PH 10-K diff: FY 2024-06-30 → FY 2025-06-30
Paragraph-level diff of Risk Factors (Item 1A) and Management's Discussion & Analysis (Item 7).
Item 1A · Risk Factors
+21 paragraphs −20 paragraphs ~20 changed
FY 2024-06-30 (earlier)
FY 2025-06-30 (later)
ITEM 1A . Risk Factors
The following "risk factors" identify what we believe to be the risks that could materially adversely affect our financial and/or operational performance. These risk factors should be considered and evaluated together with information incorporated by reference or otherwise included elsewhere in this Annual Report on Form 10-K. Additional risks not currently known to the8
Table of ContentsCompany or that the Company currently believes are immaterial also may impair the Company’s business, financial condition, results of operations and cash flows.Business and Operational Risks
Risks arising from uncertainty in worldwide and regional economic conditions may harm our business and make it difficult to project long-term performance.
Our business is sensitive to global macro-economic conditions. Macroeconomic downturns may have an adverse effect on our business, results of operations and financial condition, as well as our distributors, customers and suppliers, and on activity in many of the industries and markets we serve. Among the economic factors which may have such an effect are manufacturing and other end-market activity, currency exchange rates, air travel trends, difficulties entering new markets, tariffs and governmental trade and monetary policies, global pandemics, and general economic conditions such as inflation, deflation, interest rates and credit availability. These factors may, among other things, negatively impact our level of purchases, capital expenditures, and creditworthiness, as well as our distributors, customers and suppliers, and, therefore, the Company’s revenues, operating profits, margins, and order rates.We cannot predict changes in worldwide or regional economic conditions and government policies, as such conditions are highly volatile and beyond our control. In addition, our responses to mitigate the impact of these conditions, such as potential price increases, could negatively impact our market share or relationships with distributors or customers. If these conditions deteriorate or remain at depressed levels for extended periods, however, our business, results of operations and financial condition could be materially adversely affected.As a global business, we are exposed to economic, political and other risks in different countries in which we operate, which could materially reduce our sales, profitability or cash flows, or materially increase our liabilities.Our net sales attributable to selling locations outside of the United States were approximately 36 percent in 2025, 36 percent in 2024 and 37 percent in 2023. In addition, many of our customers, manufacturing operations and suppliers are located outside the United States. The Company expects net sales from non-U.S. markets to continue to represent a significant portion of its total net sales. Our non-U.S. operations are subject to risks in addition to those facing our domestic operations, including:• fluctuations in currency exchange rates and/or changes in monetary policy;
• limitations on ownership and on repatriation of earnings;
• transportation delays and other supply chain disruptions;• political, social and economic instability and disruptions, including armed conflicts;• government embargoes, sanctions or trade restrictions, including possible further restrictions on trade and/or obstacles to conducting business in China;
• the imposition of duties and tariffs and other trade barriers;
• import and export controls;
• labor unrest and current and changing regulatory environments;
• public health crises, including pandemics;
• the potential for nationalization of enterprises;
• difficulties in staffing and managing multi-national operations;
• limitations on our ability to enforce legal rights and remedies;• potentially adverse tax consequences, including any consequences from the One Big Beautiful Bill Act; and• difficulties in implementing restructuring actions on a timely basis.For example, the global nature of our business and our operations exposes us to political, economic, and other conditions in foreign countries and regions, such as the uncertainty about the future relationship between the U.S. and China, including with respect to trade policies, treaties, government regulations and tariffs. Any increased trade barriers or restrictions on global trade, including trade with China, could adversely impact our business, results of operations or financial condition.
If we are unable to successfully manage the risks associated with expanding our global business or adequately manage operational fluctuations internationally, the risks could have a material adverse effect on our business, results of operations or financial condition.9
Table of ContentsIncreased cybersecurity threats and more sophisticated and targeted computer crime have posed and could continue to pose a risk to our information technology systems, and a disruption to or breach in the security of such systems, if material, could have adverse effects on our result of operations and financial condition.
We rely extensively on information technology systems to manage and operate our business, some of which are managed or accessible by third parties. The security and functionality of these information technology systems, and the processing of data by these systems, are critical to our business operations. If these systems, or any part of the systems, are damaged, intruded upon, attacked, shutdown or cease to function properly (whether by planned upgrades, force majeure, telecommunications failures, criminal acts, including hardware or software break-ins or extortion attempts, or viruses, or other cybersecurity incidents) and we suffer any resulting interruption in our ability to manage and operate our business or if our products are affected, our results of operations and financial condition could be materially adversely affected. There can be no guarantee that the actions and controls we have implemented and are implementing, or which we cause or have caused third-parties with access to our systems to implement, will be sufficient to protect and mitigate risks associated with our information technology systems. Additionally, certain of our employees working remotely at times and the increased adoption of generative artificial intelligence may increase our vulnerability to cyber and data protection risks. In addition to existing risks, any adoption or deployment of or exposure to new technologies via acquisitions or internal initiatives or changes to our information technology systems as a result of divestitures may increase our exposure to risks, breaches, or failures, which could materially adversely affect our results of operations or financial condition. Furthermore, the Company has access to sensitive, confidential, or personal data or information that is subject to privacy and security laws, regulations, or other contractually-imposed controls. Despite our use of reasonable and appropriate controls, security breaches, theft, misplaced, lost or corrupted data, programming, or employee errors and/or malfeasance have led and could in the future lead to the compromise or improper use of such sensitive, confidential, or personal data or information. Such events may result in possible negative consequences, such as fines, ransom demands, penalties, failure to comply with laws governing sensitive data, loss of reputation, intellectual property, competitiveness or customers, increased security and compliance costs or other negative consequences. Further, the amount of insurance coverage that we maintain may be inadequate to cover claims or liabilities relating to a cybersecurity incident. Depending on the nature and magnitude of these events, they may have an adverse impact on our results of operations or financial condition.
