Parker-Hannifin Corp (PH)

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. Often but not always, these statements may be identified from the use of forward-looking terminology such as "anticipates," "believes," "may," "should," "could," "expects," "targets," "is likely," "will," or the negative of these terms and similar expressions, and may also include statements regarding future performance, orders, earnings projections, events or developments. Parker cautions readers not to place undue reliance on these statements. It is possible that the future performance may differ materially from expectations, including those based on past performance.

Among other factors that may affect future performance are:

•changes in business relationships with and orders by or from major customers, suppliers or distributors, including delays or cancellations in shipments;

•disputes regarding contract terms, changes in contract costs and revenue estimates for new development programs;

•changes in product mix;

•ability to identify acceptable strategic acquisition targets;

•uncertainties surrounding timing, successful completion or integration of acquisitions and similar transactions;

•ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;

•the determination and ability to successfully undertake business realignment activities and the expected costs, including cost savings, thereof;

•ability to implement successfully business and operating initiatives, including the timing, price and execution of share repurchases and other capital initiatives;

•availability, cost increases of or other limitations on our access to raw materials, component products and/or commodities if associated costs cannot be recovered in product pricing;

•ability to manage costs related to insurance and employee retirement and health care benefits;

•legal and regulatory developments and other government actions, including related to environmental protection, and associated compliance costs; supply chain and labor disruptions, including as a result of labor shortages;

•threats associated with international conflicts and cybersecurity risks and risks associated with protecting our intellectual property;

•uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals;

•effects on market conditions, including sales and pricing, resulting from global reactions to U.S. trade policies;

•manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and economic conditions such as inflation, deflation, interest rates and credit availability; inability to obtain, or meet conditions imposed for, required governmental and regulatory approvals;

•changes in the tax laws in the United States and foreign jurisdictions and judicial or regulatory interpretations thereof; and

•large scale disasters, such as floods, earthquakes, hurricanes, industrial accidents and pandemics.

The Company makes these statements as of the date of the filing of this Annual Report on Form 10-K for the year ended June 30, 2024 and undertakes no obligation to update them unless otherwise required by law.

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Overview

The Company is a global leader in motion and control technologies. Leveraging a unique combination of interconnected technologies, we design, manufacture, and provide aftermarket support for highly engineered solutions that create value for customers primarily in aerospace and defense, in-plant and industrial equipment, transportation, off-highway, energy, and HVAC and refrigeration markets around the world.

By aligning around our purpose, Enabling Engineering Breakthroughs that Lead to a Better Tomorrow, Parker is better positioned for the challenges and opportunities of tomorrow.

The Win Strategy 3.0 is Parker's business system which defines the goals and initiatives that create responsible, sustainable growth and enable Parker's long-term success. It works with our purpose, which is a foundational element of The Win Strategy, to engage team members and create responsible and sustainable growth. Our shared values shape our culture and our interactions with stakeholders and the communities in which we operate and live.

We believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of aerospace & defense, in-plant & industrial equipment, transportation, off-highway, energy, and HVAC and refrigeration. We believe we can meet our strategic objectives by:

•serving the customer and continuously enhancing its experience with the Company;

•successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;

•maintaining a decentralized division and sales company structure;

•fostering a safety-first and entrepreneurial culture;

•engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;

•delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;

•enabling a sustainable future by providing innovative clean technology solutions that offer a positive, global environmental impact and operating responsibly by reducing our energy use and emissions;

•acquiring strategic businesses;

•organizing around targeted regions, technologies and markets;

•driving efficiency by implementing lean enterprise principles; and

•creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.

Our order rates provide a near-term perspective of the Company's outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders.

We manage our supply chain through our "local for local" manufacturing strategy, ongoing supplier management process, and broadened supply base. We are monitoring inflation and manage its impact through a variety of cost and pricing measures, including continuous improvement and lean initiatives. Additionally, we strategically manage our workforce and discretionary spending. At the same time, we are appropriately addressing the ongoing needs of our business so that we continue to serve our customers.

Over the long term, the extent to which our business and results of operations will be impacted by economic and political uncertainty, geopolitical risks and public health crises depends on future developments that remain uncertain. We will continue to monitor the global environment and manage our business with the goal to minimize unfavorable impacts on operations and financial results.

The discussion below is structured to separately discuss the Consolidated Statement of Income, Business Segments, and Liquidity and Capital Resources. The term "year" and references to specific years refer to the applicable fiscal year. Dollars are presented in millions, except per share amounts or as otherwise noted, and totals may not sum due to rounding. Discussion of the 2022 financial statements is included in Part II, Item 7 of the Company's 2023 Annual Report on Form 10-K.

CONSOLIDATED STATEMENT OF INCOME

The Consolidated Statement of Income summarizes the Company's operating performance. The discussion below compares the operating performance in 2024 and 2023.

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Net sales in 2024 increased from the 2023 amount due to higher sales in the Aerospace Systems Segment resulting from strength across commercial and defense markets, partially offset by lower sales in the Diversified Industrial Segment. The acquisition (the "Acquisition") of Meggitt plc ("Meggitt") increased sales by approximately $501 million during the current year. The effect of currency exchange rates decreased net sales in 2024 by approximately $10 million, which is attributable to the Diversified Industrial Segment, partially offset by an increase in net sales due to the effect of currency exchange rates in the Aerospace Systems Segment. The impact of divestiture activity decreased sales by approximately $62 million in 2024.

Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 2024 primarily due to higher margins in both segments resulting from price increases, favorable product mix, moderating material and freight costs and operational efficiencies. In addition, cost of sales in 2023 included $110 million of amortization expense related to the step-up in inventory to fair value resulting from the Acquisition.

Cost of sales also included business realignment and acquisition integration charges of $34 million in 2024 compared to $29 million in 2023.

Selling, general and administrative expenses ("SG&A") decreased in 2024 compared to 2023 primarily due to the absence of acquisition-related transaction costs in 2023 totaling $115 million and benefits from prior-year acquisition integration and business realignment activities. The decrease was partially offset by an increase in intangible asset amortization and share-based compensation expense, as well as an increase in general and administrative expenses resulting from the Acquisition.

SG&A also included business realignment and acquisition integration charges of $55 million and $94 million in 2024 and 2023, respectively.

Interest expense in 2024 decreased compared to 2023 primarily due to the repayment of debt.

Other (income) expense, net included the following:

Foreign currency transaction (gain) loss primarily relates to the impact of exchange rates on cash, forward contracts, certain cross-currency swap contracts and intercompany transactions. During 2023, it also includes foreign currency transaction loss associated with completing the Acquisition.

Loss on deal-contingent forward contracts includes a loss on the deal-contingent forward contracts related to the Acquisition. Refer to Note 17 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

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Gain on sale of businesses and assets, net in 2023 includes a gain on the sale of the aircraft wheel and brake business within the Aerospace Systems Segment of $374 million. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Effective tax rate in 2024 was lower than 2023, due to an overall increase in discrete tax benefits along with a change in U.S. state and local income taxes and non-recurring acquisition expenses. Refer to Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a reconciliation of the U.S. federal statutory tax rate to our effective tax rate.

BUSINESS SEGMENT INFORMATION

The Business Segment information presents sales and operating income on a basis that is consistent with the manner in which the Company's various businesses are managed for internal review and decision-making.

Diversified Industrial Segment

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The Diversified Industrial Segment operations experienced the following percentage changes in net sales:

1This table reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with accounting principles generally accepted in the United States of America ("GAAP") to percentage changes in net sales adjusted to remove the effects of acquisitions and divestitures for 12 months after their completion as well as changes in currency exchange rates (a non-GAAP measure). The effects of acquisitions, divestitures and changes in currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Net Sales

Diversified Industrial Segment sales in 2024 decreased $249 million from 2023. The Acquisition increased sales by approximately $115 million. The effect of currency exchange rates decreased sales by approximately $30 million. The impact of divestiture activity decreased sales by approximately $23 million. Excluding the effects of the Acquisition, changes in currency exchange rates and divestiture activity, sales in 2024 decreased $312 million from prior-year levels.

North America businesses - Sales within the North America businesses of the Diversified Industrial Segment decreased $116 million in 2024. The effect of the Acquisition increased sales by approximately $77 million. The effect of currency exchange rates increased sales by approximately $25 million during the year. The impact of divestiture activity decreased sales by approximately $23 million. Excluding the effects of the Acquisition, changes in the currency exchange rates and divestiture activity, sales in 2024 decreased $196 million from prior-year levels reflecting lower demand within the HVAC and refrigeration, transportation, off-highway and in-plant and industrial equipment markets. The decrease in sales was partially offset by an increase in demand within the aerospace and defense and energy markets.

International businesses - Sales within the International businesses of the Diversified Industrial Segment decreased $132 million in 2024. The effect of the Acquisition increased sales by approximately $38 million. The effect of currency exchange rates decreased sales by approximately $54 million, reflecting the strengthening of the U.S. dollar primarily against currencies in Turkey, China and Japan, partially offset by the weakening of the U.S. dollar primarily against currencies in the Eurozone countries and United Kingdom. Excluding the effects of the Acquisition and changes in the currency exchange rates, sales in 2024 decreased $116 million from prior-year levels primarily due to lower sales in the Asia Pacific region and Europe, partially offset by an increase in sales in Latin America.

Within Europe, the decrease in sales was primarily due to lower demand within the HVAC and refrigeration, off-highway, energy and in-plant and industrial equipment markets, partially offset by higher demand within the aerospace and defense and transportation markets.

Within the Asia Pacific region, the decrease in sales was primarily due to lower demand within the in-plant and industrial equipment, energy, off-highway and HVAC and refrigeration markets, partially offset by higher demand within the aerospace and defense and transportation markets.

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Within Latin America, the increase in sales was primarily due to higher demand within the aerospace and defense, in-plant and industrial equipment, energy, HVAC and refrigeration, off-highway and transportation markets.

Operating Margin

Diversified Industrial Segment operating margin increased in 2024, in both the North America and International businesses, primarily due to benefits from price increases, favorable product mix, moderating material and freight costs and operational efficiencies. These benefits were partially offset by higher business realignment charges in the current year.

Business Realignment

The following business realignment and acquisition integration charges are included in the Diversified Industrial Segment operating income:

Business realignment charges include 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 both 2024 and 2023, acquisition integration charges relate to the acquisition of Meggitt. Business realignment and acquisition integration charges within the International businesses were primarily incurred in Europe.

We anticipate that cost savings realized from the workforce reduction measures taken during 2024 will increase operating income in 2025 by approximately two percent for both the International and North America businesses. We expect to continue to take actions necessary to integrate acquisitions and appropriately structure the operations of the Diversified Industrial Segment. These actions are expected to result in approximately $53 million in business realignment and acquisition integration charges in 2025. However, continually changing business conditions could impact the ultimate costs we incur.

Backlog

Diversified Industrial Segment backlog decreased in 2024 primarily due to shipments exceeding orders in both the North America and International businesses. The decrease in backlog was split evenly between both businesses. Within the International businesses, Europe, the Asia Pacific region and Latin America accounted for approximately 70 percent, 25 percent, and five percent of the decrease, respectively.

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

Aerospace Systems Segment

Sales

Aerospace Systems Segment sales increased $1.1 billion in 2024. The Acquisition increased sales by $386 million. The effect of currency exchange rates increased sales by approximately $19 million. The impact of divestiture activity decreased sales by approximately $40 million. Excluding the effects of the Acquisition, changes in currency exchange rates and divestiture activity, sales in 2024 increased $748 million from prior-year levels. The increase in sales is primarily driven by higher volume across all market segments, especially the commercial aftermarket.

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Operating Margin

Aerospace Systems Segment operating margin increased in 2024 primarily due to higher sales volume, favorable aftermarket mix and lower acquisition-integration charges, as well as benefits of cost containment initiatives and prior-year business realignment and acquisition integration activities. These benefits were partially offset by a $79 million increase in intangible asset amortization expense in 2024. In addition, operating income in the prior year included $110 million of amortization expense related to the step-up in inventory to fair value resulting from the Acquisition.

Business Realignment

Within the Aerospace Systems Segment, we incurred acquisition integration and business realignment charges of $35 million and $90 million in 2024 and 2023, respectively. We expect to incur approximately $12 million in acquisition integration charges in 2025. However, continually changing business conditions could impact the ultimate costs we incur.

Backlog

Aerospace Systems Segment backlog increased in 2024 primarily due to orders exceeding shipments in all businesses, especially the commercial and defense aftermarket businesses.

