 97,525 | ||||||||||||||
| Deferred income taxes | 1,259,417 | (19,700) | 1,239,717 | ||||||||||||||
| Other liabilities | 418,461 | (137,365) | 281,096 | ||||||||||||||
| Total liabilities assumed | 3,447,334 | (2,480) | 3,444,854 | ||||||||||||||
| 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 final acquisition valuation, we acquired $4.2 billion of customer-related intangible assets, $1.1 billion of technology and $303 million of trade names, each with weighted average estimated useful lives of 21, 22, and 18 years, respectively. These intangible assets were valued using the income approach, which includes significant assumptions around future revenue growth, earnings before interest, taxes, depreciation and amortization, royalty rates and discount rates. Such assumptions are classified as level 3 inputs within the fair value hierarchy.
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The following table presents unaudited pro forma information for the three months ended September 30, 2022 as if the Acquisition had occurred on July 1, 2021.
| (Unaudited) | Three Months Ended | ||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||
| Net sales | $ | 4,614,105 | |||||||||||||||||||||
| Net income attributable to common shareholders | 498,375 |
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 of 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 $196 million during the three months ended September 30, 2022. 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 2023, we divested the MicroStrain sensing systems business, which was part of the Diversified Industrial Segment, for proceeds of $37 million. The resulting pre-tax gain of $13 million is included in other income, net in the Consolidated Statement of Income. The operating results and net assets of the MicroStrain sensing systems business were immaterial to the Company's consolidated results of operations and financial position.
During September 2022, we divested our aircraft wheel and brake business, which was part of the Aerospace Systems Segment, for proceeds of $441 million. The resulting pre-tax gain of $373 million is included in other income, 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.
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 months ended September 30, 2023 and 2022.
| Three Months Ended | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 650,827 | $ | 387,854 | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic - weighted average common shares | 128,472,550 | 128,425,002 | |||||||||||||||||||||
| Increase in weighted average common shares from dilutive effect of equity-based awards | 1,890,891 | 1,517,406 | |||||||||||||||||||||
| Diluted - weighted average common shares, assuming exercise of equity-based awards | 130,363,441 | 129,942,408 | |||||||||||||||||||||
| Basic earnings per share | $ | 5.07 | $ | 3.02 | |||||||||||||||||||
| Diluted earnings per share | $ | 4.99 | $ | 2.98 | |||||||||||||||||||
For the three months ended September 30, 2023 and 2022, 172,255 and 887,307 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.
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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 September 30, 2023, we repurchased 124,496 shares at an average price, including commissions, of $401.62 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 $32 million at September 30, 2023 and June 30, 2023.
8. Non-trade and notes receivable
The non-trade and notes receivable caption in the Consolidated Balance Sheet is comprised of the following components:
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Notes receivable | $ | 99,259 | $ | 102,288 | ||||||||||
| Accounts receivable, other | 196,838 | 206,879 | ||||||||||||
| Total | $ | 296,097 | $ | 309,167 |
9. Inventories
The inventories caption in the Consolidated Balance Sheet is comprised of the following components:
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Finished products | $ | 800,236 | $ | 794,128 | ||||||||||
| Work in process | 1,571,430 | 1,488,665 | ||||||||||||
| Raw materials | 657,082 | 625,086 | ||||||||||||
| Total | $ | 3,028,748 | $ | 2,907,879 |
10. Supply chain financing
We have supply chain financing ("SCF") programs 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 voluntary.
Amounts due to our suppliers that elected to participate in the SCF programs are included in accounts payable, trade on the Consolidated Balance Sheet and payments made under the programs are included within operating activities on the Consolidated Statement of Cash Flows. Accounts payable, trade included approximately $85 million payable to suppliers who have elected to participate in the SCF programs as of September 30, 2023 and June 30, 2023. The amounts settled through the SCF programs and paid to the participating financial intermediaries totaled $72 million and $37 million during the first three months of fiscal 2024 and 2023, respectively.