Price and supply fluctuations of the raw materials used in our production processes and by our suppliers of component parts could negatively impact our financial results.
Our supply of raw materials could be interrupted for a variety of reasons, including availability and pricing. Furthermore, changes to United States and other countries' tariff and import/export regulations have in the past and may in the future have a negative impact on the availability and pricing of raw materials. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect our results of operations and profit margins. Our efforts to manage these fluctuations by, among other things, passing along price increases to our customers, may be subject to a time delay between the increased raw material prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due to pricing pressure, contract terms or other factors. Any such inability to manage fluctuations could adversely impact our results of operations and cash flows.Our suppliers of component parts may significantly and quickly increase their prices in response to increases in costs of raw materials that they use to manufacture the component parts. As a result, we may not be able to increase our prices commensurately with our increased costs. Consequently, our results of operations or financial condition could be materially adversely affected.Our operations are subject to natural and man-made unexpected events that may increase our costs, interrupt production or our supply chain or otherwise adversely affect our business, results of operations or financial condition.
The occurrence of one or more unexpected events, including war, acts of terrorism or violence, civil unrest, fires, tornadoes, hurricanes, earthquakes, floods and other forms of severe weather in the United States or in other countries in which we operate or in which our suppliers are located could adversely affect our operations and financial performance. Natural disasters, pandemics, equipment failures, power outages or other unexpected events could result in physical damage to and complete or partial closure of one or more of our manufacturing facilities or distribution centers, temporary or long-term disruption in the supply of component products from some local and international suppliers, and disruption and delay in the transport of our products to dealers, end-users and distribution centers. Existing insurance coverage may not provide protection for all of the costs that may arise from such events. The impacts of these unexpected events are difficult to predict but could have a material adverse effect on our business, results of operations or financial condition.10
Table of ContentsChanges in the demand for and supply of our products may adversely affect our financial results, financial condition and cash flow.
Demand for and supply of our products has been and may be adversely affected by numerous factors, some of which we cannot predict or control. Such factors include:
• 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, and changes in contract cost and revenue estimates for new development programs;
• changes in product mix;
• changes in the market acceptance of our products;
• increased competition in the markets we serve;
• declines in the general level of industrial production;
• weakness in the end-markets we serve;
• fluctuations in the availability or the prices of raw materials; and
• fluctuations in currency exchange rates.
If any of these factors occur, the demand for and supply of our products could suffer, which could materially adversely affect the Company’s results of operations.
The development of new products and technologies requires substantial investment and is required to remain competitive in the markets we serve. If we are unable to successfully introduce new commercial products, our profitability could be adversely affected.
The markets we serve are characterized by rapidly changing technologies and frequent introductions of new products and services. Our ability to develop new products based on technological innovation can affect our competitive position and often requires the investment of significant resources. If we cannot develop, or have difficulties or delays developing new and enhanced products and services, or if we fail to gain market or regulatory acceptance of new products and technologies, our revenues may be materially reduced and our competitive position could be materially adversely affected. In addition, we may invest in research and development of products and services, or in acquisitions or other investments, that do not lead to significant revenue, which could adversely affect our profitability.
Changes in the competitive environment in which we operate may eliminate any competitive advantages that we currently have, which could adversely impact our business.
Our operations are subject to competition from a wide variety of global, regional and local competitors, which could adversely affect our results of operations by creating downward pricing pressure and/or a decline in our margins or market shares. To compete successfully, we must excel in terms of product quality and innovation, technological and engineering capability, manufacturing and distribution capability, delivery, price competitiveness, and customer experience.We may be required to make material expenditures in order to comply with environmental laws and regulations, to address the effects of climate change and to respond to customer needs and investor expectations regarding climate-related goals, each of which may negatively impact our business.
Our operations necessitate the use and handling of hazardous materials and, as a result, subject us to various U.S. federal, state and local laws and regulations, as well as non-U.S. laws, designed to protect the environment and to regulate the discharge of materials into the environment. These laws impose penalties, fines and other sanctions for non-compliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or the exposure to, hazardous materials. Among other laws, we are subject to the U.S. federal "Superfund" law, under which we have been designated as a "potentially responsible party" and may be liable for clean-up costs associated with various waste sites, some of which are on the United States Environmental Protection Agency’s Superfund priority list. We could incur substantial costs as a result of non-compliance with or liability for cleanup or other costs or damages under environmental laws, including the "Superfund" law.In addition, worldwide focus on climate change issues has led to legislative and regulatory efforts to limit greenhouse gas emissions in the United States and in other countries in which we operate. Increased regulation of greenhouse gas emissions and other climate change concerns could subject us to additional costs and restrictions, including increased energy and raw material costs. We are not able to predict how such regulations would affect our business, operations or financial results, but increased regulation could have a material adverse effect on our business, operations and financial condition.
