Parker(PH) - 2022 Q3 - Quarterly Report

Part I - Financial Information Financial Statements This section presents Parker-Hannifin Corporation's unaudited consolidated financial statements for the period ended March 31, 2022, detailing income, balance sheet, cash flows, segment information, and notes on key events Consolidated Statement of Income This statement details the company's financial performance over three and nine months ended March 31, 2022, showing net sales, income before taxes, net income, and diluted earnings per share Consolidated Statement of Income (Three and Nine Months Ended March 31, 2022, in thousands) | Financial Metric | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $4,086,387 | $3,746,326 | $11,673,776 | $10,388,771 | | Income before income taxes | $433,989 | $599,340 | $1,496,058 | $1,590,406 | | Net income | $348,088 | $473,239 | $1,187,280 | $1,241,892 | | Net income attributable to common shareholders | $348,017 | $473,153 | $1,186,774 | $1,241,307 | | Diluted Earnings Per Share | $2.67 | $3.60 | $9.10 | $9.50 | Consolidated Balance Sheet This statement provides a snapshot of the company's assets, liabilities, and equity as of March 31, 2022, and June 30, 2021 Consolidated Balance Sheet Summary (in thousands) | Balance Sheet Item | March 31, 2022 | June 30, 2021 | | :--- | :--- | :--- | | Total current assets | $8,229,694 | $5,616,750 | | Total assets | $22,545,320 | $20,341,200 | | Total current liabilities | $5,406,664 | $3,096,503 | | Total liabilities | $13,572,461 | $11,927,530 | | Total shareholders' equity | $8,959,866 | $8,398,307 | | Total liabilities and equity | $22,545,320 | $20,341,200 | Consolidated Statement of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities for the nine months ended March 31, 2022 and 2021 Cash Flow Summary (Nine Months Ended March 31, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,548,438 | $1,881,405 | | Net cash (used in) provided by investing activities | $(125,762) | $51,413 | | Net cash provided by (used in) financing activities | $799,258 | $(2,215,670) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $2,222,040 | $(195,914) | Business Segment Information This section provides detailed financial data for the company's Diversified Industrial and Aerospace Systems segments, including net sales and operating income - The company operates in two reportable business segments: Diversified Industrial and Aerospace Systems, both leveraging eight core technologies[20] Segment Net Sales (in thousands) | Segment | Three Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Diversified Industrial: North America | $2,014,715 | $5,615,454 | | Diversified Industrial: International | $1,439,357 | $4,214,972 | | Aerospace Systems | $632,315 | $1,843,350 | | Total net sales | $4,086,387 | $11,673,776 | Segment Operating Income (in thousands) | Segment | Three Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Diversified Industrial: North America | $413,998 | $1,085,117 | | Diversified Industrial: International | $298,475 | $881,206 | | Aerospace Systems | $119,016 | $352,063 | | Total segment operating income | $831,489 | $2,318,386 | Notes to Consolidated Financial Statements This section provides additional details and explanations for the financial statements, including backlog, acquisition details, share repurchases, and impacts from global events - The company's backlog at March 31, 2022 was $7.761 billion, with approximately 88% expected to be recognized as revenue within the next 12 months[34] - Announced a recommended cash acquisition of Meggitt plc for approximately £6.263 billion, to be funded with cash and new debt, pending regulatory clearances[35][36] - In connection with the Meggitt acquisition, the company deposited $2.487 billion into a restricted escrow account as of March 31, 2022[37] - The company repurchased 1,095,430 shares for approximately $330 million during the nine months ended March 31, 2022[41][51] - Incurred $20 million in expenses due to the exit of business operations in Russia, primarily from write-downs of inventory and working capital[48] - Entered into deal-contingent forward contracts with a notional amount of £6,415 million to mitigate currency risk for the Meggitt acquisition, resulting in a liability of $396 million at March 31, 2022[73][74] Management's Discussion and Analysis (MD&A) Management discusses fiscal 2022 Q3 financial results, highlighting sales growth, impacts of inflation and supply chain issues, and analyzing segment performance, liquidity, and capital resources, including Meggitt acquisition financing Overview The company manages impacts from the Russia-Ukraine war and COVID-19, including inflation and supply chain disruptions, while commercial aerospace demand begins to recover - The company's business is impacted by the Russia-Ukraine war and COVID-19 pandemic, leading to an inflationary environment, supply chain disruptions, and labor market issues[89] - In response to international sanctions, the company suspended all shipments to and from Russia and closed its Moscow office in March 2022[89] - A third-party data breach was detected on March 14, 2022, but it has not had a significant financial or operational impact on the company[93] Consolidated Statement of Income Analysis Net sales for the nine months ended March 31, 