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11. Business realignment and acquisition integration charges
We incurred business realignment and acquisition integration charges in the first three months of fiscal 2024 and 2023. In both the first three months of fiscal 2024 and 2023, 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 2024 and 2023, a majority of the business realignment charges were incurred in 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 | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Diversified Industrial | $ | 12,639 | $ | 2,012 | |||||||||||||||||||
| Aerospace Systems | 453 | 1,849 | |||||||||||||||||||||
Reductions to our workforce made in connection with such business realignment charges by business segment are as follows:
| Three Months Ended | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Diversified Industrial | 325 | 51 | |||||||||||||||||||||
| Aerospace Systems | 2 | 12 | |||||||||||||||||||||
The business realignment charges are presented in the Consolidated Statement of Income as follows:
| Three Months Ended | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Cost of sales | $ | 6,984 | $ | 2,499 | |||||||||||||||||||
| Selling, general and administrative expenses | 6,108 | 1,362 | |||||||||||||||||||||
During the first three months of fiscal 2024, approximately $11 million in payments were made relating to business realignment charges. Remaining payments related to business realignment actions of approximately $16 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.
We also incurred the following acquisition integration charges:
| Three Months Ended | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Diversified Industrial | $ | 1,139 | $ | 186 | |||||||||||||||||||
| Aerospace Systems | 5,267 | 11,805 |
Charges incurred in fiscal 2024 and 2023 relate to the acquisition of Meggitt. In both fiscal 2024 and 2023, these charges were primarily included in selling, general and administrative expenses ("SG&A") within the Consolidated Statement of Income.
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12. Equity
Changes in equity for the three months ended September 30, 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, 2023 | $ | 90,523 | $ | 305,522 | $ | 17,041,502 | $ | (1,292,872) | $ | (5,817,787) | $ | 11,391 | $ | 10,338,279 | |||||||||||||||||||||||||||
| Net income | 650,827 | 245 | 651,072 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | (222,075) | 361 | (221,714) | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($1.48 per share) | (190,420) | (190,420) | |||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | 31,225 | 18,522 | 49,747 | ||||||||||||||||||||||||||||||||||||||
| Acquisition activity | 415 | (2,429) | (2,014) | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | 90,523 | $ | 337,162 | $ | 17,501,909 | $ | (1,514,947) | $ | (5,849,265) | $ | 9,568 | $ | 10,574,950 |
| 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 | 387,854 | 183 | 388,037 | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) | (300,582) | (1,130) | (301,712) | ||||||||||||||||||||||||||||||||||||||
| Dividends paid ($1.33 per share) | (171,097) | (79) | (171,176) | ||||||||||||||||||||||||||||||||||||||
| Stock incentive plan activity | 33,136 | 15,199 | 48,335 | ||||||||||||||||||||||||||||||||||||||
| Shares purchased at cost | (50,000) | (50,000) | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 90,523 | $ | 360,443 | $ | 15,878,565 | $ | (1,843,780) | $ | (5,723,230) | $ | 10,883 | $ | 8,773,404 |
Changes in accumulated other comprehensive (loss) in shareholders' equity by component for the three months ended September 30, 2023 and 2022 are as follows:
| Foreign Currency Translation Adjustment | Retirement Benefit Plans | Total | |||||||||||||||
| Balance at June 30, 2023 | $ | (962,044) | $ | (330,828) | $ | (1,292,872) | |||||||||||
| Other comprehensive (loss) before reclassifications | (222,893) | — | (222,893) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive (loss) | — | 818 | 818 | ||||||||||||||
| Balance at September 30, 2023 | $ | (1,184,937) | $ | (330,010) | $ | (1,514,947) |
| Foreign Currency Translation Adjustment | Retirement Benefit Plans | Total | |||||||||||||||
| Balance at June 30, 2022 | $ | (1,149,071) | $ | (394,127) | $ | (1,543,198) | |||||||||||
| Other comprehensive (loss) before reclassifications | (305,353) | — | (305,353) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive (loss) | — | 4,771 | 4,771 | ||||||||||||||
| Balance at September 30, 2022 | $ | (1,454,424) | $ | (389,356) | $ | (1,843,780) |
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Significant reclassifications out of accumulated other comprehensive (loss) in shareholders' equity for the three months ended September 30, 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 | ||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||
| Retirement benefit plans | ||||||||||||||||||||
| Amortization of prior service cost and initial net obligation | $ | (302) | Other income, net | |||||||||||||||||