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Climate change could also present risks to our operations. Extreme weather events linked to climate change, including hurricanes, flooding, wildfires, high heat and water scarcity, among others, create physical risks to our operating locations and supply chains. Further, although we are working towards and intend to meet our goal of achieving near-total decarbonization (scope 1 and 2 emissions) within our operations by 2040, we may be required to expend significant resources to do so, which could increase our operational costs. There can be no assurance of the extent to which any of our climate-related goals will be achieved, if at all, including on the timeline expected by customers or investors, or that any future investments we make in furtherance of achieving our goals will meet customer expectations and needs, investor expectations or market standards regarding sustainability, including reducing greenhouse gas emissions. Any failure, or perceived failure, by us to achieve our climate-related goals, further our initiatives, adhere to our public statements, comply with federal, state or international climate-related laws and regulations or meet evolving and varied customer and investor expectations and standards could result in legal and regulatory proceedings against us or could cause our customers to find other suppliers, each of which could adversely affect our reputation, the market price of our common shares, our results of operations, our financial condition or our cash flows.We operate in challenging markets for talent and may fail to attract, develop and retain key personnel.
We depend on the skills, institutional knowledge, working relationships, and continued services and contributions of key personnel, including our leadership team and others at all levels of the company, as a critical part of our human capital resources. In addition, our ability to achieve our operating and strategic goals depends on our ability to identify, hire, train and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel in a highly competitive labor market, and we may lose key personnel or fail to attract other talented personnel or otherwise identify and retain suitable replacements. Any such loss or failure could have material adverse effects on our results of operations, financial condition and cash flows.
Strategic Transactions Risks
We are subject to risks relating to acquisitions and joint ventures, and risks relating to the integration of acquired companies.We expect to continue our strategy of identifying and acquiring businesses with complementary products and services, and entering into joint ventures, which we believe will enhance our operations and profitability. However, there can be no assurance that we will be able to continue to find suitable businesses to purchase or joint venture opportunities, or that we will be able to acquire such businesses or enter into such joint ventures on acceptable terms. In addition, we may be unable to consummate announced pending transactions, including the Curtis Instruments, Inc. acquisition, due to an inability to obtain necessary regulatory approvals or support for otherwise suitable business targets or joint venture opportunities or otherwise, and we may be unable to obtain such regulatory approvals or support or otherwise consummate transactions on the timeline or terms that we anticipate, if at all. Furthermore, there are no assurances that we will be able to avoid acquiring or assuming unexpected liabilities. If we are unable to avoid these risks, our results of operations and financial condition could be materially adversely affected.In addition, we may not be able to integrate successfully any businesses that we purchase into our existing business, and it is possible that any acquired businesses or joint ventures may not be profitable. We may encounter, or have encountered, the following difficulties during the integration process:
• the consequences of a change in tax treatment, including the cost of integration and compliance and the possibility that the full benefits anticipated to result from the acquisitions may not be realized;
• delays in the integration of management teams, strategies, operations, products, and services;
• differences in business backgrounds, corporate cultures, and management philosophies that may delay successful integration;
• the ability to retain key employees;
• the ability to create and enforce uniform standards, controls, procedures, policies, and information systems;
• challenges of integrating complex systems, technologies, networks, and other assets of the acquired companies in a manner that minimizes any adverse impact or disruptions to customers, suppliers, employees, and other constituencies; and
• unknown liabilities and unforeseen increased expenses or delays associated with the integration beyond current estimates.If we are unable to avoid these risks, our results of operations and financial condition could be materially adversely affected.
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Table of ContentsOur results may be adversely affected if expanded operations from acquisitions are not effectively managed.Our recent acquisitions have expanded, and further acquisitions and joint ventures may expand, significantly the size and complexity and reduce costs of our business. Our future success depends, in part, on the ability to manage this expanded business, which may pose or has posed substantial challenges for management, including challenges related to the management and monitoring of the expanded global operations and new manufacturing processes and products, and the associated costs and complexity. There can be no assurance of successful management of these matters or that we will realize the expected benefits of the acquisitions.The Company may be subject to risks relating to organizational changes.We regularly execute organizational changes such as divestitures and realignments to support our growth and cost management strategies. We also engage in initiatives aimed to increase productivity, efficiencies and cash flow and to reduce costs. The Company commits significant resources to identify, develop and retain key employees to ensure uninterrupted leadership and direction. If we are unable to successfully manage these and other organizational changes, the ability to complete such activities and realize anticipated synergies or cost savings as well as our results of operations and financial condition could be materially adversely affected. We cannot offer assurances that any of these initiatives will be beneficial to the extent anticipated, or that the estimated efficiency improvements, incremental cost savings or cash flow improvements will be realized as anticipated or at all.Financial Risks
Increasing costs of certain employee and retiree benefits could adversely affect our liability for such benefits.
The funding requirements and the amount of expenses recorded for our defined benefit pension plans are dependent on changes in market interest rates and the value of plan assets, which are dependent on actual plan asset returns. Significant changes in market interest rates and decreases in the fair value of plan assets and investment losses on plan assets would increase funding requirements and expenses and may adversely impact our results of operations.