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

Corporate general and administrative expense

Corporate general and administrative expenses decreased in 2024 primarily due to lower expenses related to the Company's incentive compensation programs and professional service fees, partially offset by an increase in salaries and benefits, charitable contributions and information technology expenses.

Other (income) expense, net

Foreign currency transaction (gain) loss primarily relates to the impact of exchange rates on cash, forward contracts, certain cross currency swap contracts and intercompany transactions. During 2023, it also includes foreign currency transaction loss associated with completing the Acquisition.

Acquisition-related expenses include transaction costs related to the acquisition of Meggitt. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

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Loss on deal-contingent forward contracts includes losses on the deal-contingent forward contracts related to the Acquisition. Refer to Note 17 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Gain on sale of businesses and assets, net includes a gain on the sale of the aircraft wheel and brake business within the Aerospace Systems Segment of approximately $374 million in 2023. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

LIQUIDITY AND CAPITAL RESOURCES

We believe that we are great generators and deployers of cash. We assess our liquidity in terms of our ability to generate cash to fund our operations and meet our strategic capital deployment objectives, which include the following:

•Continuing our record annual dividend increases

•Investing in organic growth and productivity

•Strategic acquisitions that strengthen our portfolio

•Offset share dilution through 10b5-1 share repurchase program

Cash Flows

A summary of cash flows follows:

Cash flows from operating activities were $3,384 million in 2024 compared to $2,980 million in 2023. The increase of $404 million in 2024 was primarily related to an increase in earnings combined with strong management of working capital items. We continue to focus on managing inventory and other working capital requirements. Cash flows from operating activities for 2023 were negatively impacted by acquisition-related transaction expenses.

•Days sales outstanding relating to trade receivables for the Company was 51 days in both 2024 and 2023.

•Days supply of inventory on hand was 80 days in 2024 and 85 days in 2023.

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Cash flows from investing activities in 2024 and 2023 were impacted by the following factors:

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

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

•Net proceeds from the sale of the aircraft wheel and brake business of approximately $443 million in 2023.

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

•Net maturities of marketable securities of $7 million in 2024 compared to $19 million in 2023.

•Capital expenditures of $400 million in 2024 compared to $381 million in 2023.

Cash flows from financing activities in 2024 and 2023 were impacted by the following factors:

•Repurchases of 0.4 million common shares for $200 million during 2024 compared to repurchases of 0.7 million common shares for $200 million during 2023.

•Proceeds of $2.0 billion from borrowings under the term loan facility (the "Term Loan Facility") in 2023.

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

•Payments to retire $900 million aggregate principal amount of private placement notes assumed in the Acquisition in 2023. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

•Net commercial paper borrowings of $359 million in 2024 compared to net commercial paper borrowings of $358 million in 2023.

•Principal payments totaling $385 million related to the Term Loan Facility in 2024 compared to principal payments totaling $1.1 billion related to the Term Loan Facility in 2023. Refer to Note 11 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

•Payments related to maturity of $2.0 billion aggregate principal amounts of senior notes in 2024.

Cash Requirements

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

We have committed cash outflow related to long-term debt, operating and financing lease agreements, and postretirement benefit obligations. Refer to Notes 11, 12, and 13 respectively, of Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Dividends

Cash dividends have been paid for 296 consecutive quarters, including a yearly increase in dividends for the last 68 years. The current annual dividend rate is $6.52 per common share.

Share Repurchases

The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized to repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a year. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. Refer to Note 14 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

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Liquidity

Cash, comprised of cash and cash equivalents and marketable securities and other investments, includes $311 million and $422 million held by the Company's foreign subsidiaries at June 30, 2024 and 2023, respectively. The Company does not permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested.

We are currently authorized to sell up to $3.0 billion of short-term commercial paper notes. There were $2.1 billion outstanding commercial paper notes as of June 30, 2024, and the largest amount of commercial paper notes outstanding during the fourth quarter of 2024 was $2.3 billion.

The Company has a line of credit totaling $3.0 billion through a multi-currency revolving credit agreement with a group of banks. As of June 30, 2024, $0.9 billion was available for borrowing under the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement supports our commercial paper program, and issuances of commercial paper reduce the amount of credit available under the agreement. The credit agreement expires in June 2028; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings. Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

We primarily utilize unsecured medium-term notes and senior notes to meet our financing needs and we expect to continue to borrow funds at reasonable rates over the long term. Refer to the Cash flows from financing activities section above and Note 11 of the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

The Company’s credit agreements and indentures governing certain debt securities contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at June 30, 2024, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At June 30, 2024, the Company's debt to debt-shareholders' equity ratio was 0.47 to 1.0. We are in compliance, and expect to remain in compliance, with all covenants set forth in the credit agreement and indentures.

Our goal is to maintain an investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At June 30, 2024, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:

Supply Chain Financing

We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers. We currently have supply chain financing ("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 do not believe that changes in the availability of supply chain financing will have a significant impact on our liquidity. Refer to Note 8 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Strategic Acquisitions and Divestitures

Acquisitions will be considered from time to time to the extent there is a strong strategic fit, while at the same time maintaining the Company’s strong financial position. In addition, we will continue to assess our existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. During 2024, we divested two businesses and in 2023, we completed one acquisition and divested two businesses. On July 28, 2024, the Company signed an agreement to divest its Meggitt composites and fuel containment business within the North America businesses of the Diversified Industrial Segment. Refer to Notes 1 and 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

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CRITICAL ACCOUNTING POLICIES & ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management's judgment.

Revenue Recognition - Revenues are recognized when control of performance obligations, which are distinct goods or services within the contract, is transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. A majority of our revenues are recognized at a point in time when control is transferred to the customer, which is generally at the time of shipment. However, a portion of our revenues are recognized over time if the customer simultaneously receives control as we perform work under a contract, if the customer controls the asset as it is being produced or if the product has no alternative use and we have a contractual right to payment.

For contracts where revenue is recognized over time, we use the cost-to-cost, efforts expended or units of delivery method depending on the nature of the contract, including length of production time. The estimation of costs and efforts expended requires management's judgment due to the duration of the contractual agreements as well as the technical nature of the products involved. Adjustments to these estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.

When there are multiple performance obligations within a contract, the transaction price is allocated to each performance obligation based on its standalone selling price. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers for the same product or service. Revenue is recognized when control of the individual performance obligations is transferred to the customer.

We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.

Impairment of Goodwill and Long-Lived Assets - We test goodwill for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate the carrying value of a reporting unit may exceed its fair value. Our five reporting units are equivalent to our operating segments. As quoted market prices are not available for our reporting units, determining whether an impairment occurred requires the valuation of the respective reporting unit, which is estimated using both income-based and market-based valuation methods. The income-based valuation method utilizes a discounted cash flow model which requires several assumptions, including future sales growth and operating margin levels as well as assumptions regarding future industry-specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions in the discounted cash flow analysis. Within the discounted cash flow models, the Company uses a discount rate, commensurate with its cost of capital but adjusted for inherent business risks, and an appropriate terminal growth factor. The market-based valuation performed for each reporting unit includes an analysis consisting of market-adjusted multiples based on key data points for guideline public companies. We also reconcile the estimated aggregate fair value of our reporting units resulting from these procedures to our overall market capitalization.

At December 31, 2023, the Company performed its annual goodwill impairment test for each of its five reporting units. The results of this test indicated the fair value substantially exceeded carrying value for all reporting units. We continually monitor our reporting units for impairment indicators and update assumptions used in the most recent calculation of a reporting unit's fair value as appropriate.

Long-lived assets held for use, which primarily includes finite-lived intangible assets and property, plant and equipment, 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 are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During 2024, the Company did not record any material impairments related to long-lived assets.

Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of

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return on plan assets, increases in compensation levels and amortization periods for actuarial gains and losses. Assumptions are determined based on Company data and appropriate market indicators and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements.

For the Company's domestic qualified defined benefit plan, our largest plan, a 50 basis point change in the assumed long-term rate of return on plan assets is estimated to have an $18 million effect on annual pension expense and a 50 basis point decrease in the discount rate is estimated to decrease annual pension expense by $6 million. As of June 30, 2024, $331 million of past years' net actuarial losses related to the Company's domestic qualified defined benefit plan are subject to amortization in the future. These losses will generally be amortized over approximately seven years and will negatively affect earnings in the future. Any actuarial gains experienced in future years will help offset the effect of the net actuarial loss amortization. Further information on pensions is provided in Note 13 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Business Combinations - From time to time, we may enter into business combinations. Business acquisitions are accounted for using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. In the fair value evaluation of intangible assets acquired, there are significant estimates and assumptions, including forecasts of future cash flows, revenues; and earnings before interest, taxes, depreciation and amortization; as well as the selection of the royalty rates and discount rates. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The acquisition method of accounting also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations.

Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the balances as new information becomes available. For those tax positions where it is more likely than not that a tax benefit will be sustained, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon examination by a taxing authority that has full knowledge of all relevant information will be recorded. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. Further information on income taxes is provided in Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Loss Contingencies - The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability and litigation reserves. Establishing loss accruals for these matters requires management's estimate and judgment with regards to risk exposure and ultimate liability or realization. We review these loss accruals periodically and make adjustments to reflect the most recent facts and circumstances.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are described in Note 1 to the Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. Often but not always, these statements may be identified from the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “should,” “could,” “potential,” “continues,” “plans,” “forecasts,” “estimates,” “projects,” “predicts,” “would,” “intends,” “expects,” “targets,” “is likely,” “will,” or the negative of these terms and similar expressions, and include all statements regarding future performance, earnings projections, events or developments. Neither the Company nor any of its respective associates or directors, officers or advisers, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this document will actually occur. The Company cautions readers not to place undue reliance on these statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from past performance or current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company’s ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of changes in tax laws in the United States and foreign jurisdictions and any judicial or regulatory interpretation thereof on future performance and earnings projections may impact the Company’s tax calculations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.

Among other factors which may affect future performance are:

•changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;

•disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs and changes in product mix;

•the impact of political, social and economic instability and disruptions, including public health crises such as the COVID-19 pandemic;

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

•the ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;

•the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;

•ability to implement successfully capital allocation initiatives, including timing, price and execution of share repurchases;

•availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;

•global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates, credit availability and changes in consumer habits and preferences;

•ability to manage costs related to insurance and employee retirement and health care benefits;

•legal and regulatory developments and changes;

•additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;

•ability to enter into, own, renew, protect and maintain intellectual property and know-how;

•leverage and future debt service obligations;

•potential impairment of goodwill;

•compliance costs associated with environmental laws and regulations;

•potential labor disruptions or shortages and the ability to attract and retain key personnel;

•uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals;

•global competitive market conditions, including U.S. trade policies and resulting effects on sales and pricing;

•local and global political and economic conditions, including the Russia-Ukraine war and its residual effects;

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•inability to obtain, or meet conditions imposed for, required governmental and regulatory approvals;

•government actions and natural phenomena such as pandemics, floods, earthquakes, hurricanes or other natural phenomena that may be related to climate change;

•increased cyber security threats and sophisticated computer crime; and

•success of business and operating initiatives.

The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended June 30, 2023, and undertakes no obligation to update them unless otherwise required by law.

Overview

The Company is a global leader in motion and control technologies. For more than a century, the Company has engineered the success of its customers in a wide range of diversified industrial and aerospace markets.

By aligning around our purpose, Enabling Engineering Breakthroughs that Lead to a Better Tomorrow, Parker is better positioned for the challenges and opportunities of tomorrow.

The Win Strategy 3.0 is Parker's business system which defines the goals and initiatives that create responsible, sustainable growth and enable Parker's long-term success. It works with our purpose, which is a foundational element of The Win Strategy, to engage team members and create responsible and sustainable growth. Our shared values shape our culture and our interactions with stakeholders and the communities in which we operate and live.

We believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation. We believe we can meet our strategic objectives by:

•serving the customer and continuously enhancing its experience with the Company;

•successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;

•maintaining a decentralized division and sales company structure;

•fostering a safety-first and entrepreneurial culture;

•engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;

•delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;

•enabling a sustainable future by providing innovative clean technology solutions that offer a positive, global environmental impact and operating responsibly by reducing our energy use and emissions;

•acquiring strategic businesses;

•organizing around targeted regions, technologies and markets;

•driving efficiency by implementing lean enterprise principles; and

•creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.