| Recognized actuarial loss | (792) | Other income, net | ||||||||||||||||||
| Total before tax | (1,094) | |||||||||||||||||||
| Tax benefit | 276 | |||||||||||||||||||
| Net of tax | $ | (818) |
| Details about Accumulated Other Comprehensive (Loss) Components | Income (Expense) Reclassified from Accumulated Other Comprehensive (Loss) | Consolidated Statement of Income Classification | ||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||
| Retirement benefit plans | ||||||||||||||||||||
| Amortization of prior service cost and initial net obligation | $ | (210) | Other income, net | |||||||||||||||||
| Recognized actuarial loss | (6,110) | Other income, net | ||||||||||||||||||
| Total before tax | (6,320) | |||||||||||||||||||
| Tax benefit | 1,549 | |||||||||||||||||||
| Net of tax | $ | (4,771) |
13. Goodwill and intangible assets
The changes in the carrying amount of goodwill for the three months ended September 30, 2023 are as follows:
| Diversified Industrial Segment | Aerospace Systems Segment | Total | |||||||||||||||
| Balance at June 30, 2023 | $ | 7,682,755 | $ | 2,945,839 | $ | 10,628,594 | |||||||||||
| Acquisition | 1,113 | 9,778 | 10,891 | ||||||||||||||
| Divestiture | (10,520) | — | (10,520) | ||||||||||||||
| Foreign currency translation | (83,232) | (22,604) | (105,836) | ||||||||||||||
| Balance at September 30, 2023 | $ | 7,590,116 | $ | 2,933,013 | $ | 10,523,129 |
Acquisition represents goodwill resulting from the purchase price allocation for the Acquisition during the measurement period. Divestiture represents goodwill associated with the sale of the business. Refer to Note 4 for further discussion.
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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:
| September 30, 2023 | June 30, 2023 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Patents and technology | $ | 2,104,195 | $ | 374,104 | $ | 2,128,847 | $ | 352,040 | |||||||||||||||
| Trade names | 1,036,723 | 399,105 | 1,047,678 | 390,737 | |||||||||||||||||||
| Customer relationships and other | 8,015,606 | 2,191,357 | 8,109,063 | 2,092,197 | |||||||||||||||||||
| Total | $ | 11,156,524 | $ | 2,964,566 | $ | 11,285,588 | $ | 2,834,974 |
Total intangible amortization expense for the three months ended September 30, 2023 and 2022 was $156 million and $87 million, respectively. The estimated amortization expense for the five years ending June 30, 2024 through 2028 is $565 million, $543 million, $539 million, $533 million and $524 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 three months ended September 30, 2023 and 2022.
14. Retirement benefits
Net pension (benefit) expense recognized included the following components:
| Three Months Ended | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Service cost | $ | 13,527 | $ | 14,253 | |||||||||||||||||||
| Interest cost | 66,881 | 46,351 | |||||||||||||||||||||
| Expected return on plan assets | (88,248) | (66,345) | |||||||||||||||||||||
| Amortization of prior service cost | 302 | 210 | |||||||||||||||||||||
| Amortization of net actuarial loss | 1,182 | 6,443 | |||||||||||||||||||||
| Amortization of initial net obligation | — | — | |||||||||||||||||||||
| Net pension (benefit) expense | $ | (6,356) | $ | 912 |
We recognized $0.6 million and $0.2 million in expense related to other postretirement benefits during the three months ended September 30, 2023 and 2022, respectively. Components of retirement benefits expense, other than service cost, are included in other income, net in the Consolidated Statement of Income.
15. Debt
Our debt portfolio includes a term loan facility (the “Term Loan Facility”). Interest rates reset every one, three or six months at the discretion of the Company. At September 30, 2023, the Term Loan Facility had an interest rate of Secured Overnight Financing Rate plus 122.5 bps. Additionally, the provisions of the Term Loan Facility allow for prepayments at the Company's discretion. During the three months ended September 30, 2023, we made principal payments totaling $175 million related to the Term Loan Facility. Refer to the Company’s 2023 Annual Report on Form 10-K for further discussion.
Commercial paper notes outstanding at September 30, 2023 and June 30, 2023 were $1.6 billion and $1.8 billion, respectively.
Based on the Company’s rating level at September 30, 2023, 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, 2023, our debt to debt-shareholders' equity ratio was 0.54 to 1.0. We are in compliance, and expect to remain in compliance, with all covenants set forth in the credit agreement and indentures.
16. Income taxes
We file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world. We are open to assessment on our U.S. federal income tax returns by the Internal Revenue Service for fiscal years after 2013, and our state and local returns for fiscal years after 2016. We are also open to assessment for significant foreign jurisdictions for fiscal years after 2011. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements.