2022, increased to $11.674 billion due to higher volume, with gross profit margin improving to 28.0%, while other expense significantly increased due to a $396 million loss on deal-contingent forward contracts - Net sales increased for the nine months of fiscal 2022 due to higher volume in both the Diversified Industrial and Aerospace Systems Segments, with currency changes decreasing net sales by $89 million[98] - Gross profit margin increased in fiscal 2022 due to higher sales volume, continuous improvement initiatives, and price increases, which were partially offset by increased freight, material, and labor costs[99] - Other expense for the nine months ended March 31, 2022, was $386 million, a significant shift from an income of $122 million in the prior year, primarily driven by a $396 million loss on deal-contingent forward contracts and $51 million in acquisition-related financing fees[104][106][107] Business Segment Information Analysis Both Diversified Industrial and Aerospace Systems segments reported increased sales and operating income, with Diversified Industrial sales up 13.9% and Aerospace Systems operating margin improving to 19.1% due to commercial recovery Diversified Industrial Segment Sales Growth (vs. Prior Year) | Region | Three Months Ended Mar 31, 2022 (as reported) | Nine Months Ended Mar 31, 2022 (as reported) | | :--- | :--- | :--- | | North America | 14.6% | 15.7% | | International | 3.6% | 11.6% | | Total Segment | 9.7% | 13.9% | - Diversified Industrial segment operating margin increased in both North America (to 19.3%) and International (to 20.9%) for the nine-month period, driven by higher sales volume and price increases, partially offset by higher operating costs[116] - Aerospace Systems segment sales increased due to higher volume in commercial OEM and aftermarket, while military OEM and aftermarket volume declined[124] - Aerospace Systems operating margin for the nine months ended March 31, 2022, increased to 19.1% from 15.9% in the prior year, driven by higher sales volume, favorable product mix, and lower engineering expenses[125] Liquidity and Capital Resources Cash from operations for the first nine months of fiscal 2022 was $1.548 billion, down due to increased working capital, with liquidity impacted by Meggitt acquisition financing, while maintaining a strong position and compliance with debt covenants - Cash from operating activities decreased by $333 million to $1.548 billion for the nine months of fiscal 2022, primarily due to increased working capital requirements and a decrease in net income[135] - The company declared a quarterly dividend of $1.33 per share on April 28, 2022, marking 66 consecutive fiscal years of increased annual dividends[138] - To finance the proposed Meggitt acquisition, the company issued $2,126 million of commercial paper in October 2021 and established a Bridge Credit Agreement and a $2 billion Term Loan Facility[141][146][147][148] - The company's debt to debt-shareholders' equity ratio was 0.48 to 1.0 at March 31, 2022, well within the most restrictive covenant limit of 0.65 to 1.0[144] Quantitative and Qualitative Disclosures About Market Risk The company manages foreign currency and interest rate risks using derivative instruments, aiming for a 60/40 mix of fixed to variable rate debt, while acknowledging potential material impacts from the Russia-Ukraine war and COVID-19 - The company uses derivative instruments like forward exchange contracts, deal-contingent forward contracts, and cross-currency swaps to manage foreign currency risk[154] - The company's objective is to maintain a 60/40 mix between fixed-rate and variable-rate debt to manage interest rate risk[156] - The future financial impact of the Russia-Ukraine war and the COVID-19 pandemic cannot be reasonably estimated but is acknowledged as potentially material[157] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal controls over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[158] - No material changes were made to the company's internal controls over financial reporting during the quarter ended March 31, 2022[159] Part II - Other Information Legal Proceedings The company is involved in various environmental matters and will report any such matter where monetary sanctions are expected to exceed $1.0 million - The company reports on environmental legal matters when it reasonably believes monetary sanctions may exceed $1.0 million[162] Issuer Purchases of Equity Securities During Q3 FY2022, the company repurchased 165,622 common shares under its program, with approximately 8.6 million shares remaining authorized for repurchase as of March 31, 2022 Issuer Purchases of Equity Securities (Q3 FY2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 1 - Jan 31, 2022 | 50,800 | $319.34 | | Feb 1 - Feb 28, 2022 | 49,700 | $304.83 | | Mar 1 - Mar 31, 2022 | 65,122 | $285.99 | | Total | 165,622 | | - As of March 31, 2022, 8,601,550 shares may yet be purchased under the existing share repurchase program, which has no expiration date[163] Exhibits This section lists exhibits filed with the Form 10-Q, including incentive plan amendments, CEO/CFO certifications, and Inline XBRL data files - Exhibits filed include amendments to the Long-Term Incentive Performance Plan, CEO/CFO certifications, and Inline XBRL financial data[165]