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Parker-Hannifin (PH): Company Profile, Stock Price, News, Rankings

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Parker-Hannifin

parker-hannifin

Please note this conference is being recorded.

I will now turn the conference over to your host, Todd Lianbruno, Chief Financial Officer. Thank you. You may begin.

Well, you, Diego. I'd like to welcome everyone to Parker's fiscal year twenty twenty five third quarter earnings release webcast. As Diego said, this is Todd Lianbruno, Chief Financial Officer speaking. And as usual with me today is Jenny Parmatier, our Chairman and Chief Executive Officer. We really do appreciate your interest in Parker and thank you for joining us today.

If we could move to Slide two, this slide addresses all of our disclosures on forward looking projections and non GAAP financial measures. Obviously, the items listed here could cause actual results to vary from our forecasts. The press release, this presentation, all reconciliations for all non GAAP measures were released this morning and are available under the Investors section on our website at parker.com. The agenda for today has Jenny starting with the highlights to our record third quarter performance. She's also going to reiterate the strengths of our transformed portfolio and how the tools of our Win Strategy allow us to drive performance in all economic climates.

I'm going to follow Jenny with some more details on our third quarter financial results. And then we're going to provide an update to our FY twenty twenty five outlook, including market verticals and of course updated financial guidance. We're going to conclude the session with the normal question and answer portion of our call, and we are going to do our best to address as many questions as possible. We know it is a busy day out there. So with that, I would ask everyone to move to Slide three.

Thank you, Todd, and thank you to everyone for attending our call today. Our third quarter performance demonstrates the strength of our business and our global team's ability to continue to deliver record results. We produced top quartile safety performance again this quarter, aligned with our goal to be the safest industrial company in the world. Record adjusted segment operating margin of 26.3. This is our first quarter surpassing 26%.

Record adjusted EBITDA margin of 27% and year to date cash flow from operations of $2,300,000,000 Parker order rates increased to 9%, reflecting our transformed portfolio and long cycle strength. This team is continuing to expand margins and EPS in a most dynamic environment. Next slide please. And this is how we do it. Our business system, the Win Strategy, has enabled us to consistently deliver strong results through business cycles.

Safety, engagement, and ownership are the foundation of our culture. With our decentralized structure and the agility of our global team, we are confident in our ability to manage through macroeconomic uncertainty, including tariffs. Every tool in this business system expands margins. Margins. Next slide please.

And our portfolio is more resilient than ever. We have the number one position in the motion and control industry with interconnected technologies and solutions across our key market verticals. The acquisitions of Clarcor, LORD, Exotic and Meggitt have doubled the size of our filtration, engineered materials and aerospace businesses, giving us greater exposure to longer cycle and secular growth trends. Next slide please. Dedicated use of our simplification tools drives margin expansion across cycles.

Today, we have a more agile operating structure than we have ever had before. Through use of Kaizen and the Parker Lean system, we evaluate and adjust our structure and footprint to ensure continuous improvement and optimization of our resources. Disciplined use of our eightytwenty tools has made us successful in reducing revenue complexity. Leveraging our distribution channel and rationalizing product allows us to serve our customers better. And our simplified design tools further reduce product and related manufacturing complexity that enables growth and efficiency in our operations.

We are using all of these tools to expand margins no matter what phase of the business cycle we are in. Next slide please. Supply chain leadership is a competitive differentiator for Parker. The addition of enhanced demand and capacity tools as well as dual sourcing strategies has increased visibility and resilience, reduced lead times and improved the customer experience. We have always had a local for local model driven by our desire to be close to our customers.

This has also allowed us to leverage global capacity to better serve all of our customers. We have dealt with tariffs before and are extremely grateful for our excellent pricing and supply chain teams. Tariffs are a lot of noise and work, but our teams are leveraging analytics and robust processes to navigate and act quickly through these dynamic and challenging times. Announced tariffs are approximately 3% of cost of goods sold or $375,000,000 on an annualized basis, fully offset by mitigation actions and designed to protect earnings per share. I'll now turn it back over to Todd to review the third quarter highlights.