The Company absorbs a portion of healthcare costs for its employees. If healthcare costs rise significantly and we continue to absorb the majority of these costs, these increasing costs may adversely impact our future results of operations.Additional liabilities relating to changes in tax rates or exposure to additional income tax liabilities could adversely impact our financial condition and cash flow.We are subject to income taxes in the U.S. and various non-U.S. jurisdictions. Our domestic and international tax liabilities are dependent upon the location of earnings among these different jurisdictions. Our future financial condition and cash flow could be adversely affected by changes in effective tax rate as a result of changes in tax laws and judicial or regulatory interpretation thereof (including regulations and other guidance promulgated under the One Big Beautiful Bill Act), the mix of earnings in countries with differing statutory tax rates, changes in overall profitability, changes in U.S. generally accepted accounting principles ("GAAP"), or changes in the valuation of deferred tax assets. In addition, the amount of income taxes paid by the Company is subject to ongoing audits by non-U.S. and U.S. federal, state and local tax authorities. If these audits result in assessments different from estimated amounts, future financial results may include unfavorable adjustments to the Company’s tax liabilities, which could have a material adverse effect on the Company’s financial condition and cash flow.Our indebtedness and restrictive covenants under our credit facilities could limit our operational and financial flexibility.We have incurred significant indebtedness, and expect to incur additional debt for acquisitions, operations, research and development and capital expenditures, or for other reasons related to our overall capital deployment strategy. Our ability to make interest and scheduled principal payments and meet restrictive covenants could be adversely impacted by changes in the availability, terms and cost of capital, changes in interest rates or changes in our credit ratings or our outlook. These changes could increase our cost of financing and limit our debt capacity, thereby limiting our ability to pursue acquisition opportunities, react to market conditions and meet operational and capital needs, which may place us at a competitive disadvantage.We carry goodwill on our balance sheet, which is subject to impairment testing and could subject us to significant non-cash charges to earnings in the future if impairment occurs.We have goodwill recorded on our balance sheet. Goodwill is not amortized, but is tested for impairment annually as of January 1, in the third quarter or more often if events or changes in circumstances indicate a potential impairment may exist. Factors that could indicate that our goodwill is impaired include a decline in our stock price and market capitalization, lower than projected operating results and cash flows, and slower growth rates in our industry. Declines in our stock price, lower
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operating results and any decline in industry conditions in the future could increase the risk of impairment. Impairment testing incorporates our estimates of future operating results and cash flows, estimates of allocations of certain assets and cash flows among reporting units, estimates of future growth rates, and our judgment regarding the applicable discount rates used on estimated operating results and cash flows. If we determine at a future time that impairment exists, it may result in a significant non-cash charge to earnings and lower stockholders’ equity.Legal and Regulatory Risks
As a provider of products to the U.S. government, we are subject to additional risks related to future government spending as well as unusual performance conditions and enhanced compliance risks.
In addition to the risks identified herein, doing business with the U.S. government subjects us to unusual risks, including dependence on the level of government spending and compliance with and changes in governmental acquisition regulations. Agreements relating to the sale of products to government entities may be subject to termination, reduction or modification, either at the convenience of the government or for our failure to perform, or other unsatisfactory performance under the applicable contract. We are subject to government investigations of our business practices and compliance with government acquisition regulations. If the Company were charged with wrongdoing as a result of any such investigation, it could be suspended from bidding on or receiving awards of new government contracts, and we could be subject to fines or penalties associated with contract non-compliance or resulting from such investigations, which could have a material adverse effect on our results of operations.Litigation and legal and regulatory proceedings against the Company could decrease our liquidity, impair our financial condition and adversely affect our results of operations.
From time to time, we are subject to litigation or other commercial disputes and other legal and regulatory proceedings relating to our business. Due to the inherent uncertainties of any litigation, commercial disputes or other legal or regulatory proceedings, we cannot accurately predict their ultimate outcome, including the outcome of any related appeals. An unfavorable outcome could materially adversely impact our business, financial condition and results of operations. Furthermore, as required by U.S. GAAP, we establish reserves based on our assessment of contingencies, including contingencies related to legal claims asserted against us. Subsequent developments in legal proceedings may affect our assessment and estimates of the loss contingency recorded as a reserve and require us to make payments in excess of our reserves, which could have an adverse effect on our results of operations.
We are subject to national and international laws and regulations, such as the anti-corruption laws of the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, relating to our business and our employees. Despite our policies, procedures and compliance programs, our internal controls and compliance systems may not be able to protect the Company from prohibited acts willfully committed by our employees, agents or business partners that would violate such applicable laws and regulations. Any such improper acts could damage the Company's reputation, subject us to civil or criminal judgments, fines or penalties, and could otherwise disrupt the Company's business, and as a result, could materially adversely impact our business, financial condition and results of operations.
Further, our operations are subject to certain antitrust and competition laws in the jurisdictions in which we conduct our business, in particular the United States and Europe. These laws prohibit, among other things, anticompetitive agreements and practices. If any of our commercial agreements or practices are found to violate or infringe such laws, we may be subject to civil and other penalties. We may also be subject to third-party claims for damages. Further, agreements that infringe antitrust and competition laws may be void and unenforceable, in whole or in part, or require modification in order to be lawful and enforceable. Accordingly, any violation of these laws could harm our reputation and could have a material adverse effect on our earnings, cash flows and financial condition.
Due to the nature of our business and products, we may be liable for damages based on product liability claims.
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and sale of our products and the products of third-party vendors that we use or resell. Significant product liability claims could have a material adverse effect on the Company’s financial condition, liquidity and results of operations. Although we currently maintain what we believe to be suitable and adequate product liability insurance, there can be no assurance that we will be able to maintain our insurance on acceptable terms or that our insurance will provide adequate protection against all potential significant liabilities.
Failure to protect our intellectual property and know-how could reduce or eliminate any competitive advantage and reduce our sales and profitability, and the cost of protecting our intellectual property may be significant.Protecting our intellectual property is critical to our innovation efforts. We own a number of patents, trade secrets, copyrights, trademarks, trade names and other forms of intellectual property related to our products and services throughout the world and
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in the operation of our business. We also have exclusive and non-exclusive rights to intellectual property owned by others. Our intellectual property may be challenged, stolen or otherwise infringed upon by third parties or we may be unable to maintain, renew or enter into new license agreements with third-party owners of intellectual property on reasonable terms. In addition, the global nature of our business increases the risk that our intellectual property may be subject to infringement, theft or other unauthorized use or disclosure by others. In some cases, our ability to protect our intellectual property rights by legal recourse or otherwise may be limited, particularly in countries where laws or enforcement practices are inadequate or undeveloped. And the cost of enforcing our rights may be significant. Unauthorized use or disclosure of our intellectual property rights or our inability to protect our intellectual property rights could lead to reputational harm and/or adversely impact our competitive position and results of operations.