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As of September 30, 2023, we had gross unrecognized tax benefits of $111 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 $24 million and $2 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 $40 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.
17. 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.
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:
| September 30, 2023 | June 30, 2023 | |||||||||||||
| Carrying value of long-term debt | $ | 10,641,866 | $ | 10,845,359 | ||||||||||
| Estimated fair value of long-term debt | 9,814,002 | 10,221,563 |
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, cross-currency swap contracts and certain foreign currency denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions, and we do not anticipate any material non-performance by any of the counterparties. We do not hold or issue derivative financial instruments for trading purposes.
The Company’s €700 million aggregate principal amount of Senior Notes due 2025 have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Senior Notes due 2025 into U.S. dollars is recorded in accumulated other comprehensive (loss) and remains there until the underlying net investment is sold or substantially liquidated.
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 | September 30, 2023 | June 30, 2023 | ||||||||||||||||||
| Net investment hedges | ||||||||||||||||||||
| Cross-currency swap contracts | Investments and other assets | $ | 26,725 | $ | 21,578 | |||||||||||||||
| Other derivative contracts | ||||||||||||||||||||
| Forward exchange contracts | Non-trade and notes receivable | 418 | — | |||||||||||||||||
The cross-currency swap and forward exchange 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 contracts 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 in other income, net in the Consolidated Statement of Income.
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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 | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Deal-contingent forward contracts | $ | — | $ | (389,992) | |||||||||||||||||||
| Forward exchange contracts | 436 | (1,364) | |||||||||||||||||||||
| Costless collar contracts | — | 5,389 | |||||||||||||||||||||
| Cross-currency swap contracts | — | 4,659 |
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 | |||||||||||||||||||||||
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Cross-currency swap contracts | $ | 2,583 | $ | 26,819 | |||||||||||||||||||
| Foreign currency denominated debt | 17,879 | 36,139 |
During the three months ended September 30, 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 September 30, 2023 and June 30, 2023 are as follows:
| Quoted Prices | Significant Other | Significant | ||||||||||||||||||||||||
| Fair | In Active | Observable | Unobservable | |||||||||||||||||||||||
| Value at | Markets | Inputs | Inputs | |||||||||||||||||||||||
| September 30, 2023 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Derivatives | $ | 27,143 | $ | — | $ | 27,143 | $ | — | ||||||||||||||||||
| Quoted Prices | Significant Other | Significant | ||||||||||||||||||||||||
| Fair | In Active | Observable | Unobservable | |||||||||||||||||||||||
| Value at | Markets | Inputs | Inputs | |||||||||||||||||||||||
| June 30, 2023 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Derivatives | $ | 21,578 | $ | — | $ | 21,578 | $ | — | ||||||||||||||||||
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 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.
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.
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18. 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.
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 | ||||||||||||||||||||||||||
| September 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| Diversified Industrial: | ||||||||||||||||||||||||||
| North America | $ | 2,229,906 | $ | 2,131,760 | ||||||||||||||||||||||
| International | 1,388,622 | 1,355,013 | ||||||||||||||||||||||||
| Aerospace Systems | 1,228,960 | 746,002 | ||||||||||||||||||||||||
| Total net sales | $ | 4,847,488 | $ | 4,232,775 | ||||||||||||||||||||||
| Segment operating income | ||||||||||||||||||||||||||
| Diversified Industrial: | ||||||||||||||||||||||||||
| North America | $ | 506,053 | $ | 452,986 | ||||||||||||||||||||||
| International | 300,701 | 293,940 | ||||||||||||||||||||||||
| Aerospace Systems | 226,260 | 92,151 | ||||||||||||||||||||||||
| Total segment operating income | 1,033,014 | 839,077 | ||||||||||||||||||||||||
| Corporate general and administrative expenses | 55,656 | 51,660 | ||||||||||||||||||||||||
| Income before interest expense and other expense | 977,358 | 787,417 | ||||||||||||||||||||||||
| Interest expense | 134,468 | 117,794 | ||||||||||||||||||||||||
| Other expense, net | 22,455 | 166,278 | ||||||||||||||||||||||||
| Income before income taxes | $ | 820,435 | $ | 503,345 | ||||||||||||||||||||||
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PARKER-HANNIFIN CORPORATION
FORM 10-Q
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