Thank you, Jenny. I am on Slide nine and I'm going to just run through the financial results very quickly. As Jenny said, this was a strong quarter, record setting quarter in fact. It was another quarter of continued margin expansion and EPS growth. Sales were down 2% versus prior.

Organic growth was positive at 1%. Currency remained unfavorable at negative 1%. The main driver really of the overall decline is the result of those previously announced divestitures that we've made this year that accounted for 2% of the decline, which is essentially the entire decline. As Jenny mentioned, adjusted segment operating margins were up 160 basis points to 26.3%, that is a record. And adjusted EBITDA margins were up 150 basis points to 27%.

Obviously, the first time we've ever done that, that is a record. Net income is 9.4% at 18.2% return on sales. Both of those numbers are records and adjusted earnings per share is up 7% to $6.94 Being able to grow earnings per share 7% with the top line down 2% is just another indicator of just how different Parker is today. This was another quarter of strong performance that was consistent across all of the businesses, each contributed to the margin expansion and cash flow performance that Jenny mentioned. And this performance that we had in Q3 continues to support the expectations we have for another record year.

If we could go to the next slide, Slide 10, this just shows the walk of the $0.43 increase in adjusted earnings per share. Q3, really the same story that we had in the first half of the year, unbelievably disciplined operating performance. Segment operating income dollars are up $53,000,000 that's $0.32 of the increase in earnings per share. Aerospace continues to be the primary driver of our segment operating margin dollar growth. But the industrial businesses also delivered record segment operating margin percentages despite the pressures on the top line in those businesses.

Interest expense continues to be down, that is a $0.17 favorable result this year. That is really the result of our commitment to reducing debt. Corporate G and A is favorable $08 that really is related to lower market based benefits and just great discretionary cost controls across the businesses. Other expense was a drag of $0.13 That really is a combination of just less favorable pension expense versus prior year and obviously some currency translation just based on FX rates and volatility. And then lastly, share count and income tax basically offset each other.

That's how we got to the $694 adjusted EPS for the quarter. Really just want to commend our teams around the world for just great cost diligence and unbelievable operating performance that drove the strong results. Okay, if we go to eleven, we'll just dive into the segments a little bit. Order trend continues to be positive for the company. Orders are plus nine versus prior year.

Really, is driven by longer cycle strength that continues to drive order rates and backlog higher. And once again, every business delivered record segment operating margins. The total company is up 160 basis points. Specifically in the diversified North American businesses, sales were $2,000,000,000 organic growth was down 3% versus prior. That did improve sequentially from Q2, but the result was lower than we expected going into the quarter.

We continue to just see softness in the transportation, off highway and energy markets. Distribution sentiment remains positive, but what's really nice here is adjusted segment operating margins are up 110 basis points to a record 25.2%, really just driven by great operating performance and like I said before, cost controls. Gradual improvement in distribution kept orders at North America positive at plus 3% We were happy to see that. And this is the second quarter in a row of positive order entry results for North America.

If we look at the international businesses, order rates improved really to a double digit positive 11 here. That is really driven by a nice recovery and the long cycle exposure there. Sales were $1,400,000,000 Organically, was also down 3%. Asia Pacific specifically was up 2% organically. Latin America continues to be very robust at plus 8%, while the EMEA region remains challenged at negative 7%.

Our international teams really are remaining agile and focused on cost controls and reductions and really efficiency improvements. The evidence is clear in their margin performance. Adjusted segment operating margins here were 25.1% and expanded by 160 basis points versus prior year. Aerospace continues to be the standout, unbelievable inspiring results here. Sales were a record $1,600,000,000 in Aerospace, that's up 12% versus prior year.