Item 7 · Management's Discussion & Analysis
+137 paragraphs −144 paragraphs ~137 changed
FY 2024-06-30 (earlier)
ITEM 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking StatementsForward-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.18
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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 2023.19
Table of Contents(dollars in millions) 2024 2023
Net sales $ 19,930 $ 19,065
Gross profit margin 35.8 % 33.7 %
Selling, general and administrative expenses $ 3,315 $ 3,354
Selling, general and administrative expenses, as a percent of sales 16.6 % 17.6 %
Interest expense $ 506 $ 574
Other (income) expense, net (277) 184
Gain on sale of businesses and assets, net $ (12) $ (363)
Effective tax rate 20.9 % 22.2 %
Net income attributable to common shareholders $ 2,844 $ 2,083
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:(dollars in millions) 2024 2023
Expense (income)
Foreign currency transaction (gain) loss $ (38) $ 46
Income related to equity method investments (152) (124)
Non-service components of retirement benefit cost (73) (67)
Interest income (15) (46)
Loss on deal-contingent forward contracts — 390
Other items, net 1 (15)
$ (277) $ 184
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.20
Table of ContentsGain 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(dollars in millions) 2024 2023
Net Sales
North America businesses $ 8,800 $ 8,916
International businesses 5,657 5,789
Diversified Industrial Segment 14,457 14,706Operating incomeNorth America businesses 1,964 1,853
International businesses 1,213 1,218
Diversified Industrial Segment $ 3,176 $ 3,071Operating income as a percent of salesNorth America businesses 22.3 % 20.8 %
International businesses 21.4 % 21.0 %
Diversified Industrial Segment 22.0 % 20.9 %
Backlog $ 4,182 $ 4,78621
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The Diversified Industrial Segment operations experienced the following percentage changes in net sales:2024
North America businesses – as reported (1.3) %
Acquisitions 0.9 %
Divestitures (0.3) %
Currency 0.3 %
North America businesses – without acquisitions, divestitures and currency 1
(2.2) %
International businesses – as reported (2.3) %
Acquisitions 0.7 %
Currency (1.0) %
International businesses – without acquisitions and currency 1
(2.0) %
Diversified Industrial Segment – as reported (1.7) %
Acquisitions 0.8 %
Divestitures (0.2) %
Currency (0.2) %
Diversified Industrial Segment – without acquisitions, divestitures and currency 1
(2.1) %
1 This 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 SalesDiversified 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.22
Table of ContentsWithin 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:(dollars in millions) 2024 2023
North America businesses $ 20 $ 9
International businesses 34 23
Diversified Industrial Segment $ 54 $ 32
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.BacklogDiversified 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(dollars in millions) 2024 2023
Sales $ 5,472 $ 4,360
Operating income $ 1,111 $ 562
Operating income as a percent of sales 20.3 % 12.9 %
Backlog $ 6,680 $ 6,201
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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Table of ContentsOperating MarginAerospace 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 RealignmentWithin 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.BacklogAerospace 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
(dollars in millions) 2024 2023
Expense (income)
Corporate general and administrative expense $ 218 $ 230
Corporate general and administrative expense, as a percent of sales 1.1 % 1.2 %
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(dollars in millions) 2024 2023
Expense (income)
Foreign currency transaction (gain) loss $ (38) $ 46
Stock-based compensation 95 78
Non-service components of retirement benefit cost (73) (67)
Acquisition-related expenses 1 114
Loss on deal-contingent forward contracts — 390
Gain on sale of businesses and assets, net (12) (363)
Interest income (15) (46)
Other items, net 10 (1)
$ (32) $ 151
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 programCash Flows
A summary of cash flows follows:(dollars in millions) 2024 2023Cash provided by (used in):Operating activities $ 3,384 $ 2,980
Investing activities (299) (8,177)
Financing activities (3,115) (971)
Effect of exchange rates (24) (5)
Net decrease in cash and cash equivalents and restricted cash $ (53) $ (6,173)
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.
25Table of ContentsCash 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 RequirementsWe 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.
DividendsCash 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 RepurchasesThe 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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Table of ContentsLiquidityCash, 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:
Fitch Ratings BBB+
Moody's Investor Services, Inc. Baa1Standard & Poor's BBB+
Supply Chain Financing
We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers. We currently have supply chain financing ("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 DivestituresAcquisitions 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
28Table of Contentsreturn 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.29Table of Contents
FY 2025-06-30 (later)
ITEM 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking StatementsForward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. Often but not always, these statements may be identified from the use of forward-looking terminology such as "anticipates," "believes," "may," "should," "could," "expects," "targets," "is likely," "will," or the negative of these terms and similar expressions, and include all statements regarding future performance, orders, earnings projections, events or developments. Neither Parker nor any of its respective associates or directors, officers or advisers provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements will actually occur. Parker cautions readers not to place undue reliance on these statements. It is possible that the future performance may differ materially from past performance or current expectations. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.