Our order rates provide a near-term perspective of the Company's outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders.

The continuing residual effects of the Russia-Ukraine war and the COVID-19 pandemic, including the inflationary cost environment as well as disruption within the global supply chain and labor markets, have impacted our business. We continue to manage the challenging supply chain environment through our "local for local" manufacturing strategy, ongoing supplier management process, and broadened supply base. We continue to manage the impact of the inflationary cost environment through a variety of cost and pricing measures, including continuous improvement and lean initiatives. Additionally, we strategically manage our workforce and discretionary spending. At the same time, we are appropriately addressing the ongoing needs of our business so that we continue to serve our customers.

Over the long-term, the extent to which our business and results of operations will be impacted by economic and political uncertainty depends on future developments that remain uncertain. We will continue to monitor the environment and manage our business with the goal to minimize the impact on operations and financial results.

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As previously announced, on March 14, 2022, we detected that an unauthorized party gained access to our systems. After securing our network and concluding our investigation, we found that the data exfiltrated during the incident included personal information of our team members. We have notified individuals whose personal information was involved and offered them credit monitoring services. We have also provided notification regarding the incident to the appropriate regulatory authorities. A consolidated class action lawsuit has been filed in the United States District Court for the Northern District of Ohio against the Company over the incident. The parties have reached a settlement in principle in the lawsuit, which the district court preliminarily approved on March 14, 2023, and finally approved on August 2, 2023. Based on our ongoing assessments, the incident has not had a significant financial or operational impact and has not had a material impact on our business, operations or financial results.

The discussion below is structured to separately discuss the Consolidated Statement of Income, Business Segments, and Liquidity and Capital Resources. The term "year" and references to specific years refer to the applicable fiscal year.

CONSOLIDATED STATEMENT OF INCOME

The Consolidated Statement of Income summarizes the Company's operating performance. The discussion below compares the operating performance in 2023, 2022, and 2021.

Net sales in 2023 increased from the 2022 amount due to higher volume in both the Diversified Industrial and Aerospace Systems Segments. The Acquisition completed within the last 12 months increased sales by approximately $2.1 billion during the current year. The effect of currency rate changes decreased net sales in 2023 by approximately $470 million, substantially all of which is attributable to the Diversified Industrial International businesses. Divestitures completed within the last 12 months decreased sales by approximately $69 million in 2023.

Net sales in 2022 increased from the 2021 amount due to higher volume in both the Diversified Industrial and Aerospace Systems Segments. The effect of currency rate changes decreased net sales in 2022 by approximately $255 million, substantially all of which is attributable to the Diversified Industrial International businesses.

Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased slightly in 2023 primarily due to higher margins in both the Aerospace Systems and Diversified Industrial Segments. The increase in gross profit margin is primarily due to higher sales volume and benefits from continuous improvement initiatives, as well as price increases. The increase was partially offset by the step-up in inventory to fair value of $110 million, related to the Acquisition, within the Aerospace Systems Segment. Additionally, increased freight, material and labor costs resulting from the ongoing inflationary environment and disruption within the global supply chain and labor markets impacted margin. Cost of sales also included business realignment and acquisition integration charges of $29 million in 2023 compared to $5 million in 2022.

Gross profit margin increased in 2022 primarily due to higher margins in both the Aerospace and Diversified Industrial Segments. The increase in gross profit margin is primarily due to higher sales volume and benefits from continuous improvement initiatives, as well as price increases, partially offset by increased freight, material and labor costs resulting from ongoing inflationary environment and disruption within the global supply chain and labor markets. Cost of sales also included business realignment and acquisition integration charges of $5 million in 2022 compared to $27 million in 2021.

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Selling, general and administrative expenses ("SG&A") increased in 2023 primarily due to higher amortization expense, research and development expense, information technology charges, as well as increased general and administrative charges associated with the Acquisition. Additionally, acquisition-related transaction costs for the year totaled $115 million. SG&A also included business realignment and acquisition integration charges of $94 million and $14 million in 2023 and 2022, respectively.

SG&A increased in 2022 primarily due to acquisition-related transaction costs of $44 million as well as higher net expense from the Company's deferred compensation plan and related investments and higher professional fees and related expenses. SG&A also included business realignment and acquisition integration charges of $14 million and $31 million in 2022 and 2021, respectively.

Interest expense in 2023 increased compared to 2022 primarily due to higher average interest rates and higher average debt outstanding. Interest expense in 2022 increased compared to 2021 primarily due to higher average debt outstanding, partially offset by lower average interest rates.

Other expense (income), net included the following:

Foreign currency transaction loss (gain) primarily relates to the impact of exchange rates on cash, forward contracts, certain cross-currency swap contracts and intercompany transactions. During 2023, it also includes foreign currency transaction loss associated with completing the Acquisition.

Acquisition-related financing fees in 2022 relate to the bridge credit agreement (the "Bridge Credit Agreement") fees associated with the Acquisition. Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Loss on deal-contingent forward contracts in 2023 and 2022 includes a loss on the deal-contingent forward contracts related to the Acquisition. Refer to Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Gain on disposal of assets in 2023 includes a gain on the sale of the aircraft wheel and brake business within the Aerospace Systems Segment of $374 million. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. In 2021 it primarily consists of a gain of $101 million on the sale of land.

Effective tax rate in 2023 was higher than 2022, primarily due to an overall decrease in discrete tax benefits along with a reduction in the benefit from the foreign derived intangible income deduction. Effective tax rate in 2022 was lower than 2021 primarily due to an overall increase in discrete tax benefits.

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BUSINESS SEGMENT INFORMATION

The Business Segment information presents sales and operating income on a basis that is consistent with the manner in which the Company's various businesses are managed for internal review and decision-making.

Diversified Industrial Segment

The Diversified Industrial Segment operations experienced the following percentage changes in net sales:

1The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with U.S. generally accepted accounting principles ("GAAP") to percentage changes in net sales adjusted to remove the effects of the Acquisition made within the last 12 months as well as currency exchange rates (a non-GAAP measure). The effects of the Acquisition and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Net Sales

Diversified Industrial North America - Sales in 2023 for the Diversified Industrial North American businesses increased 15.7 percent from 2022. The effect of the Acquisition increased sales by approximately $311 million. Currency exchange rates did not materially impact sales during the year. Excluding the effects of the Acquisition and changes in the currency exchange rates, sales in 2023 for the Diversified Industrial North American businesses increased 11.7 percent from prior-year levels reflecting higher demand from distributors and end users across most markets, including, the cars and light trucks, farm and agriculture, construction equipment, heavy-duty truck, oil and gas, lawn and turf, metal fabrication, industrial machinery, semiconductor, and material handling markets, partially offset by lower end user demand in the life sciences market.

Sales in 2022 for the Diversified Industrial North American businesses increased 15.4 percent from 2021. The effect of currency exchange rates increased sales by approximately $7 million. Excluding the effect of currency rate changes, sales in 2022 for the Diversified Industrial North American businesses increased 15.3 percent from prior-year levels reflecting higher

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demand from distributors and end users in virtually all markets, including, the farm and agriculture, life sciences, heavy-duty truck, construction equipment, engines, refrigeration, material handling, metal fabrication, and semiconductor markets.

Diversified Industrial International - Sales in the Diversified Industrial International businesses increased 2.7 percent in 2023. The effect of the Acquisition increased sales by approximately $128 million. Currency exchange rates decreased sales by approximately $465 million, reflecting the strengthening of the U.S. dollar primarily against currencies in the Eurozone countries, China and Japan. Excluding the effects of the Acquisition and changes in the currency exchange rates, sales in 2023 for the Diversified Industrial International businesses increased 8.7 percent from 2022 levels. During 2023, Europe, the Asia Pacific region, and Latin America accounted for approximately 75 percent, 10 percent, and 15 percent, respectively, of the increase in sales.

Within Europe, the increase in sales was primarily due to higher demand from distributors and end users in the construction equipment, cars and light trucks, heavy-duty truck, oil and gas, industrial machinery, material handling, metal fabrication, farm and agriculture, and semiconductor markets, partially offset by a decrease in end-user demand in the power generation market.

Within the Asia Pacific region, the increase in sales was primarily due to higher demand from distributors and end users in the construction equipment, cars and light trucks, marine, heavy-duty truck, telecommunications, engines, and mining markets, partially offset by a decrease in end-user demand in the life sciences, refrigeration, and semiconductor markets.

Within Latin America, the increase in sales was primarily due to higher demand from distributors and end users in the cars and light trucks, oil and gas, farm and agriculture, railroad, and metal fabrication markets, partially offset by a decrease in end-user demand in the construction equipment and industrial machinery markets.

Sales in the Diversified Industrial International businesses increased 6.7 percent in 2022. The effect of currency rate changes decreased sales by $256 million, reflecting the strengthening of the U.S. dollar primarily against currencies in the Eurozone countries, Turkey and Japan. Excluding the effect of currency rate changes, sales in 2022 for the Diversified Industrial International businesses increased 11.6 percent from 2021 levels. During 2022, Europe, the Asia Pacific region, and Latin America accounted for approximately 70 percent, 20 percent, and 10 percent, respectively, of the increase in sales.

Within Europe, the increase in sales was primarily due to higher demand from distributors and end users in the construction equipment, heavy-duty truck, industrial machinery, life sciences, machine tool, mining, material handling, engines, and forestry markets, partially offset by a decrease in end-user demand in the cars and light trucks, semiconductor, telecommunications, and oil and gas markets.

Within the Asia Pacific region, the increase in sales was primarily due to higher demand from distributors and end users in the semiconductor, refrigeration, industrial machinery, life sciences, and machine tool markets, partially offset by a decrease in end-user demand in the engines, power generation, heavy-duty truck, railroad equipment, and material handling markets.

Within Latin America, the increase in sales was primarily due to higher demand from distributors and end users in the farm and agriculture, cars and light trucks, mining, heavy-duty truck, construction equipment, and industrial machinery markets, partially offset by a decrease in end-user demand in the power generation and life sciences markets.

Operating Margin

Diversified Industrial North America - Operating margins in 2023 increased from 2022 primarily due to benefits from higher sales volume, continuous improvement initiatives and price increases, partially offset by higher material and operating costs resulting from the inflationary environment, as well as unfavorable product mix.

Diversified Industrial International - Operating margins in 2023 increased from 2022 primarily due to benefits from continuous improvement initiatives and price increases, partially offset by higher material and operating costs resulting from the inflationary environment, as well as unfavorable product mix.

Operating margins in 2022 increased from 2021 in both the North American and International businesses primarily due to higher sales volume and benefits from continuous improvement initiatives, as well as price increases. These increases were partially offset by increased operating costs, including higher freight, material, and labor costs resulting from the ongoing disruption within the current supply chain environment and labor market. In addition, within the International businesses, operating margin in 2022 benefited from savings related to prior-year restructuring actions.

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Business Realignment

The following business realignment and acquisition integration charges are included in Diversified Industrial North America and Diversified Industrial International operating income:

Business realignment charges include severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity, as well as plant closures. Acquisition integration charges in the current year relate to the acquisition of Meggitt, and charges in both 2022 and 2021 relate to the 2020 acquisition of Lord. During 2021, business realignment charges primarily consisted of actions taken to address the impact of the COVID-19 pandemic on our business. Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe.

During 2022, we also incurred $6 million of expense within the Diversified Industrial International businesses as a result of our exit of business operations in Russia. These charges primarily consist of write-downs of inventory and other working capital items.

We anticipate that cost savings realized from the workforce reduction measures taken during 2023 will increase operating income in 2024 by approximately one percent in the Diversified Industrial International businesses and will not materially impact operating income in the Diversified Industrial North American businesses. We expect to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment. These actions are expected to result in approximately $78 million in business realignment and acquisition integration charges in 2024. However, continually changing business conditions could impact the ultimate costs we incur.

Backlog

The increase in Diversified Industrial Segment backlog in 2023 was primarily due to the addition of Meggitt backlog, partially offset by shipments exceeding orders in both the North American and International businesses. Excluding the addition of Meggitt backlog, North American and International businesses accounted for approximately 60 percent and 40 percent of the change, respectively. Within the International business, the Asia Pacific region, Europe and Latin America accounted for approximately 80 percent, 15 percent, and five percent of the change, respectively.

