Dear Shareholders, This past year was remarkable in two very different ways. It was a year of outstanding cash generation and record financial performance, including sales, adjusted segment operating margins and adjusted earnings per share. At the same time, it was a year marked by an extraordinary number of significant challenges, including the effects of inflation, supply chain constraints, labor shortages, the war in Ukraine, and the lasting effects of the COVID-19 pandemic. Our ability to achieve these record results during such a challenging year is a testament to our team members around the world, their focus on executing the Win Strategy 3.0, and the years of focused efforts to transform our business into one that is fundamentally stronger, more agile and highly resilient.
Going forward, we see compelling margin expansion opportunities supported by exciting secular trends, including aerospace, digital transformation, electrification and clean technologies. These are key drivers of sustainable organic growth that are expected to lift Parker’s performance to even greater heights.
A PATTERN OF RECORD PERFORMANCE
The actions we have taken as part of the Win Strategy and the ongoing transformation of our portfolio have built a much more resilient and longer cycle business capable of weathering the challenges we have faced. Our results over the past several years, including fiscal year 2022, demonstrate the consistency with which Parker is executing and delivering record levels of performance:
- Since fiscal year 2015, we have reduced our Recordable Incident Rate by 72% and our Lost Time Incident Rate by 44%. Our goal is to achieve zero recordable incidents by 2030. We believe nobody should ever be injured at work.
- Total net sales were a record at $15.86 billion, an increase of 11%, compared with $14.35 billion in fiscal year 2021.
- Total segment operating margin reached 20.1% as reported, or a record 22.3% adjusted, a 120-basis point improvement from fiscal year 2021.
- Net income was $1.32 billion. Adjusted net income was $2.44 billion, an increase of 24%, compared with $1.97 billion in the prior year.
- EBITDA margin was 15.4% as reported, and 22.6% on an adjusted basis, a 130-basis point improvement in adjusted EBITDA margin compared with fiscal year 2021.
- Earnings per share were $10.09 as reported. Adjusted earnings per share increased 24% to a record $18.72.
With our purpose as our guide, the Win Strategy charting the path forward and our continued portfolio transformation fueling our momentum, Parker is operating at an incredibly high level and the future has never looked brighter.
CAPITAL DEPLOYMENT ADDS RESILIENCY AS PORTFOLIO TRANSFORMATION CONTINUES
Parker has a long track record of generating and deploying cash efficiently to drive growth, create outstanding returns for shareholders and strengthen our future.
On September 13, 2022, we announced the completion of our cash acquisition of Meggitt PLC, a global leader in aerospace and defense motion and control technologies, which was first announced in August 2021. The acquisition will significantly increase the size of our aerospace business and aftermarket sales mix, creating a world-class provider of engineered aerospace solutions. Together, we will have the ability to advance next generation commercial and military aerospace programs and better serve customers through accelerated R&D and highly complementary technologies.
With Meggitt, we are applying the lessons learned and best practices established with our successful integrations of CLARCOR Inc., LORD Corporation and Exotic Metals Forming Company in recent years. In addition to the remarkable team members they brought to Parker, those acquisitions fundamentally transformed our range of filtration, engineered materials and aerospace technologies. This further enhances the breadth of our portfolio, approximately 85% of which are solutions with strong intellectual property protection, and we will continue to focus on highly engineered products and systems with long product lifecycles as a key competitive differentiator.
The benefits of widening our exposure to attractive margin, high-growth businesses are already evident in our recent organic sales, margins and cash flow performance. By deploying cash to complete these strategic acquisitions, we are building a better Parker – one that more effectively withstands periods of economic instability to deliver outstanding value for our shareholders, better positions the company to capitalize on key growth trends and increases our exposure to longer cycle and less volatile markets.
TRENDS ACCELERATING ORGANIC GROWTH
Parker has a broad range of opportunities to drive future growth. In the next five years, our goal is to achieve 4% to 6% organic sales growth over the cycle, which is a step change from our previous industrial production-based growth target.
Many of the initiatives outlined in the Win Strategy will be key drivers of that growth. On top of that, we see a need for industrial companies to reinvest in capital spending, after a long period of underinvestment, to strengthen supply chains, build infrastructure and acquire equipment, which leads to higher levels of machine automation where Parker plays a leading role.
The acquisitions we have completed have added businesses that are accretive to organic growth rates and offer more exposure to longer cycle end markets and a growing aftermarket revenue stream for Parker. Today, we are better positioned to capitalize on several important secular trends that we see having lasting impact on future growth.
As the global aerospace industry gradually re-emerges from the pandemic, its continued recovery will benefit Parker due to our well-balanced, long-cycle portfolio of commercial and military aircraft technologies. The acquisition of Meggitt will add extensive new capabilities and significantly expand our aerospace technology offering to customers.
Challenges stemming from the extended shortage of semiconductors during the past several years have emphasized the importance of these chips to nearly every global industry. Parker provides a broad range of products and systems that support semiconductor manufacturing. These will remain in critical demand as production spend continues to rise in the coming years.
Our technologies can similarly be found throughout 5G towers, large-scale data centers and specialty machine automation systems in manufacturing facilities across the globe.
The rapid pace of clean energy technology and regulations are converging to accelerate consumer adoption of electric vehicles, while OEMs continue to advance and implement various hybrid and all-electric solutions for heavy-duty equipment. Parker technology can be found throughout passenger cars and SUVs, light-duty trucks, tractors, buses and countless other vehicles that have historically been powered by combustion engines. The transition from combustion engine to electric nearly doubles Parker’s bills-of-material on many applications. We see tremendous upside in the coming years as manufacturers, fleets and drivers around the world continue to transition to electric power.
Our company is essential to the production of both solar and wind energy. At the same time, we’re applying our filtration technology to enable cleaner and faster extraction of lithium for batteries, supporting the growing hydrogen economy, and continually getting involved in pioneering opportunities – all to realize a cleaner, more sustainable future.
The broader trend of both public and private interest in clean technologies and renewable energy to achieve net zero carbon emissions will require massive investment during the next two decades. Parker technologies will help the world achieve these clean energy goals.
Our strategy and ongoing portfolio transformation have positioned Parker for significant margin expansion opportunities and will enable sustained organic growth over the cycle.
NEW FIVE-YEAR FINANCIAL PERFORMANCE TARGETS
While Parker has made meaningful advancements over the past several years, our team members are committed to achieving top quartile performance and we intend to build upon our strong financial position and distinct competitive advantages. As a result, in March 2022 we announced new five-year financial performance targets through fiscal year 2027:
- 4% to 6% Organic Growth
- 25% Adjusted Segment Operating Margin
- 25% Adjusted EBITDA Margin
- 16% Free Cash Flow Margin
- >10% Adjusted Earnings Per Share Growth
Achieving our fiscal year 2027 financial targets would put us among the top quartile of our proxy peer companies.
Our team members have demonstrated unwavering responsiveness during a period of immense change, and Parker’s record performance is a direct result of their trust, engagement, tireless efforts and disciplined execution. It’s our people, our culture and values, and our purpose that make us successful. We are proud to be a part of this world-class Parker team.
Sincerely,
Thomas L. Williams
Chairman and Chief Executive Officer
Lee C. Banks
Vice Chairman and President
September 2022
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