Among other factors which may affect future performance are:• changes in business relationships with and 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, including the acquisition of Curtis Instruments, Inc.;• 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 tariffs and 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, 2025 and undertakes no obligation to update them unless otherwise required by law.18
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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.We manage our supply chain through our "local for local" manufacturing strategy, ongoing supplier management process, and broadened supply base. We actively monitor global trade policies and inflation, managing their impact through a variety of cost and pricing measures. In addition, continuous improvement and lean initiatives, along with disciplined workforce and discretionary spending management, further enhance our ability to mitigate these impacts. 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 global 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. The Company has changed its presentation on the Consolidated Financial Statements from thousands to millions and, as a result, any necessary rounding adjustments have been made to prior period disclosed amounts within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Discussion of the 2023 financial statements is included in Part II, Item 7 of the Company's 2024 Annual Report on Form 10-K.19
Table of ContentsCONSOLIDATED STATEMENT OF INCOME
The Consolidated Statement of Income summarizes the Company's operating performance. The discussion below compares the operating performance in 2025 and 2024.
(dollars in millions) 2025 2024
Net sales $ 19,850 $ 19,930
Gross profit margin 36.9 % 35.8 %
Selling, general and administrative expenses $ 3,255 $ 3,315
Selling, general and administrative expenses, as a percent of sales 16.4 % 16.6 %
Interest expense $ 409 $ 506
Other (income) expense, net (183) (276)
Gain on sale of businesses and assets, net $ (273) $ (12)
Effective tax rate 14.0 % 20.9 %
Net income attributable to common shareholders $ 3,531 $ 2,844
Net sales in 2025 decreased from the 2024 amount due to lower sales in the Diversified Industrial Segment, partially offset by higher sales in the Aerospace Systems Segment resulting from strength across commercial and defense markets. Within the Diversified Industrial Segment, the impact of divestiture activity decreased sales by approximately $295 million in 2025. The effect of currency exchange rates decreased net sales in 2025 by approximately $41 million, which is primarily attributable to the Diversified Industrial Segment.
Gross profit margin (calculated as net sales less cost of sales, divided by net sales) increased in 2025 primarily due to higher margins in both segments resulting from price increases, favorable product mix, cost containment and continued execution of the Win Strategy.
Cost of sales also included business realignment and acquisition integration charges of $31 million and $34 million in 2025 and 2024, respectively.
Selling, general and administrative expenses decreased in 2025 compared to 2024 primarily due to benefits from prior-year restructuring and acquisition-integration activities, lower research and development expenses and cost containment initiatives.
Selling, general and administrative expenses also included business realignment and acquisition integration charges of $45 million and $55 million in 2025 and 2024, respectively.
Interest expense in 2025 decreased compared to 2024 primarily due to lower average debt outstanding.Other (income) expense, net included the following:(dollars in millions) 2025 2024
Foreign currency transaction loss (gain) (1)
$ 46 $ (38)
Income related to equity method investments (178) (152)
Non-service components of retirement benefit cost (51) (73)
Interest income (11) (15)
Saegertown incident (2)
8 —
Other items, net 3 2
Total other (income) expense, net $ (183) $ (276)
(1) Foreign currency transaction loss (gain) primarily relates to the impact of exchange rates on cash, forward contracts and intercompany transactions.
(2) On February 9, 2025, a fire damaged a portion of our Saegertown, Pennsylvania facility, causing a pause in production. Some production and operations were re-established within days of the event. Global available capacity has been utilized to restore production, substantially fulfill demand and minimize customer disruption. There was no material impact as a result of this disruption during fiscal 2025 and none is expected during future periods. We maintain third-party insurance coverage for property damage, clean-up, replacement and business interruption, subject to an $8 million deductible and liability retention for the event, which was recorded in the third quarter of 2025. While we expect to be reimbursed for a significant portion of our business interruption impacts by our third-party insurance coverage, we will not record any associated gain until realized.20
Table of ContentsGain on sale of businesses and assets, net in 2025 primarily relates to the divestiture of the composites and fuel containment ("CFC") business. 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 2025, was lower than the U.S. Federal statutory rate of 21 percent due to tax benefits from the release of a foreign valuation allowance, share-based compensation, foreign-derived intangible income and a tax benefit from a lower taxable gain on divestitures than gain under GAAP, which were partially offset by U.S. state and local taxes and taxes related to international activities.
The effective tax rate in 2024, was lower than the U.S. Federal statutory rate of 21 percent due to share-based compensation and foreign-derived intangible income, which were partially offset by U.S. state and local taxes and taxes related to international activities.
Refer to Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a further 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(dollars in millions) 2025 2024
Net sales
North America businesses $ 8,134 $ 8,801
International businesses 5,531 5,657
Diversified Industrial Segment 13,665 14,458Operating incomeNorth America businesses 1,891 1,963
International businesses 1,229 1,213
Diversified Industrial Segment $ 3,120 $ 3,176Operating income as a percent of salesNorth America businesses 23.2 % 22.3 %
International businesses 22.2 % 21.4 %
Diversified Industrial Segment 22.8 % 22.0 %
Backlog $ 3,655 $ 4,18221
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The Diversified Industrial Segment operations experienced the following percentage changes in net sales:2025
North America businesses – as reported (7.6) %
Divestitures (3.4) %
Currency (0.5) %
North America businesses – without divestitures and currency (1)
(3.7) %
International businesses – as reported (2.2) %
Currency (0.3) %
International businesses – without currency (1)
(1.9) %
Diversified Industrial Segment – as reported (5.5) %
Divestitures (2.0) %
Currency (0.5) %
Diversified Industrial Segment – without divestitures and currency (1)
(3.0) %
(1) This table reconciles the percentage changes in net sales of the Diversified Industrial Segment reported in accordance with GAAP to percentage changes in net sales adjusted to remove the effects of divestitures for 12 months after their completion as well as changes in currency exchange rates (a non-GAAP measure). The effects of 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 SalesDiversified Industrial Segment sales in 2025 decreased $793 million from 2024. The effect of currency exchange rates decreased sales by approximately $63 million. The impact of divestiture activity decreased sales by approximately $295 million. Excluding the effects of changes in currency exchange rates and divestiture activity, sales in 2025 decreased $435 million from prior-year levels.