The increase in Diversified Industrial Segment backlog in 2022 was primarily due to orders exceeding shipments in both the North American and International businesses. Backlog within the North American and International businesses accounted for approximately 75 percent and 25 percent of the change, respectively. Within the International business, the Asia Pacific region, Europe and Latin America accounted for approximately 60 percent, 30 percent, and 10 percent of the change, respectively.

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

Aerospace Systems Segment

Sales

Aerospace Systems Segment sales in 2023 increased compared to prior-year primarily due to the addition of Meggitt sales of $1.6 billion. Sales also increased compared to 2022 due to higher volume in the commercial OEM and aftermarket businesses, partially offset by lower military OEM and aftermarket volume. The increase in sales was partially offset by divestitures during 2023.

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Sales in 2022 were higher than the 2021 level primarily due to higher commercial aftermarket and OEM volume, partially offset by lower military OEM and aftermarket volume.

Operating Margin

Aerospace Systems Segment operating margin decreased in 2023 primarily due to acquisition-related expenses, including higher estimated amortization and depreciation expense associated with the preliminary fair value estimates of intangible assets, plant and equipment, and inventory, as well as acquisition integration charges. Additionally, higher commercial OEM volume, an increase in contract loss reserves related to certain commercial OEM programs, challenges created by the disruption within the supply chain and labor markets and higher engineering development expenses also contributed to the lower operating margin. These factors were partially offset by higher commercial aftermarket volume and cost containment initiatives.

Aerospace Systems Segment operating margin increased in 2022 primarily due to higher sales volume, favorable commercial aftermarket product mix, higher aftermarket profitability as well as lower unfunded engineering development expenses. These benefits were partially offset by challenges created by the ongoing inflationary environment, disruption within the supply chain and labor markets as well as unfavorable commercial OEM product mix.

Business Realignment

Within the Aerospace Systems Segment, we incurred acquisition integration and business realignment charges of $90 million in 2023. We expect to incur approximately $27 million in business realignment and acquisition integration charges in 2024. However, continually changing business conditions could impact the ultimate costs we incur.

During 2022, we incurred $7 million of expense within the Aerospace Systems Segment as a result of our exit of business operations in Russia. These charges primarily consist of write-downs of inventory and other working capital items.

Backlog

The increase in Aerospace Systems Segment backlog in 2023 was primarily due to the addition of Meggitt backlog as well as orders exceeding shipments in the commercial OEM and aftermarket businesses and the military OEM and aftermarket businesses.

The increase in backlog in 2022 was primarily due to orders exceeding shipments in the commercial OEM and aftermarket businesses, partially offset by shipments exceeding orders in the military OEM and aftermarket businesses.

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

Corporate general & administrative expenses

Corporate general and administrative expenses increased in 2023 primarily due to higher net expense from the Company's incentive compensation programs and higher professional fees. These expenses were partially offset by lower expenses relating to the Company's deferred compensation plan and related investments. The increase in 2022 was primarily due to higher net expense from the Company's deferred compensation plan and related investments, higher professional fees and related expenses as well as higher incentive compensation expense. These expenses were partially offset by lower pension expense.

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Other expense (income) (in Business Segments)

Foreign currency transaction loss (gain) primarily relates to the impact of exchange rates on cash, forward contracts, certain cross currency swap contracts and intercompany transactions. During 2023, it also includes foreign currency transaction loss associated with completing the Acquisition.

Acquisition-related expenses include Bridge Credit Agreement financing fees and transaction costs related to the Acquisition. Refer to Notes 3 and 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Loss on deal-contingent forward contracts includes losses on the deal-contingent forward contracts related to the Acquisition. Refer to Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Gain on disposal of assets includes a gain on the sale of the aircraft wheel and brake business within the Aerospace Systems Segment of approximately $374 million in 2023 and a gain of $101 million on the sale of land in 2021. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

LIQUIDITY AND CAPITAL RESOURCES

We believe that we are great generators and deployers of cash. We assess our liquidity in terms of our ability to generate cash to fund our operations and meet our strategic capital deployment objectives, which include the following:

•Continuing our record annual dividend increases

•Investing in organic growth and productivity

•Strategic acquisitions that strengthen our portfolio

•Offset share dilution through 10b5-1 share repurchase program

Cash Flows

A summary of cash flows follows:

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Cash flows from operating activities were $2,980 million in 2023, $2,442 million in 2022 and $2,575 million in 2021. The increase of $538 million in 2023 and decrease of $133 million in 2022 were primarily related to net changes in cash provided by accounts receivable, inventories, and accounts payable, trade. We continue to focus on managing inventory and other working capital requirements. Cash flows from operating activities for 2023 were negatively impacted by acquisition-transaction expenses.

•Days sales outstanding relating to trade receivables for the Company was 51 days in 2023, 51 days in 2022, and 50 days in 2021.

•Days supply of inventory on hand was 85 days in 2023, 77 days in 2022, and 75 days in 2021.

Cash flows from investing activities in 2023, 2022, and 2021 were impacted by the following factors:

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

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

•Net maturities of marketable securities of $19 million in 2023 compared to $4 million in 2022 and $45 million in 2021.

•Capital expenditures of $381 million in 2023 compared to $230 million in 2022 and $210 million in 2021.

•Net proceeds from the sale of the aircraft wheel and brake business of approximately $443 million in 2023.

•Net proceeds from the sale of land of approximately $111 million in 2021.

•Cash collateral received of $250 million in 2023 that was paid in 2022 per the credit support annex ("CSA") attached to the deal-contingent forward contracts. Refer to Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Cash flows from financing activities in 2023, 2022, and 2021 were impacted by the following factors:

•Repurchases of 0.7 million common shares for $200 million during 2023 compared to repurchases of 1.3 million and 0.3 million common shares for $380 million and $100 million during 2022 and 2021, respectively.

•Proceeds of $2.0 billion from borrowings under the term loan facility (the "Term Loan Facility") in fiscal 2023. Subsequently in fiscal 2023, we made payments totaling $1.1 billion towards the outstanding balance under the Term Loan Facility. Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

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

•Payments to retire $900 million aggregate principal amount of private placement notes assumed in the Acquisition in Fiscal 2023. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

•Net proceeds from Senior Notes issuances of $3.6 billion in 2022 compared to term loan repayments of $1.2 billion in 2021.

•Net commercial paper borrowings of $358 million in 2023 compared to net commercial paper borrowings of $1.4 billion in 2022 and net commercial paper repayments of $723 million in 2021.

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Cash Requirements

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

We have committed cash outflow related to long-term debt, operating and financing lease agreements, and postretirement benefit obligations. Refer to Notes 10, 11, and 12 respectively, of Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Dividends

Dividends have been paid for 292 consecutive quarters, including a yearly increase in dividends for the last 67 years. The current annual dividend rate is $5.92 per common share.

Share Repurchases

The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized to repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a year. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. Refer to Note 13 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Liquidity

Cash, comprised of cash and cash equivalents and marketable securities and other investments, includes $422 million, $465 million, and $467 million held by the Company's foreign subsidiaries at June 30, 2023, 2022, and 2021, respectively. The Company does not permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested.

We are currently authorized to sell up to $3.0 billion of short-term commercial paper notes. There were $1.8 billion outstanding commercial paper notes as of June 30, 2023, and the largest amount of commercial paper notes outstanding during the fourth quarter of 2023 was $2.1 billion.

The Company has a line of credit totaling $3.0 billion through a multi-currency revolving credit agreement with a group of banks. As of June 30, 2023, $1.2 billion was available for borrowing under the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement supports our commercial paper program, and issuances of commercial paper reduce the amount of credit available under the agreement. During 2023, the Company amended its credit agreement and extended the expiration to June 2028. The Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings. Refer to Note 9 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

We primarily utilize unsecured medium-term notes and senior notes to meet our financing needs and we expect to continue to borrow funds at reasonable rates over the long term. During 2022, the Company issued $1.4 billion aggregate principal amount of 3.65 percent Senior Notes due June 15, 2024, $1.2 billion aggregate principal amount of 4.25 percent Senior Notes due September 15, 2027, and $1.0 billion aggregate principal amount of 4.50 percent Senior Notes due September 15, 2029 (collectively, the "Senior Notes"). We used proceeds of the Senior Notes to finance a portion of the Acquisition.

The Company’s credit agreements and indentures governing certain debt securities contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at June 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 June 30, 2023, the Company's debt to debt-shareholders' equity ratio was 0.55 to 1.0. We are in compliance, and expect to remain in compliance, with all covenants set forth in the credit agreement and indentures.

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Our goal is to maintain an investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At June 30, 2023, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:

Supply Chain Financing

We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers. We currently have supply chain financing ("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 completely voluntary. Amounts due to our suppliers that elected to participate in the SCF programs are included in accounts payable on the Consolidated Balance Sheet. Accounts payable included approximately $85 million and $46 million payable to suppliers who have elected to participate in the SCF programs as of June 30, 2023 and June 30, 2022, respectively. In 2023 and 2022, the amount settled through the SCF programs and paid to participating financial institutions totaled $284 million and $35 million, respectively. The increase in the amount outstanding in the programs from the June 30, 2022 balance is primarily due to the addition of Meggitt's SCF program. We account for payments made under the programs in the same manner as our other accounts payable, which is a reduction to our cash flows from operations. We do not believe that changes in the availability of supply chain financing will have a significant impact on our liquidity.

Strategic Acquisitions

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

During September 2022, the Company fully drew against the $2.0 billion Term Loan Facility, which will mature in September 2025, to finance a portion of the Acquisition. Subsequently, during the year we made principal payments totaling $1.1 billion related to the Term Loan Facility. Refer to Note 10 of the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

On September 12, 2022, we completed the acquisition of all outstanding ordinary shares of Meggitt for 800 pence per share, resulting in an aggregate cash purchase price of $7.2 billion, including the assumption of debt. We funded the purchase using cash and net proceeds from the issuance of senior notes and commercial paper and the Term Loan Facility, which were accumulated in an escrow account designated for the Acquisition. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Upon closing the Acquisition, we settled the deal-contingent forward contracts entered into during October 2021 to mitigate the risk of appreciation in the GBP-denominated purchase price. These deal-contingent forward contracts had an aggregate notional amount of £6.4 billion. Refer to the Cash Flows section above and Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

On April 11, 2022, the European Commission cleared the Acquisition, conditional on full compliance with commitments offered by Parker, including a commitment to divest its aircraft wheel and brake business within the Aerospace Systems Segment. In accordance with these commitments, we sold the aircraft wheel and brake business in September 2022 for proceeds of $443 million. Refer to Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management's judgment.

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Revenue Recognition - Revenues are recognized when control of performance obligations, which are distinct goods or services within the contract, is transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. A majority of our revenues are recognized at a point in time when control is transferred to the customer, which is generally at the time of shipment. However, a portion of our revenues are recognized over time if the customer simultaneously receives control as we perform work under a contract, if the customer controls the asset as it is being produced, or if the product has no alternative use and we have a contractual right to payment.

For contracts where revenue is recognized over time, we use the cost-to-cost or units of delivery method depending on the nature of the contract, including length of production time. The estimation of costs and efforts expended requires management's judgment due to the duration of the contractual agreements as well as the technical nature of the products involved. Adjustments to these estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.

When there are multiple performance obligations within a contract, the transaction price is allocated to each performance obligation based on its standalone selling price. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers for the same product or service. Revenue is recognized when control of the individual performance obligations is transferred to the customer.

We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.

Impairment of Goodwill and Long-Lived Assets - We test goodwill for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate the carrying value of a reporting unit may exceed its fair value. Our five reporting units are equivalent to our operating segments. As quoted market prices are not available for our reporting units, determining whether an impairment occurred requires the valuation of the respective reporting unit, which is estimated using both income-based and market-based valuation methods. The income-based valuation method utilizes a discounted cash flow model which requires several assumptions, including future sales growth and operating margin levels as well as assumptions regarding future industry-specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions in the discounted cash flow analysis. Within the discounted cash flow models, the Company uses a discount rate, commensurate with its cost of capital but adjusted for inherent business risks, and an appropriate terminal growth factor. The market-based valuation performed for each reporting unit includes an analysis consisting of market-adjusted multiples based on key data points for guideline public companies. We also reconcile the estimated aggregate fair value of our reporting units resulting from these procedures to our overall market capitalization.

At December 31, 2022, the Company performed its annual goodwill impairment test for each of its five reporting units. The results of this test indicated the fair value substantially exceeded carrying value for all reporting units. We continually monitor our reporting units for impairment indicators and update assumptions used in the most recent calculation of a reporting unit's fair value as appropriate.