Once again, this quarter, they exceeded our expectations on the top line. All of that growth was organic. Organic growth was 12%, really continue to be driven by the aftermarket strength in both defense and commercial end markets. This is the ninth consecutive quarter of double digit organic growth for aerospace, just unbelievably stellar performance. Margins are up 200 basis points and reached a record 20.7 We are certainly pleased that Aerospace is now a third of the company and Aerospace orders continue to be positive at plus 14%.

If we go to the next slide, Slide 12 is just some comments on cash flow. Strong cash flow performance from the corporation. Cash flow from operations on a year to date basis is 15.8%. That equates to $2,300,000,000 That is up 8% versus prior year and the $2,300,000,000 is a year to date record. Year to date free cash flow is also up 8% versus prior, that's about $2,000,000,000 or 13.7% of sales.

So just great cash flow performance across the company. You may have noticed last Wednesday, our Board approved a 10% increase to our quarterly dividend as a result of their confidence in the company's ability to continue to generate strong cash flows no matter what the business cycle brings us. And our dividend per share on a quarterly basis is now 1.8 The action will extend our record of increasing annual dividends paid per share to an amazing sixty nine years. Lastly, during the quarter, we purchased $600,000,000 of shares in addition to the usual $50,000,000 that we purchased as part of our 10b5-one program. Total repurchases in the quarter equated to $650,000,000 and on a year to date basis, repurchases now total $750,000,000 So moving on to guidance, let's move to Slide 14.

Jenny, I'm going hand it back to you to start with the update on market

Thank you, Todd. So taking a look at our FY twenty twenty five sales forecast by market vertical. For Aerospace and Defense, Todd just went over some strong results. We are raising full year organic growth to 12% on continued aftermarket strength and gradual OEM recovery. Previous guidance was 11%.

We are lowering in plant and industrial equipment growth to be negative low single digits. Now this was previously slightly positive low single digits, but this lowering is due to a prolonged delay in industrial recovery. But it is worth noting that quoting activity remains strong despite the project delays that are being seen. We are lowering transportation growth to be negative low single digit. This was previously neutral and this is primarily due to lower automotive production forecast in North America and EMEA.

Work truck demand does remain stronger than on highway same as last quarter. Off highway improved slightly to negative low teens. This was previously negative mid teens. OEM destocking and end market weakness does persist, but it is partially offset by stronger aftermarket. Ag weakness continues, no real sign of recovery here yet.

Lowered energy to negative low single digits, this was previously neutral, and this is due to lower oil prices and a disciplined approach to capital spending. And we have increased HVAC and R to high single digits. This was previously mid single digits and driven primarily by strength in residential air conditioning. I'll hand it back to you Todd to go over the guidance update.

Okay. Thank you, Jenny. Moving to Slide 15, I'm just going go through some of the details for the guide. Reported sales growth for the year is now forecasted to be approximately minus one. In respect to organic growth to be about positive 1%.

We have raised Aerospace organic growth to 12% for the year, but we've lowered Industrial segment, the Industrial segment to minus 3%. Industrial North America organic growth is now forecasted to be approximately minus 4% and Industrial International organic growth is now forecasted to be approximately negative 2.5%. The previously announced divestitures on a full year basis will be negative 1.5%. One hundred % of those divestitures were reported within the industrial North American businesses. And currency is now expected to be just a slight negative 0.5% headwind and those are based on March 31 exchange rates.

In respect to segment operating margins, we are raising guidance by 10 basis points. For the full year, that will now be 25.9% segment operating margin. That forecast will be a full year margin expansion of 100 basis points versus prior year. And of course, that improvement is being contributed by all businesses. Assumptions for corporate G and A, interest and other, as usual, we provided those in the appendix.

