Acquisitions and divestitures

3 Months Ended

Sep. 30, 2023

Business Combination and Asset Acquisition [Abstract]

Acquisitions

On September 12, 2022, we completed the acquisition (the "Acquisition") of all the outstanding ordinary shares of Meggitt plc ("Meggitt") for 800 pence per share, resulting in an aggregate cash purchase price of $7.2 billion, including the assumption of debt.

Meggitt is a leader in design, manufacturing and aftermarket support of technologically differentiated systems and equipment in aerospace, defense and selected energy markets with annual sales of approximately $2.1 billion for the year ended December 31, 2021. For segment reporting purposes, approximately 82 percent of Meggitt's sales are included in the Aerospace Systems Segment, while the remaining 18 percent are included in the Diversified Industrial Segment.

Assets acquired and liabilities assumed are recognized at their respective fair values as of the Acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. During the three months ended September 30, 2023, measurement period adjustments did not have a material impact on the Consolidated Statement of Income. The following table presents the final estimated fair values of Meggitt's assets acquired and liabilities assumed on the Acquisition date.


	June 30, 2023 (previously reported)		Measurement Period Adjustments		September 12, 2022 (Final)
Assets:
Cash and cash equivalents	$	89,704	$	—	$	89,704
Accounts receivable	409,642		1,181		410,823
Inventories	739,304		13,580		752,884
Prepaid expenses and other	102,032		20,673		122,705
Property, plant and equipment	658,997		(1,428)		657,569
Deferred income taxes	34,198		(18,730)		15,468
Other assets	180,991		(647)		180,344
Intangible assets	5,679,200		(28,000)		5,651,200
Goodwill	2,789,080		10,891		2,799,971
Total assets acquired	$	10,683,148	$	(2,480)	$	10,680,668
Liabilities:
Notes payable and long-term debt payable within one year	$	308,176	$	—	$	308,176
Accounts payable, trade	219,842		(705)		219,137
Accrued payrolls and other compensation	87,074		(1)		87,073
Accrued domestic and foreign taxes	21,068		(818)		20,250
Other accrued liabilities	322,040		158,137		480,177
Long-term debt	711,703		—		711,703
Pensions and other postretirement benefits	99,553		(2,028)		97,525
Deferred income taxes	1,259,417		(19,700)		1,239,717
Other liabilities	418,461		(137,365)		281,096

Total liabilities assumed	3,447,334		(2,480)		3,444,854
Net assets acquired	$	7,235,814	$	—	$	7,235,814

Goodwill is calculated as the excess of the purchase price over the net assets acquired and represents cost synergies and enhancements to our existing technologies. For tax purposes, Meggitt's goodwill is not deductible. Based upon a final acquisition valuation, we acquired $4.2 billion of customer-related intangible assets, $1.1 billion of technology and $303 million of trade names, each with weighted average estimated useful lives of 21, 22, and 18 years, respectively. These intangible assets were valued using the income approach, which includes significant assumptions around future revenue growth, earnings before interest, taxes, depreciation and amortization, royalty rates and discount rates. Such assumptions are classified as level 3 inputs within the fair value hierarchy.

The following table presents unaudited pro forma information for the three months ended September 30, 2022 as if the Acquisition had occurred on July 1, 2021.

(Unaudited)

Three Months Ended

September 30, 2022

Net sales

4,614,105

Net income attributable to common shareholders

498,375

The historical consolidated financial information of Parker and Meggitt has been adjusted in the pro forma information in the table above to give effect to events that are directly attributable to the Acquisition and factually supportable. To reflect the occurrence of the Acquisition on July 1, 2021, the unaudited pro forma information includes adjustments for the amortization of the step-up of inventory to fair value and incremental depreciation and amortization expense resulting from the fair value adjustments to property, plant and equipment and intangible assets. These adjustments were based upon a preliminary purchase price allocation. Additionally, adjustments to financing costs and income tax expense were also made to reflect the capital structure and anticipated effective tax rate of the combined entity. Additionally, the pro forma information includes adjustments for nonrecurring transactions directly related to the Acquisition, including the gain on the divestiture of the aircraft wheel and brake business, loss on deal-contingent forward contracts, and transaction costs. These non-recurring adjustments totaled $196 million during the three months ended September 30, 2022. The resulting pro forma amounts are not necessarily indicative of the results that would have been obtained if the Acquisition had occurred as of the beginning of the period presented or that may occur in the future, and do not reflect future synergies, integration costs or other such costs or savings.

Divestitures

During September 2023, we divested the MicroStrain sensing systems business, which was part of the Diversified Industrial Segment, for proceeds of $37 million. The resulting pre-tax gain of $13 million is included in other income, net in the Consolidated Statement of Income. The operating results and net assets of the MicroStrain sensing systems business were immaterial to the Company's consolidated results of operations and financial position.

During September 2022, we divested our aircraft wheel and brake business, which was part of the Aerospace Systems Segment, for proceeds of $441 million. The resulting pre-tax gain of $373 million is included in other income, net in the Consolidated Statement of Income. The operating results and net assets of the aircraft wheel and brake business were immaterial to the Company's consolidated results of operations and financial position.