Long-lived assets held for use, which primarily includes finite-lived intangible assets and property, plant and equipment, 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 are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During 2023, the Company did not record any material impairments related to long-lived assets.

Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels and amortization periods for actuarial gains and losses. Assumptions are determined based on Company data and appropriate market indicators and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements.

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For the Company's domestic qualified defined benefit plan, a 50 basis point change in the assumed long-term rate of return on plan assets is estimated to have an $18 million effect on annual pension expense and a 50 basis point decrease in the discount rate is estimated to decrease annual pension expense by $3 million. As of June 30, 2023, $342 million of past years' net actuarial losses related to the Company's domestic qualified defined benefit plan are subject to amortization in the future. These losses will generally be amortized over approximately seven years and will negatively affect earnings in the future. Any actuarial gains experienced in future years will help offset the effect of the net actuarial loss amortization. Further information on pensions is provided in Note 12 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Business Combinations - From time to time, we may enter into business combinations. Business acquisitions are accounted for using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. In the fair value evaluation of intangible assets acquired, there are significant estimates and assumptions, including forecasts of future cash flows, revenues; and earnings before interest, taxes, depreciation and amortization; as well as the selection of the royalty rates and discount rates. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The acquisition method of accounting also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations.

Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the balances as new information becomes available. For those tax positions where it is more likely than not that a tax benefit will be sustained, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon examination by a taxing authority that has full knowledge of all relevant information will be recorded. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. Further information on income taxes is provided in Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Loss Contingencies - The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability and litigation reserves. Establishing loss accruals for these matters requires management's estimate and judgment with regards to risk exposure and ultimate liability or realization. We review these loss accruals periodically and make adjustments to reflect the most recent facts and circumstances.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are described in Note 1 to the Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. Often but not always, these statements may be identified from the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “should,” “could,” “potential,” “continues,” “plans,” “forecasts,” “estimates,” “projects,” “predicts,” “would,” “intends,” “expects,” “targets,” “is likely,” “will,” or the negative of these terms and similar expressions, and include all statements regarding future performance, earnings projections, events or developments. Neither the Company nor any of its respective associates or directors, officers or advisers, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this document will actually occur. The Company cautions readers not to place undue reliance on these statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from past performance or current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company’s ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of changes in tax laws in the United States and foreign jurisdictions and any judicial or regulatory interpretation thereof on future performance and earnings projections may impact the Company’s tax calculations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.

Among other factors which may affect future performance are:

•changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;

•disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs and changes in product mix;

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

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

•the ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;

•the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;

•ability to implement successfully capital allocation initiatives, including timing, price and execution of share repurchases;

•availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;

•ability to manage costs related to insurance and employee retirement and health care benefits;

•legal and regulatory developments and changes;

•additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;

•ability to enter into, own, renew, protect and maintain intellectual property and know-how;

•leverage and future debt service obligations;

•potential impairment of goodwill;

•compliance costs associated with environmental laws and regulations;

•potential labor disruptions or shortages;

•uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals;

•global competitive market conditions, including U.S. trade policies and resulting effects on sales and pricing;

•global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates, credit availability and changes in consumer habits and preferences;

•local and global political and economic conditions, including the Russia-Ukraine war and its residual effects;

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•inability to obtain, or meet conditions imposed for, required governmental and regulatory approvals;

•government actions and natural phenomena such as pandemics, floods, earthquakes, hurricanes or other natural phenomena that may be related to climate change;

•increased cyber security threats and sophisticated computer crime; and

•success of business and operating initiatives.

The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended June 30, 2022, and undertakes no obligation to update them unless otherwise required by law.

Overview

The Company is a global leader in motion and control technologies. For more than a century, the Company has engineered the success of its customers in a wide range of diversified industrial and aerospace markets.

By aligning around our purpose, Enabling Engineering Breakthroughs that Lead to a Better Tomorrow, Parker is better positioned for the challenges and opportunities of tomorrow.

The Win Strategy 3.0 is Parker's business system that defines the goals and initiatives that drive growth, transformation and success. It works with our purpose, which is a foundational element of The Win Strategy, to engage team members and create responsible and sustainable growth. Our shared values shape our culture and our interactions with stakeholders and the communities in which we operate and live.

We believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation. We believe we can meet our strategic objectives by:

•Serving the customer and continuously enhancing its experience with the Company;

•Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;

•Maintaining a decentralized division and sales company structure;

•Fostering a safety-first and entrepreneurial culture;

•Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;

•Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;

•Enabling a sustainable future by providing innovative technology solutions that offer a positive, global environmental impact and operating responsibly by reducing our energy use and emissions;

•Acquiring strategic businesses;

•Organizing around targeted regions, technologies and markets;

•Driving efficiency by implementing lean enterprise principles; and

•Creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.

Our order rates provide a near-term perspective of the Company's outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders.

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

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

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We continue to prioritize the safety of our team members. To minimize the spread of COVID-19 in our workplaces, we implemented heightened prevention, screening and hygiene protocols. Our actions have varied depending on the spread of COVID-19 in the communities in which we operate, applicable government requirements and the needs of our employees, customers and business.

Over the long term, the extent to which our business and results of operations will be impacted by the economic and political uncertainty resulting from the Russia-Ukraine war and the COVID-19 pandemic depends on future developments that remain uncertain. These developments include the duration of the supply chain and labor market constraints, the severity and duration of the Russia-Ukraine war and related sanctions, distribution and continuing effectiveness of vaccines, the severity and spread of COVID-19 and its variants and mitigating actions by government authorities. Additionally, while these events and other global economic factors have led to an increased inflationary environment, we will continue to monitor and manage inflation to minimize its impact on our business, operations, and financial results.

As previously announced, on March 14, 2022, we detected that an unauthorized party gained access to our systems. After securing our network and concluding our investigation, we found that the data exfiltrated during the incident included personal information of our team members. We have notified individuals whose personal information was involved and offered them credit monitoring services. We have also provided notification regarding the incident to the appropriate regulatory authorities. A consolidated class action lawsuit has been filed in the United States District Court for the Northern District of Ohio against the Company over the incident. Based on our ongoing assessments, the incident has not had a significant financial or operational impact and has not had a material impact on our business, operations or financial results.

The discussion below is structured to separately discuss the Consolidated Statement of Income, Business Segments, and Liquidity and Capital Resources. The term "year" and references to specific years refer to the applicable fiscal year. Discussion of the 2020 financial statements is included in Part II, Item 7 of the Company's 2021 Annual Report on Form 10-K.

CONSOLIDATED STATEMENT OF INCOME

The Consolidated Statement of Income summarizes the Company's operating performance. The discussion below compares the operating performance in 2022 and 2021.

Net sales in 2022 increased from the 2021 amount due to higher volume in both the Diversified Industrial and Aerospace Systems Segments. The effect of currency rate changes decreased net sales in 2022 by approximately $255 million, substantially all of which is attributable to the Diversified Industrial International businesses.

Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 2022 primarily due to higher margins in both the Aerospace Systems and Diversified Industrial Segments. The increase in gross profit margin is primarily due to higher sales volume and benefits from continuous improvement initiatives, as well as price increases, partially offset by increased freight, material and labor costs resulting from the ongoing inflationary environment and disruption within the global supply chain and labor markets. Cost of sales included net foreign currency transaction gains of $40 million and $11 million in 2022 and 2021, respectively. Cost of sales also included business realignment and acquisition integration charges of $9 million in 2022 compared to $35 million in 2021.

Selling, general and administrative expenses ("SG&A") increased in 2022 primarily due to acquisition-related transaction costs of $44 million as well as higher net expense from the Company's deferred compensation plan and related investments and higher professional fees and related expenses. SG&A also included business realignment and acquisition integration charges of $10 million and $23 million in 2022 and 2021, respectively.

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Interest expense in 2022 increased primarily due to higher average debt outstanding, partially offset by lower average interest rates.

Other expense (income), net included the following:

Acquisition-related financing fees in 2022 relate to the bridge credit agreement (the "Bridge Credit Agreement") fees associated with the proposed Acquisition. Refer to Notes 3 and 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Loss on deal-contingent forward contracts in 2022 includes an unrealized loss on the deal-contingent forward contracts related to the proposed Acquisition. Refer to Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Gain on disposal of assets in 2021 primarily consists of a gain of $101 million on the sale of land.

Effective tax rate in 2022 was lower than 2021 primarily due to an overall increase in discrete tax benefits.

BUSINESS SEGMENT INFORMATION

The Business Segment information presents sales and operating income on a basis that is consistent with the manner in which the Company's various businesses are managed for internal review and decision-making.

Diversified Industrial Segment

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The Diversified Industrial Segment operations experienced the following percentage changes in net sales:

1The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of currency exchange rates (a non-GAAP measure). The effects of currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Net Sales

Diversified Industrial North America - Sales in 2022 for the Diversified Industrial North American businesses increased 15.4 percent from 2021. The effect of currency exchange rates increased sales by approximately $7 million. Excluding the effect of currency rate changes, sales in 2022 for the Diversified Industrial North American businesses increased 15.3 percent from prior-year levels reflecting higher demand from distributors and end users in virtually all markets, including, the farm and agriculture, life sciences, heavy-duty truck, construction equipment, engines, refrigeration, material handling, metal fabrication, and semiconductor markets.

Diversified Industrial International - Sales in the Diversified Industrial International businesses increased 6.7 percent in 2022. The effect of currency rate changes decreased sales by $256 million, reflecting the strengthening of the U.S. dollar primarily against currencies in the Eurozone countries, Turkey and Japan. Excluding the effect of currency rate changes, sales in 2022 for the Diversified Industrial International businesses increased 11.6 percent from 2021 levels. During 2022, Europe, the Asia Pacific region, and Latin America accounted for approximately 70 percent, 20 percent, and 10 percent, respectively, of the increase in sales.

Within Europe, the increase in sales was primarily due to higher demand from distributors and end users in the construction equipment, heavy-duty truck, industrial machinery, life sciences, machine tool, mining, material handling, engines, and forestry markets, partially offset by a decrease in end-user demand in the cars and light trucks, semiconductor, telecommunications, and oil and gas markets.

Within the Asia Pacific region, the increase in sales was primarily due to higher demand from distributors and end users in the semiconductor, refrigeration, industrial machinery, life sciences, and machine tool markets, partially offset by a decrease in end-user demand in the engines, power generation, heavy-duty truck, railroad equipment, and material handling markets.

Within Latin America, the increase in sales was primarily due to higher demand from distributors and end users in the farm and agriculture, cars and light trucks, mining, heavy-duty truck, construction equipment, and industrial machinery markets, partially offset by a decrease in end-user demand in the power generation and life sciences markets.

Operating Margin

Operating margins in 2022 increased in both the North American and International businesses primarily due to higher sales volume and benefits from continuous improvement initiatives, as well as price increases. These increases were partially offset by increased operating costs, including higher freight, material, and labor costs resulting from the ongoing disruption within the current supply chain environment and labor market. In addition, within the International businesses, operating margin in 2022 benefited from savings related to prior-year restructuring actions.

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Business Realignment

The following business realignment and acquisition integration charges are included in Diversified Industrial North America and Diversified Industrial International operating income:

In both fiscal 2022 and 2021, business realignment charges included severance costs related to actions taken under the Company's simplification initiative aimed at reducing organizational and process complexity, as well as plant closures. During fiscal 2021, business realignment charges primarily consisted of actions taken to address the impact of the COVID-19 pandemic on our business. Acquisition integration charges relate to the 2020 acquisition of Lord. Business realignment and acquisition integration charges within the Diversified Industrial International businesses were primarily incurred in Europe.

We anticipate that cost savings realized from the workforce reduction measures taken during 2022 will increase operating income in 2023 by approximately one percent in the Diversified Industrial International businesses and will not materially impact operating income in the Diversified Industrial North American businesses. In 2023, we expect to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment. These actions are expected to result in approximately $31 million in business realignment charges in 2023. However, continually changing business conditions could impact the ultimate costs we incur.

During 2022, we also incurred $6 million of expense within the Diversified Industrial International businesses as a result of our exit of business operations in Russia. These charges primarily consist of write-downs of inventory and other working capital items.