We expect full year tax rate to be 21.5%. When you look at adjusted EPS, we now see the full year excuse me, as reported EPS, the full year is now $26.2 at the midpoint and we are maintaining our adjusted EPS guide of $26.7 at the midpoint. On both of those numbers, there's a range of plus or minus $0.10 on both the as reported and the adjusted figures. In respect to tariffs, Jenny mentioned this earlier, but we expect to fully mitigate any additional costs associated with all the announced tariffs. Our EPS guidance does include costs and mitigation actions with all announced tariffs and those will be fully offset within the quarter.

For Parker, on an annualized basis, we have targeted the announced tariff cost to be about $375,000,000 and that equates to roughly 3% of our cost of goods sold. We foresee full year free cash flow to be $3,100,000,000 and of course free cash flow conversion is expected to be greater than 100%. For Q4, the last quarter of our fiscal year, more specifically, we expect reported sales to be $5,100,000,000 organic growth of positive 05%, adjusted segment operating margin is expected to be approximately 26.1%. We have modeled a tax rate of 22% for the quarter and adjusted EPS is expected to be $7.05 That also includes all announced tariffs and our mitigating actions. So that's it for the details on the guide.

Jenny, I'll hand it back to you and ask everyone to move to Slide 16.

Thanks, Todd. And just a final reminder on what drives Parker. I said it at the beginning of the presentation, safety, engagement and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance. And we remain committed to being great generators and deployers of cash.

We are actively focused in extending our track record, deploying capital to deliver the best shareholder value possible. Back to you, Chad.

Okay. Diego, we are ready to start the Q and A portion of the call. So we'll take whoever you have in queue.

Thank you. Our first question comes from Mig Dobre with Baird. Please state your question.

Thank you for taking the question. Good morning, everyone. I guess the orders, at least to me, were quite surprising in the quarter. It's been, what, more than three years since we've seen international orders up 14% positive in North America as well. So I guess my question is this.

When you talk about longer cycle, can you maybe talk a little bit more about that? How do these orders actually get to convert to revenues? What's kind of the time cycle here? And related to this, and I recognize that you don't provide fiscal twenty twenty six guidance now, but given this inflection that we've seen in orders, is it fair for us to expect positive organic growth in fiscal twenty twenty six in your industrial business?

Sure, Mig. So to answer your last question first, I think it is fair to say that we should get some positive industrial growth in FY twenty twenty six. And these orders that we're talking about long cycle are definitely beyond this last quarter here in fiscal year twenty twenty five. So as Todd went through and you said the rates did increase to 9% for total Parker. So when you look at North America, this was the second consecutive quarter of positive orders and stayed the same at 3%.

So remember we have aerospace and defense business in our industrial segment. So we saw some strong orders there and we also saw HVAC and Refrigeration orders remain strong. There was some gradual improvement from the distribution channel, not anything that I would call restocking, but their sentiment is positive and they are awaiting the recovery. When you look at international order growth, it definitely accelerated on long cycle strength. So Europe mainly driven by long cycle energy orders, power gen and oil and gas.

Todd mentioned Asia orders remained solidly positive and that is primarily driven by electronics and semicon. And this is the third quarter in a row of positive orders for international. And Aerospace, obviously, I think well aware of that, but the backlog did increase again. Last quarter was a record at $7,000,000,000 and this quarter it went up to $7,300,000,000 and this is on both strong commercial and defense orders. So that's some color on the orders.

Great. Thank you. And my follow-up, speaking of backlog, very sizable in aerospace, than a year's worth of business in there. And you sized the tariff impact here, but I sort of do wonder how you think about the risks that you might have on a cost side, whether it's tariff or any other costs related to this backlog and your ability to kind of either manage that through or any other mechanisms that you have?

So we as we said, we expect we will fully mitigate the tariff impact. We as I was going through in my slides, we have several different actions in place. And when you look at the mitigation actions, I would put them in three different buckets, pricing actions, supply chain actions, and what we do all the time with the Win Strategy reducing costs ongoing basis. So those three areas are how we're confident that we're going to fully mitigate this and we're ready.