North America businesses - Sales within the North America businesses of the Diversified Industrial Segment decreased $667 million in 2025. The effect of currency exchange rates decreased sales by approximately $43 million during the year. The impact of divestiture activity decreased sales by approximately $295 million. Excluding the effects of changes in the currency exchange rates and divestiture activity, sales in 2025 decreased $329 million from prior-year levels reflecting lower demand within the off-highway, transportation, in-plant and industrial equipment and energy markets, partially offset by an increase in demand in the HVAC and refrigeration and aerospace and defense markets.
International businesses - Sales within the International businesses of the Diversified Industrial Segment decreased $126 million in 2025. The effect of currency exchange rates decreased sales by approximately $20 million, reflecting the strengthening of the U.S. dollar primarily against currencies in Mexico, Brazil and China, partially offset by the weakening of the U.S. dollar primarily against currencies in the United Kingdom and the Eurozone countries. Excluding changes in the currency exchange rates, sales in 2025 decreased $106 million from prior-year levels primarily due to lower sales in Europe, partially offset by an increase in sales in the Asia Pacific Region and Latin America.
Within Europe, the decrease in sales was primarily due to lower demand from end users across the in-plant and industrial equipment, off-highway and transportation markets.
Within the Asia Pacific region, the increase in sales was primarily due to higher demand within the electronics and semiconductor and in-plant and industrial equipment markets, partially offset by lower demand from end users in the transportation, energy and off-highway markets.
Within Latin America, the increase in sales was primarily due to higher demand within the in-plant and industrial equipment, transportation and off-highway markets, partially offset by lower demand from end users in the energy market.
Operating Margin
Diversified Industrial Segment operating margin increased in 2025, in both the North America and International businesses, primarily due to benefits from favorable product mix, price increases and benefits related to prior-year restructuring activities as well as cost containment initiatives, partially offset by decreased sales volume.22
Table of ContentsBusiness Realignment
The following business realignment and acquisition integration charges are included in the Diversified Industrial Segment operating income:(dollars in millions) 2025 2024
North America businesses $ 17 $ 22
International businesses 39 33
Diversified Industrial Segment $ 56 $ 55
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 2025 and 2024, 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 2025 will increase operating income in 2026 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 $65 million in business realignment charges in 2026. However, continually changing business conditions could impact the ultimate costs we incur.BacklogDiversified Industrial Segment backlog decreased in 2025 primarily due to the CFC divestiture in the North America businesses, partially offset by an increase in backlog in the International businesses. Within the International businesses, the increase in backlog was primarily attributable to Europe, partially offset by the Asia Pacific region and Latin America.Backlog consists of written firm orders from a customer to deliver products and, in the case of blanket purchase orders, only includes the portion of the order for which a schedule or release date has been agreed to with the customer. The dollar value of backlog is equal to the amount that is expected to be billed to the customer and reported as a sale.
Aerospace Systems Segment(dollars in millions) 2025 2024
Net sales $ 6,185 $ 5,472
Operating income $ 1,441 $ 1,111
Operating income as a percent of sales 23.3 % 20.3 %
Backlog $ 7,389 $ 6,680
Net Sales
Aerospace Systems Segment sales increased compared to prior-year due to higher volume across all market segments, especially the commercial and defense aftermarkets.Operating MarginAerospace Systems Segment operating margin increased in 2025 primarily due to higher sales volume and favorable aftermarket mix, as well as benefits from cost containment initiatives and prior-year acquisition integration activities.Business RealignmentWithin the Aerospace Systems Segment, we incurred acquisition integration and business realignment charges of $19 million and $34 million in 2025 and 2024, respectively. We do not expect to incur significant business realignment and acquisition integration charges in 2026. However, continually changing business conditions could impact the ultimate costs we incur.BacklogAerospace Systems Segment backlog increased in 2025 primarily due to orders exceeding shipments in the commercial and defense OEM market segments.
23
Table of ContentsBacklog 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 expenses
(dollars in millions) 2025 2024
Corporate general and administrative expense $ 214 $ 218
Corporate general and administrative expense, as a percent of sales 1.1 % 1.1 %
Corporate general and administrative expenses decreased in 2025 primarily due to lower expenses related to the Company's incentive compensation programs, net expense associated with the Company's deferred compensation plan and related investments, information technology expenses and discretionary spending, partially offset by an increase in charitable contributions and professional service fees.Other (income) expense, net(dollars in millions) 2025 2024
Foreign currency transaction loss (gain) (1)
$ 46 $ (38)
Stock-based compensation 97 95
Non-service components of retirement benefit cost (51) (73)
Gain on sale of businesses and assets, net (2)
(273) (12)
Interest income (11) (15)
Saegertown incident (3)
8 —
Other items, net 15 11
Total other (income) expense, net $ (169) $ (32)
(1) Foreign currency transaction loss (gain) primarily relates to the impact of exchange rates on cash, forward contracts and intercompany transactions.
(2) Gain on sale of businesses and assets, net primarily relates to the divestiture of the CFC business. Refer to Note 3 to the Consolidated Financial Statements for further discussion.