Backlog

The increase in Diversified Industrial Segment backlog in 2022 was primarily due to orders exceeding shipments in both the North American and International businesses. Backlog within the North American and International businesses accounted for approximately 75 percent and 25 percent of the change, respectively. Within the International business, the Asia Pacific region, Europe and Latin America accounted for approximately 60 percent, 30 percent, and 10 percent of the change, respectively. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

Aerospace Systems Segment

Sales

Aerospace Systems Segment sales in 2022 were higher than the 2021 level primarily due to higher commercial aftermarket and OEM volume, partially offset by lower military OEM and aftermarket volume.

Operating Margin

Aerospace Systems Segment operating margin increased in 2022 primarily due to higher sales volume, favorable commercial aftermarket product mix, higher aftermarket profitability as well as lower unfunded engineering development expenses. These benefits were partially offset by challenges created by the ongoing inflationary environment, disruption within the supply chain and labor markets as well as unfavorable commercial OEM product mix.

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Business Realignment

During 2022, we incurred $7 million of expense within the Aerospace Systems Segment as a result of our exit of business operations in Russia. These charges primarily consist of write-downs of inventory and other working capital items.

We expect to incur approximately $4 million in business realignment charges in 2023. However, continually changing business conditions could impact the ultimate costs we incur. The amount of acquisition integration charges we will incur in 2023 is dependent upon the timing of closing of the proposed Acquisition.

Backlog

The increase in Aerospace Systems Segment backlog in 2022 was primarily due to orders exceeding shipments in the commercial OEM and aftermarket businesses, partially offset by shipments exceeding orders in the military OEM and aftermarket businesses. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

Corporate general & administrative expenses

Corporate general and administrative expenses increased in 2022 primarily due to higher net expense from the Company's deferred compensation plan and related investments, higher professional fees and related expenses as well as higher incentive compensation expense. These expenses were partially offset by lower pension expense.

Other expense (income) (in Business Segments)

Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities and other investments and intercompany transactions.

Acquisition-related expenses in 2022 include Bridge Credit Agreement financing fees and transaction costs related to the proposed Acquisition. Refer to Notes 3 and 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Loss on deal-contingent forward contracts in 2022 includes an unrealized loss on the deal-contingent forward contracts related to the proposed Acquisition. Refer to Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Gain on disposal of assets in 2021 primarily consists of a gain of $101 million on the sale of land.

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LIQUIDITY AND CAPITAL RESOURCES

We believe that we are great generators and deployers of cash. We assess our liquidity in terms of our ability to generate cash to fund our operations and meet our strategic capital deployment objectives, which include the following:

•Continuing our record annual dividend increases

•Investing in organic growth and productivity

•Strategic acquisitions that strengthen our portfolio

•Offset share dilution through 10b5-1 share repurchase program

Cash Flows

A summary of cash flows follows:

Cash flows from operating activities were $2,442 million in 2022 compared to $2,575 million in 2021. This decrease of $133 million was primarily related to net income and cash provided by working capital items, which decreased $431 million and increased $557 million, respectively. After consideration of the non-cash impact of the deal-contingent forward contracts, which increased cash provided by working capital items by $1,015 million and decreased net income by $775 million in 2022, cash flow from operations in 2022 decreased primarily due to a decrease in cash provided by working capital items of $458 million, partially offset by an increase in net income of $344 million. Refer to Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the deal-contingent forward contracts.

•Days sales outstanding relating to trade receivables for the Company was 51 days in 2022 and 50 days in 2021.

•Days supply of inventory on hand was 77 days in 2022 and 75 days in 2021.

Cash flows from investing activities in 2022 and 2021 were impacted by the following factors:

•Net maturities of marketable securities of $4 million in 2022 compared to $45 million in 2021.

•Capital expenditures of $230 million in 2022 compared to $210 million in 2021.

•Net proceeds from the sale of land of approximately $111 million in 2021.

•Cash collateral paid of $250 million in 2022 per the credit support annex ("CSA") attached to the deal-contingent forward contracts. Refer to Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Cash flows from financing activities in 2022 and 2021 were impacted by the following factors:

•Repurchases of 1.3 million common shares for $380 million during 2022 compared to repurchases of 0.3 million common shares for $100 million during 2021.

•Net proceeds from Senior Notes issuance of $3,576 million in 2022 compared to term loan repayments of $1,210 million in 2021. Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

•Net commercial paper borrowings of $1,422 million in 2022 compared to net commercial paper repayments of $723 million in 2021.

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Cash Requirements

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

We have committed cash outflow related to long-term debt, operating lease agreements, and postretirement benefit obligations. Refer to Notes 10, 11, and 12 respectively, of Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Dividends

Dividends have been paid for 288 consecutive quarters, including a yearly increase in dividends for the last 66 years. The current annual dividend rate is $5.32 per common share.

Share Repurchases

The Company has a program to repurchase its common shares. On October 22, 2014, the Board of Directors of the Company approved an increase in the overall number of shares authorized to repurchase under the program so that, beginning on such date, the aggregate number of shares authorized for repurchase was 35 million. There is no limitation on the number of shares that can be repurchased in a year. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares. Refer to Note 13 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Liquidity

Cash, comprised of cash and cash equivalents and marketable securities and other investments, includes $465 million and $467 million held by the Company's foreign subsidiaries at June 30, 2022 and 2021, respectively. The Company does not permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested.

We are currently authorized to sell up to $3,000 million of short-term commercial paper notes. There were $1,422 million outstanding commercial paper notes as of June 30, 2022, and the largest amount of commercial paper notes outstanding during the fourth quarter of 2022 was $1,682 million.

The Company has a line of credit through a multi-currency revolving credit agreement with a group of banks. During 2022, we amended our existing multi-currency credit agreement, increasing its capacity from $2,500 million to $3,000 million, by exercising the accordion feature. As of June 30, 2022, $1,578 million was available for borrowing under the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement supports our commercial paper program, and issuances of commercial paper reduce the amount of credit available under the agreement. The credit agreement expires in September 2024; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings. Refer to Note 9 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

We primarily utilize unsecured medium-term notes and senior notes to meet our financing needs and we expect to continue to borrow funds at reasonable rates over the long term. During 2022, the Company issued $1,400 million aggregate principal amount of 3.65 percent Senior Notes due June 15, 2024, $1,200 million aggregate principal amount of 4.25 percent Senior Notes due September 15, 2027, and $1,000 million aggregate principal amount of 4.50 percent Senior Notes due September 15, 2029 (collectively, the "Senior Notes"). We intend to use the proceeds of the Senior Notes to finance a portion of the purchase of the proposed Acquisition. Refer to the Cash flows from financing activities section above and Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. Additionally, during 2022, we entered into a senior, unsecured delayed-draw term loan facility in an aggregate principal amount of $2,000 million (the “Term Loan Facility”), refer to the Strategic Acquisitions section below for further discussion.

The Company’s credit agreements and indentures governing certain debt securities contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at June 30, 2022, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At June 30,

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2022, the Company's debt to debt-shareholders' equity ratio was 0.57 to 1.0. We are in compliance, and expect to remain in compliance, with all covenants set forth in the credit agreement and indentures.

Our goal is to maintain an investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At June 30, 2022, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:

Supply Chain Financing

We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers. We currently have a supply chain financing program ("SCF") with a financial intermediary, which provides certain suppliers the option to be paid by the financial intermediary earlier than the due date on the applicable invoice. We are not a party to the agreements between the participating financial intermediary 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 program. We do not reimburse suppliers for any costs they incur for participation in the program and their participation is completely voluntary. Amounts due to our suppliers that elected to participate in the SCF program are included in accounts payable on the Consolidated Balance Sheet. At June 30, 2022, accounts payable included approximately $46 million payable to suppliers who have elected to participate in the SCF program. In 2022, the amount settled through the SCF program and paid to participating financial institutions totaled $35 million. We account for payments made under the program in the same manner as our other accounts payable, which is a reduction to our cash flows from operations. We do not believe that changes in the availability of supply chain financing will have a significant impact on our liquidity.

Strategic Acquisitions

On August 2, 2021, the Company announced that it reached an agreement on the terms of a recommended cash acquisition of the entire issued and to be issued ordinary share capital of Meggitt for 800 pence per share, or approximately £6,263 million. We intend to fund the proposed Acquisition with cash resources, borrowings under debt facilities and net proceeds of debt securities. The proposed Acquisition received the European Commission's clearance on April 11, 2022, conditional on full compliance with commitments offered by the Company, including a commitment to divest its aircraft wheel and brake business within the Aerospace Systems Segment, for which a divestiture agreement was signed on May 23, 2022. The proposed Acquisition and divestiture of the aircraft wheel and brake business remain subject to customary closing conditions, including regulatory clearance.

During 2022 we deposited funds, comprised of cash on hand and net proceeds from the issuance of commercial paper and the Senior Notes, into an escrow account. The escrow account is restricted to payments for the proposed Acquisition. At June 30, 2022, the balance was $6,112 million, which was recorded within the prepaid expenses and other caption on our Consolidated Balance Sheet.

Additionally, we entered into a senior, unsecured delayed-draw term loan facility in an aggregate principal amount of $2,000 million on August 27, 2021. The proceeds of the Term Loan Facility, if drawn, will be used solely by the Company to finance a portion of the consideration of its proposed Acquisition. Refer to Note 10 of the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

In connection with the proposed Acquisition, the Company entered into a bridge credit agreement (the "Bridge Credit Agreement") on August 2, 2021. Under the Bridge Credit Agreement, lenders committed to provide senior, unsecured financing in the aggregate principal amount of £6,524 million at August 2, 2021. As permanent financing for the proposed Acquisition was secured, the principal amount of the Bridge Credit Agreement was reduced. At June 30, 2022, the available aggregate principal amount was £591 million. In July 2022, we issued $504 million of commercial paper and deposited this amount into the escrow account to finance a portion of the purchase of Meggitt. Additionally, in July 2022, we deposited a total of $250 million into escrow that was previously posted as collateral and recorded within non-trade and notes receivables at June 30, 2022. Refer to Note 16 of the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. In July 2022, after consideration of the escrow balance and funds available under the delayed-draw Term Loan Facility, we reduced the aggregate committed principal amount of the bridge credit agreement (the "Bridge Credit Agreement") to zero.

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In connection with the proposed Acquisition, the Company entered into deal-contingent forward contracts during October 2021 to mitigate the risk of appreciation in the GBP-denominated purchase price. The deal-contingent forward contracts have an aggregate notional amount of £6,415 million, and settlement is contingent upon closing the proposed Acquisition. We are recording the related fair value gains and losses, which have been and may continue to be significant, through the Consolidated Statement of Income until the closing of the proposed Acquisition. Refer to Note 16 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management's judgment.

Revenue Recognition - Revenues are recognized when control of performance obligations, which are distinct goods or services within the contract, is transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. A majority of our revenues are recognized at a point in time when control is transferred to the customer, which is generally at the time of shipment. However, a portion of our revenues are recognized over time if the customer simultaneously receives control as we perform work under a contract, if the customer controls the asset as it is being produced, or if the product has no alternative use and we have a contractual right to payment.

For contracts where revenue is recognized over time, we use the cost-to-cost, efforts expended or units of delivery method depending on the nature of the contract, including length of production time. The estimation of costs and efforts expended requires judgment on the part of management due to the duration of the contractual agreements as well as the technical nature of the products involved. Adjustments to these estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.

When there are multiple performance obligations within a contract, the transaction price is allocated to each performance obligation based on its standalone selling price. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers for the same product or service. Revenue is recognized when control of the individual performance obligations is transferred to the customer.

We consider the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.

Impairment of Goodwill and Long-Lived Assets - We test goodwill for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate the carrying value of a reporting unit may exceed its fair value. Our six reporting units are equivalent to our operating segments. As quoted market prices are not available for our reporting units, determining whether an impairment occurred requires the valuation of the respective reporting unit, which is estimated using both income-based and market-based valuation methods. The income-based valuation method utilizes a discounted cash flow model which requires several assumptions, including future sales growth and operating margin levels as well as assumptions regarding future industry-specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions in the discounted cash flow analysis. Within the discounted cash flow models, the Company uses a discount rate, commensurate with its cost of capital but adjusted for inherent business risks, and an appropriate terminal growth factor. The market-based valuation performed for each reporting unit includes an analysis consisting of market-adjusted multiples based on key data points for guideline public companies. We also reconcile the estimated aggregate fair value of our reporting units resulting from these procedures to our overall market capitalization.

At December 31, 2021, the Company performed its annual goodwill impairment test for each of its six reporting units. The results of this test indicated the fair value substantially exceeded carrying value for all reporting units. We continually monitor our reporting units for impairment indicators and update assumptions used in the most recent calculation of a reporting unit's fair value as appropriate.

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Long-lived assets held for use, which primarily includes finite-lived intangible assets and property, plant and equipment, 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 are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During 2022, the Company did not record any material impairment related to long-lived assets.

Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels and amortization periods for actuarial gains and losses. Assumptions are determined based on Company data and appropriate market indicators and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements.

For the Company's domestic qualified defined benefit plan, a 50 basis point decrease in the assumed long-term rate of return on plan assets is estimated to increase annual pension expense by $17 million and a 50 basis point decrease in the discount rate is estimated to increase annual pension expense by $19 million. As of June 30, 2022, $472 million of past years' net actuarial losses related to the Company's domestic qualified defined benefit plan are subject to amortization in the future. These losses will generally be amortized over approximately seven years and will negatively affect earnings in the future. Any actuarial gains experienced in future years will help offset the effect of the net actuarial loss amortization. Further information on pensions is provided in Note 12 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the balances as new information becomes available. For those tax positions where it is more likely than not that a tax benefit will be sustained, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon examination by a taxing authority that has full knowledge of all relevant information will be recorded. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. Further information on income taxes is provided in Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Loss Contingencies - The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability and litigation reserves. Establishing loss accruals for these matters requires management's estimate and judgment with regards to risk exposure and ultimate liability or realization. We review these loss accruals periodically and make adjustments to reflect the most recent facts and circumstances.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are described in Note 1 to the Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. Often but not always, these statements may be identified from the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “should,” “could,” “potential,” “continues,” “plans,” “forecasts,” “estimates,” “projects,” “predicts,” “would,” “intends,” “expects,” “targets,” “is likely,” “will,” or the negative of these terms and similar expressions, and include all statements regarding future performance, earnings projections, events or developments. Neither the Company nor any of its respective associates or directors, officers or advisers, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this document will actually occur. The Company cautions readers not to place undue reliance on these statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from past performance or current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company’s ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. Additionally, the actual impact of changes in tax laws in the United States and foreign jurisdictions and any judicial or regulatory interpretation thereof on future performance and earnings projections may impact the Company’s tax calculations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.

Among other factors which may affect future performance are:

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

•changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments;

•disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs and changes in product mix;

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

•the ability to successfully divest businesses planned for divestiture and realize the anticipated benefits of such divestitures;

•the determination to undertake business realignment activities and the expected costs thereof and, if undertaken, the ability to complete such activities and realize the anticipated cost savings from such activities;

•ability to implement successfully capital allocation initiatives, including timing, price and execution of share repurchases;

•availability, limitations or cost increases of raw materials, component products and/or commodities that cannot be recovered in product pricing;

•ability to manage costs related to insurance and employee retirement and health care benefits;

•legal and regulatory developments and changes;

•additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities;

•ability to enter into, own, renew, protect and maintain intellectual property and know-how;

•leverage and future debt service obligations;

•potential impairment of goodwill;

•compliance costs associated with environmental laws and regulations;

•potential labor disruptions;

•uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals;

•global competitive market conditions, including U.S. trade policies and resulting effects on sales and pricing;

•global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates, credit availability and changes in consumer habits and preferences;

•local and global political and economic conditions;

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•inability to obtain, or meet conditions imposed for, required governmental and regulatory approvals;

•government actions and natural phenomena such as floods, earthquakes, hurricanes and pandemics;

•increased cyber security threats and sophisticated computer crime; and

•success of business and operating initiatives.

The Company makes these statements as of the date of the filing of its Annual Report on Form 10-K for the year ended June 30, 2021, and undertakes no obligation to update them unless otherwise required by law.

Overview

The Company is a global leader in motion and control technologies. For more than a century, the Company has engineered the success of its customers in a wide range of diversified industrial and aerospace markets.

By aligning around our purpose, Enabling Engineering Breakthroughs that Lead to a Better Tomorrow, Parker is better positioned for the challenges and opportunities of tomorrow.

The Win Strategy 3.0 is Parker's business system that defines the goals and initiatives that drive growth, transformation and success. It works with our purpose, which is a foundational element of The Win Strategy, to engage team members and create responsible and sustainable growth. Our shared values shape our culture and our interactions with stakeholders and the communities in which we operate and live.

We believe many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, food, environment, defense, life sciences, infrastructure and transportation. We believe we can meet our strategic objectives by:

•Serving the customer and continuously enhancing its experience with the Company;

•Successfully executing The Win Strategy initiatives relating to engaged people, premier customer experience, profitable growth and financial performance;

•Maintaining a decentralized division and sales company structure;

•Fostering a safety-first and entrepreneurial culture;

•Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;

•Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;

•Enabling a sustainable future by providing innovative technology solutions that offer a positive, global environmental impact and operating responsibly by reducing our energy use and emissions;

•Acquiring strategic businesses;

•Organizing around targeted regions, technologies and markets;

•Driving efficiency by implementing lean enterprise principles; and

•Creating a culture of empowerment through our values, inclusion and diversity, accountability and teamwork.

Our order rates provide a near-term perspective of the Company's outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. We continue to monitor the impact of the COVID-19 pandemic, which has negatively impacted demand and continues to create economic uncertainty. Disruption within the aerospace industry, which is facing the consequences of travel restrictions and considerably lower demand, was significant and is expected to continue. The extent to which our business and results of operations will be impacted by the pandemic over the long term will depend on future developments that cannot be accurately predicted at this time. These developments include the availability, acceptance, distribution and effectiveness of vaccines; new information concerning the severity and spread of COVID-19 and its variants; and actions by government authorities to contain the pandemic or mitigate its economic, public health and other impacts.

We continue to prioritize the safety of our team members. To minimize the spread of COVID-19 in our workplaces, we implemented rigorous prevention, screening and hygiene protocols. Additionally, we are strategically managing costs through reductions in discretionary spending. We continue to prioritize capital expenditures related to safety and strategic investments.

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At the same time, we are appropriately addressing the ongoing needs of our business so that we may continue to serve our customers.

The discussion below is structured to separately discuss the financial statements presented in Part II, Item 8 of this Annual Report on Form 10-K. The term "year" and references to specific years refer to the applicable fiscal year. Discussion of the 2019 financial statements is included in Part II, Item 7 of the Company's 2020 Annual Report on Form 10-K.

CONSOLIDATED STATEMENT OF INCOME

The Consolidated Statement of Income summarizes the Company's operating performance. The discussion below compares the operating performance in 2021 and 2020.

*Year ended June 30, 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated Financial Statements.

Net sales in 2021 increased from the 2020 amount due to higher volume in both the Diversified Industrial International and Diversified Industrial North American businesses, partially offset by lower volume in the Aerospace Systems Segment. The effect of currency rate changes increased net sales in 2021 by approximately $257 million, of which $244 million was attributable to the Diversified Industrial International operations. Prior-year acquisitions contributed approximately $394 million in net sales during 2021.

Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 2021 primarily due to higher margins in all businesses. Gross profit margin in 2021 included net foreign currency transaction gains of $11 million and $10 million in 2021 and 2020, respectively. Gross profit margin also benefited from the absence of acquisition-related expenses, which were included in cost of sales in 2020, of $69 million. Cost of sales included business realignment and acquisition integration charges of $35 million in 2021 compared to $60 million in 2020.

Selling, general and administrative expenses ("SG&A") decreased eight percent in 2021 primarily due to benefits from lower discretionary spending and wage and salary expense resulting from actions taken in response to business conditions resulting from the COVID-19 pandemic. During 2021, SG&A also benefited from the absence of acquisition-related expenses of $119 million, which were incurred in 2020. These benefits were partially offset by higher intangible asset amortization expense related to prior-year acquisitions and higher stock compensation expense. SG&A also included business realignment and acquisition integration charges of $23 million and $38 million in 2021 and 2020, respectively.

Interest expense in 2021 decreased due to both lower interest rates and lower average debt outstanding.

Other (income), net included the following:

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Gain on disposal of assets in 2021 primarily consists of a gain of $101 million on the sale of land. In 2020, it includes gains of $12 million on the sale of real estate, partially offset by net losses on divestitures and asset sales and writedowns.

Effective tax rate in 2021 was higher than 2020 primarily due to an overall decrease in discrete tax benefits.

BUSINESS SEGMENT INFORMATION

The Business Segment information presents sales and operating income on a basis that is consistent with the manner in which the Company's various businesses are managed for internal review and decision-making.

Diversified Industrial Segment

The Diversified Industrial Segment operations experienced the following percentage changes in net sales:

The above presentation reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions made within the prior four fiscal quarters as well as the effects of currency exchange rates (a non-GAAP measure). The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Sales in 2021 for the Diversified Industrial North American operations increased 3.4 percent from 2020. Acquisitions increased sales by $188 million, and the effect of currency exchange rates increased sales by approximately $8 million. Excluding acquisitions and the effect of currency rate changes, sales in 2021 for the Diversified Industrial North American operations increased 0.4 percent from prior-year levels reflecting higher demand from distributors and end users in the refrigeration, cars and light truck, farm and agriculture and life sciences markets, partially offset by a decrease in end-user demand in the oil and gas and general industrial machinery markets.

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Sales in the Diversified Industrial International operations increased 17.3 percent in 2021. Acquisitions increased sales by approximately $136 million in 2021. The effect of currency rate changes increased sales by $244 million, reflecting the weakening of the U.S. dollar primarily against currencies in the Eurozone countries, China and the United Kingdom. Excluding acquisitions and the effect of currency rate changes, sales in 2021 for the Diversified Industrial International operations increased 8.9 percent from 2020 levels primarily due to higher demand from distributors and end users in both the mobile and industrial markets. During 2021, the Asia Pacific region, Europe, and Latin America accounted for approximately 60 percent, 26 percent, and 14 percent, respectively, of the increase in sales.

Within the Asia Pacific region, the increase in sales was primarily due to higher demand from distributors and end users in the construction equipment, semiconductor, cars and light truck, general industrial machinery, engine and life sciences markets, partially offset by a decrease in end-user demand in the oil and gas market.

Within Europe, the increase in sales was primarily due to higher demand from distributors and end users in the construction equipment, heavy-duty truck and power generation markets, partially offset by a decrease in end-user demand in the general industrial machinery, oil and gas and marine markets.

Within Latin America, the increase in sales was primarily due to higher demand from distributors and end users in the farm and agriculture, construction equipment, cars and light truck and heavy-duty truck markets, partially offset by a decrease in end-user demand in the oil and gas market.

Operating margins in 2021 increased in both the Diversified Industrial North American and International operations primarily due to higher sales volume and benefits from overall cost reductions, including lower discretionary spending, wage and salary reductions, current and prior-year restructuring actions in response to business conditions resulting from the COVID-19 pandemic, the absence of acquisition-related expenses, and productivity improvements.

The following business realignment and acquisition integration charges are included in Diversified Industrial North America and Diversified Industrial International operating income:

During 2021, business realignment charges primarily include actions taken to address the impact of COVID-19 on our business, but also include charges related to the Company’s simplification initiative. The simplification initiative is aimed at reducing organizational and process complexity and is being implemented by operating units around the world. During 2020, business realignment charges primarily include charges related to the Company’s simplification initiative, but also include permanent workforce reductions to address the impact of COVID-19 on our business. Acquisition integration charges relate to the 2020 acquisition of Lord.

The majority of the Diversified Industrial International business realignment and acquisition integration charges were incurred in Europe. We anticipate that cost savings realized from the workforce reduction measures taken during 2021 will increase operating income for 2022 by approximately one percent in both the Diversified Industrial North American and International operations. In 2022, we expect to continue to take actions necessary to structure appropriately the operations of the Diversified Industrial Segment. These actions are expected to result in approximately $40 million in business realignment and acquisition integration charges in 2022. However, continually changing business conditions could impact the ultimate costs we incur.

The increase in Diversified Industrial Segment backlog in 2021 was primarily due to orders exceeding shipments in both the North American and International businesses, with each business accounting for approximately 50 percent of the change. Within the International business, this increase in backlog was primarily related to orders exceeding shipments in both Europe and the Asia Pacific region. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

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Aerospace Systems Segment

Sales in 2021 were lower than the 2020 level primarily due to lower volume in the commercial OEM and aftermarket businesses due to the market conditions as a result of COVID-19. This decrease was partially offset by higher volume in the military OEM and aftermarket businesses as well as a $71 million increase in sales from prior-year acquisitions.