(3) The Saegertown incident represents the deductible and retained liability expense associated with a fire at our plant in Saegertown, Pennsylvania in February 2025.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• Share repurchases, including repurchases under the 10b5-1 share repurchase programCash Flows
A summary of cash flows follows:(dollars in millions) 2025 2024Cash provided by (used in):Operating activities $ 3,776 $ 3,384
Investing activities 224 (298)
Financing activities (3,977) (3,115)
Effect of exchange rates 22 (24)
Net increase (decrease) in cash and cash equivalents $ 45 $ (53)
24Table of ContentsCash flows from operating activities were $3,776 million in 2025 compared to $3,384 million in 2024. The increase of $392 million in 2025 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.
• Days sales outstanding relating to trade receivables for the Company was 51 days in both 2025 and 2024.
• Days supply of inventory on hand was 82 days in 2025 and 80 days in 2024.
Cash flows from investing activities in 2025 and 2024 were impacted by the following factors:
• Net proceeds totaling $621 million from the sale of the CFC and non-core filtration businesses in fiscal 2025.
• Proceeds totaling $74 million from the sale of the MicroStrain sensing systems and Filter Resources businesses in fiscal 2024.
• Capital expenditures of $435 million in 2025 compared to $400 million in 2024.
Cash flows from financing activities in 2025 and 2024 were impacted by the following factors:
• Repurchases under the Company's share repurchase program amounted to 2.5 million common shares for $1.6 billion during 2025 compared to repurchases of 0.4 million common shares for $200 million during 2024.
• Net commercial paper repayments of $374 million in 2025 compared to net commercial paper borrowings of $359 million in 2024.
• Principal payments totaling $490 million related to the term loan facility (the "Term Loan Facility") in 2025 compared to principal payments totaling $385 million related to the Term Loan Facility in 2024. 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.
• Aggregate principal payment of $500 million related to the maturity of medium-term notes during fiscal 2025.
• Issuance of €700 million aggregate principal amount of 2.90 percent Senior Notes due 2030 from which proceeds were used to repay the €700 million aggregate principal amount of 1.125 percent Senior Notes due 2025 in fiscal 2025.
• Payments related to the maturity of $2.0 billion aggregate principal amounts of senior notes in 2024.Cash RequirementsWe are actively monitoring our liquidity position and remain focused on managing our inventory and other working capital requirements. We are targeting 2.5 percent of sales for capital expenditures for 2026 and have a long-term target of two percent. We will continue to prioritize capital expenditures related to safety, productivity 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 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.
DividendsCash dividends have been paid for 300 consecutive quarters, including a yearly increase in dividends for the last 69 years. The current annual dividend rate is $7.20 per common share.Share RepurchasesOn October 22, 2014, the Board of Directors approved a share repurchase program authorizing the repurchase of up to 35.0 million of the Company's common shares. As of June 30, 2025, we had 4.8 million shares available under this repurchase authorization. On August 21, 2025, the Board of Directors approved an update to the number of shares available under the Company's existing share repurchase authorization so that the aggregate number of shares available for repurchase as of such date was 20.0 million. There is no limitation on the number of shares that can be repurchased in a year and there is no expiration date for the program. Repurchases may be funded primarily from operating cash flows and commercial paper borrowings and the shares are initially held as treasury shares.LiquidityCash, comprised of cash and cash equivalents and marketable securities and other investments, includes $344 million and $311 million held by the Company's foreign subsidiaries at June 30, 2025 and 2024, 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.
25
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As of June 30, 2025, the Company had a line of credit totaling $3.0 billion through a multi-currency revolving credit agreement with a group of banks with $1.2 billion available for borrowing under the credit agreement. On August 21, 2025, the multi-currency revolving credit agreement was amended to increase the total line of credit by $750 million to $3.75 billion. 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 were authorized to sell up to $3.0 billion of short-term commercial paper notes as of June 30, 2025 with $1.8 billion outstanding. The largest amount of commercial paper notes outstanding during the fourth quarter of 2025 was $2.1 billion. On August 21, 2025, the authorization limit for short-term commercial paper notes increased to $3.75 billion.
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 2025, the company issued €700 million aggregate principal amount of 2.90 percent Senior Notes due March 1, 2030. We used the net proceeds from the issuance, together with cash on hand, to repay the €700 million aggregate principal amount of 1.125 percent Senior Notes upon maturity in March 2025. Our debt portfolio previously included a Term Loan Facility. During 2025, we repaid the remaining principal balance of $490 million of the Term Loan Facility. Additionally, we repaid the $500 million aggregate principal amount of fixed rate medium-term notes bearing interest of 3.30 percent upon maturity in November 2024. 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, 2025, 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, 2025, the Company's debt to debt-shareholders' equity ratio was 0.41 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, 2025, the long-term credit ratings assigned to the Company's senior debt securities by the credit rating agencies engaged by the Company were as follows:
Fitch Ratings A-
Moody's Investor Services, Inc. A3Standard & Poor's BBB+
Supply Chain Financing
We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers. We currently have supply chain financing ("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 DivestituresAcquisitions 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 both 2025 and 2024, we divested two businesses each year. On June 30, 2025, the Company announced that it has agreed to acquire Curtis Instruments, Inc. from Rehlko, for approximately $1.0 billion in cash. The transaction is subject to customary closing conditions, including receipt of applicable regulatory approvals, and is expected to close by the end of calendar year 2025. 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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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.The Company performed its fiscal 2025 annual goodwill impairment test as of January 1 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 2025, 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
27Table of Contentsdate. Changes in the assumptions or actual experience that differs from the assumptions 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 $17 million effect on annual pension expense and a 50 basis point decrease in the discount rate is estimated to increase annual pension expense by $3 million.
Net actuarial gains and losses are recorded in accumulated other comprehensive loss and are subject to amortization and will affect earnings in the future. 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.28Table of Contents