Operating margin decreased in 2021 primarily due to lower sales volume in the commercial OEM and aftermarket businesses and lower aftermarket profitability. Lower sales volume and aftermarket profitability were partially offset by lower engineering development expenses, overall cost reductions, lower business realignment and acquisition integration charges and the benefits from such actions.

The disruption in the aerospace industry due to the COVID-19 pandemic has been significant and we have taken actions necessary to structure appropriately the operations of the Aerospace Systems Segment. We do not currently intend to incur significant additional business realignment and acquisition integration charges in 2022. However, continually changing business conditions could impact the ultimate costs we incur. We anticipate that cost savings realized from the workforce reduction measures taken during 2021 will increase segment operating income for 2022 by approximately two percent.

The increase in backlog in 2021 was primarily due to orders exceeding shipments in the military OEM business, partially offset by shipments exceeding orders in the military aftermarket and commercial OEM and aftermarket businesses. Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.

Corporate general & administrative expenses

Corporate general and administrative expenses increased slightly in 2021 primarily due to increases in stock compensation expense, deferred compensation expense and charitable contributions. These increases were partially offset by benefits from lower discretionary spending and wage and salary expense as a result of actions taken in response to business conditions resulting from the COVID-19 pandemic.

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Other (income) expense (in the Business Segment Information)

*Year ended June 30, 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated Financial Statements.

Foreign currency transaction primarily relates to the impact of changes in foreign exchange rates on cash, marketable securities and other investments and intercompany transactions. Prior-year acquisition expenses primarily relate to the acquisitions of Lord and Exotic. Gain on disposal of assets in 2021 primarily consists of a gain of $101 million on the sale of land. In 2020, it includes gains of $12 million on the sale of real estate, partially offset by net losses on divestitures and asset sales and writedowns..

CONSOLIDATED BALANCE SHEET

The Consolidated Balance Sheet shows the Company's financial position at year end, compared with the previous year end. This discussion provides information to assist in assessing factors such as the Company's liquidity and financial resources.

*Year ended June 30, 2020 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 7 to the Consolidated Financial Statements.

Cash (comprised of cash and cash equivalents and marketable securities and other investments) includes $467 million and $726 million held by the Company's foreign subsidiaries at June 30, 2021 and 2020, respectively. The Company does not permanently reinvest certain foreign earnings. The distribution of these earnings could result in non-federal U.S. or foreign taxes. All other undistributed foreign earnings remain permanently reinvested. Refer to Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Trade accounts receivable, net are receivables due from customers for sales of product. Days sales outstanding relating to trade receivables for the Company was 50 days in 2021 and 54 days in 2020. We believe that our receivables are collectible and appropriate allowances for credit losses have been recorded.

Inventories as of June 30, 2021 increased by $127 million (which includes an increase of $41 million from the effect of foreign currency translation). After consideration of the effect of foreign currency translation, inventories increased primarily due to an increase in the Diversified Industrial Segment, partially offset by a decrease in the Aerospace Systems Segment. Days supply of inventory on hand was 75 days in 2021 and 89 days in 2020.

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Notes payable and long-term debt payable within one year decreased from 2020 primarily due to the repayment of commercial paper notes outstanding. Refer to Note 9 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Long-term debt decreased from 2020 primarily due to the repayment of term loans. Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Shareholders' equity activity during 2021 included a decrease of $100 million related to share repurchases, an increase of $664 million related to pensions and postretirement benefits resulting from investment gains on plan assets and an increase of $328 million related to foreign currency translation adjustments.

CONSOLIDATED STATEMENT OF CASH FLOWS

The Consolidated Statement of Cash Flows reflects cash inflows and outflows from the Company's operating, investing and financing activities.

A summary of cash flows follows:

Cash flows from operating activities in 2021 reflects an increase in net income of $545 million and an increase of $12 million from cash provided by working capital items. We remain focused on managing our inventory and other working capital requirements.

Cash flows from investing activities in 2021 includes net proceeds from the sale of land of approximately $111 million. Cash flows from investing activities in 2020 includes $5,076 million of acquisition-related activity. It also includes $121 million of proceeds from the redemption of company-owned life insurance investments associated with the Company's deferred compensation programs as well as proceeds of $44 million related to the settlement of a cross-currency swap.

Cash flows from financing activities in 2021 includes net commercial paper repayments of $723 million and term loan repayments of $1,210 million. Cash flows from financing activities in 2020 includes proceeds from the issuance of the $925 million and $800 million term loans and the repayment of approximately $740 million of long-term debt. Refer to Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. The Company repurchased 0.3 million common shares for $100 million during 2021 compared to the repurchase of 0.8 million common shares for $147 million in 2020.

Dividends have been paid for 284 consecutive quarters, including a yearly increase in dividends for the last 65 years. The current annual dividend rate is $4.12 per common share.

Our goal is to maintain an investment-grade credit profile. The rating agencies periodically update our credit ratings as events occur. At June 30, 2021, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:

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We continue to actively monitor our liquidity position and working capital needs and prioritize capital expenditures related to safety and strategic investments. The Company remains in a stable overall capital resources and liquidity position that is adequate to meet its projected needs. In March 2020, the Company suspended the share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic. During February 2021, the Company reinitiated the share repurchase program and repurchased shares totaling $100 million during the remainder of the fiscal year.

The Company has a line of credit totaling $2,500 million through a multi-currency revolving credit agreement with a group of banks, all of which was available as of June 30, 2021. The credit agreement expires in September 2024; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. Advances from the credit agreement can be used for general corporate purposes, including acquisitions, and for the refinancing of existing indebtedness. The credit agreement requires the payment of an annual facility fee, the amount of which is dependent upon the Company’s credit ratings. Although a lowering of the Company’s credit ratings would increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings. Refer to Note 9 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

The Company is currently authorized to sell up to $2,500 million of short-term commercial paper notes. There were no outstanding commercial paper notes as of June 30, 2021, and the largest amount of commercial paper notes outstanding during the last quarter of 2021 was $203 million.

The Company’s credit agreements and indentures governing certain debt securities contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at June 30, 2021, the most restrictive financial covenant provides that the ratio of debt to debt-shareholders' equity cannot exceed 0.65 to 1.0. At June 30, 2021, the Company's debt to debt-shareholders' equity ratio was 0.44 to 1.0. We are in compliance and expect to remain in compliance with all covenants set forth in the credit agreement and indentures.

On August 2, 2021, the Company announced that it reached an agreement on the terms of a recommended cash acquisition of the entire issued and to be issued ordinary share capital of Meggitt for 800 pence per share, or approximately £6,308 million. We intend to fund the proposed acquisition with cash and new debt. The proposed acquisition remains subject to customary closing conditions, including regulatory clearances and approval by Meggitt’s shareholders.

In connection with the proposed acquisition, the Company entered into a bridge credit agreement (the "Bridge Credit Agreement") on August 2, 2021. Under the Bridge Credit Agreement, lenders are committed to provide senior, unsecured financing in the aggregate principal amount of £6,524 million. Any borrowings made under the Bridge Credit Agreement would mature 364 days from the initial funding date. The commitments are intended to be drawn to finance the proposed acquisition of Meggitt only to the extent that we do not arrange for alternative financing prior to closing.

Contractual Obligations - The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $119 million at June 30, 2021. Payment of these obligations would result from settlements with worldwide taxing authorities. Due to the difficulty in determining the timing of the settlements, these obligations are not included in the following summary of the Company's fixed contractual obligations. References to Notes are to the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have off-balance sheet arrangements.

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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The policies discussed below are considered by management to be more critical than other policies because their application places the most significant demands on management's judgment.

Revenue Recognition - Revenues are recognized when control of performance obligations, which are distinct goods or services within the contract, is transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. A majority of our revenues are recognized at a point in time when control is transferred to the customer, which is generally at the time of shipment. However, a portion of our revenues are recognized over time if the customer simultaneously receives control as we perform work under a contract, if the customer controls the asset as it is being produced, or if the product has no alternative use and we have a contractual right to payment.

For contracts where revenue is recognized over time, we use the cost-to-cost, efforts expended or units of delivery method depending on the nature of the contract, including length of production time. The estimation of costs and efforts expended requires judgment on the part of management due to the duration of the contractual agreements as well as the technical nature of the products involved. Adjustments to these estimates are made on a consistent basis and a contract reserve is established when the estimated costs to complete a contract exceed the expected contract revenues.

When there are multiple performance obligations within a contract, the transaction price is allocated to each performance obligation based on its standalone selling price. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers for the same product or service. Revenue is recognized when control of the individual performance obligations is transferred to the customer.

We consider the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.

Impairment of Goodwill and Long-Lived Assets - We test goodwill for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate the carrying value of a reporting unit may exceed its fair value. Our six reporting units are equivalent to our operating segments. As quoted market prices are not available for our reporting units, determining whether an impairment occurred requires the valuation of the respective reporting unit, which is estimated using both income-based and market-based valuation methods. The income-based valuation method utilizes a discounted cash flow model which requires several assumptions, including future sales growth and operating margin levels as well as assumptions regarding future industry-specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions in the discounted cash flow analysis. Within the discounted cash flow models, the Company uses a discount rate, commensurate with its cost of capital but adjusted for inherent business risks, and an appropriate terminal growth factor. The market-based valuation performed for each reporting unit includes an analysis consisting of market-adjusted multiples based on key data points for guideline public companies. We also reconcile the estimated aggregate fair value of our reporting units resulting from these procedures to our overall market capitalization.

At December 31, 2020, the Company performed its annual goodwill impairment test for each of its six reporting units. The results of this test indicated the fair value substantially exceeded carrying value for all reporting units. We continually monitor our reporting units for impairment indicators and update assumptions used in the most recent calculation of a reporting unit's fair value as appropriate. We did not identify any events or circumstances during 2021 that required performance of an interim impairment test.

Long-lived assets held for use, which primarily includes finite-lived intangible assets and property, plant and equipment, 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 are less than their carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During 2021, the Company did not record any material impairment related to long-lived assets.

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Pensions - The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels and amortization periods for actuarial gains and losses. Assumptions are determined based on Company data and appropriate market indicators and are evaluated each year as of the plans' measurement date. Changes in the assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements.

For the Company's domestic qualified defined benefit plan, a 50 basis point change in the assumed long-term rate of return on plan assets is estimated to have an $18 million increase in annual pension expense and a 50 basis point decrease in the discount rate is estimated to increase annual pension expense by $27 million. As of June 30, 2021, $707 million of past years' net actuarial losses related to the Company's domestic qualified defined benefit plan are subject to amortization in the future. These losses will generally be amortized over approximately seven years and will negatively affect earnings in the future. Any actuarial gains experienced in future years will help reduce the effect of the net actuarial loss amortization. Further information on pensions is provided in Note 12 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Income Taxes - Significant judgment is required in determining the Company's income tax expense and in evaluating tax positions. Deferred income tax assets and liabilities have been recorded for the differences between the financial accounting and income tax basis of assets and liabilities. Factors considered by the Company in determining the probability of realizing deferred income tax assets include forecasted operating earnings, available tax planning strategies and the time period over which the temporary differences will reverse. The Company reviews its tax positions on a regular basis and adjusts the balances as new information becomes available. For those tax positions where it is more likely than not that a tax benefit will be sustained, the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon examination by a taxing authority that has full knowledge of all relevant information will be recorded. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. Further information on income taxes is provided in Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Loss Contingencies - The Company has a number of loss exposures incurred in the ordinary course of business such as environmental claims, product liability and litigation reserves. Establishing loss accruals for these matters requires management's estimate and judgment with regards to risk exposure and ultimate liability or realization. We review these loss accruals periodically and make adjustments to reflect the most recent facts and circumstances.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are described in Note 1 to the Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

In November 2020, the SEC issued Final Rule Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information. This rule, which became effective on February 10, 2021, amended certain SEC disclosure requirements in order to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. Specifically, the amendments eliminate the requirement for Selected Financial Data, streamline the requirement to disclose Supplementary Financial Information, and amend Management's Discussion and Analysis. The final rule is applicable for fiscal years ending on or after August 9, 2021, however, early adoption on an Item-by-Item basis is permitted after February 10, 2021. We early adopted the amendments to two items resulting in the elimination of Item 301, Selected Financial Data, from Part II, Item 6 of this report and the omission of Regulation S-K Item 302(a), Supplementary Financial Information, from the notes to our consolidated financial statements in Part II, Item 8 of this report.

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