Thank you. And our next question comes from Jamie Cook with Truist Securities. Please state your question.

Hi, good morning and congratulations on another nice quarter. I guess my first question, Jenny, just the strength in margins in aerospace and defense. So to what degree are you worried that the aftermarket story and the strength in aftermarket is driving the margins that in 2026, I guess, that becomes a headwind as OE starts to pick up? And if you could just break apart, if there's anything more structural there in margins besides just aftermarket, right, improving there associated with MEG it, I guess? That's my first question.

And my second question, understanding you just put out these targets last June, but if we look at your implied adjusted EBITDA margins as we for the full year, you're targeting 25.9%, I think, versus the target you laid out last year of 27%, and your industrial businesses are still fairly depressed. So again, just trying to understand why that is conservative? Or again, is the concern that aftermarket sorry, aerospace margins are sort of over earning? You know what mean? As that normalizes and industrial picks up, 27% is really the right target.

Okay, Amy. So starting out with just a little bit of color on Arrow aftermarket. So it's been very strong for us. It was strong in Q3. I mean year to date, our aftermarket is 50% through Q3.

So now going into Q4, we're forecasting around 49%. For the full year, it will be 50%. And just a reminder too, we did really gain a lot of aftermarket with the Meggitt acquisition. So we're in a higher aftermarket position to begin with. We do see that the gradual recovery on the rates, the OEM rates are having an impact on that mix.

But we do feel very confident about our ability to continue to expand margins in aerospace. So we have not seen any degradation as a result of some of the reports out there about North America air traffic growth slowing. We're keeping a close eye on that. But we still have a very strong aftermarket business here and we see that into the foreseeable future. As far as the targets go, I mean, obviously, Todd mentioned this, we couldn't be any prouder of these teams and how they've delivered in a especially the industrial side of the business in a negative top line environment.

We really do believe continue to expand margins with all the tools in the Win Strategy. Obviously, we'd like to see this industrial side of the business turn around. I think we all will enjoy that and benefit from it. But right now, we have a lot of confidence with everything going on in the environment that we're going to hit those targets and that's what we're sticking with.

Jamie, I would just add to what Jenny said, couldn't be happier with the progress we're making on margins. But when we set those targets, we also set a 4% to 6% growth target. We also set an EPS growth target. We also set a cash flow target. And while we are making progress on those, we are far away from achieving those as well.

So we look at these kind of holistically together. It's not just one of the margins, it's really all of the targets. So I'd tell you that's what the global team is focused on right now.

And your next question comes from Julian Mitchell with Barclays. Please state your question.

Hi, good morning. Maybe first off, wanted to circle back to the sort of the jaws widening between industrial organic orders and sales trends that's been apparent for a couple of quarters. I understand on some level, it's natural if orders are meant to lead sales that there'd be a delta a lot of the time. And you mentioned the longer cycle element boosting the orders growth versus sales. Just wondered if there was any other dynamic to be aware of perhaps sort of the dollar comps that we don't see from the outside?

Is there anything notable there on orders versus sales? And maybe sort of allied to that, is there any color you could give us on how that industrial backlog is moving? Think it was $3,500,000,000 or so at the December.

Yes. So first of all, I would say that with the way the portfolio has transformed over the last several years, the connection between orders and shipments has extended, right? I mean we do see more longer cycle business. As we mentioned earlier, aerospace being a third of the business and the aerospace that is sitting inside of our industrial businesses as well as some other industrial business that we consider longer cycle, is different than it was in the past. So that connection isn't as tight as we may have been used to even on the industrial side of the business.

It was really just around any color you could give us on, say, the backlog movement in industrial? I think that was 3,500,000,000.0 at the December.

So it was $3,700,000,000 for Industrial and $7,300,000,000 for Aerospace. So it was 2% higher than prior year and 5% up sequentially.

That's very helpful. Thank you. And then just if you could put a finer point on some of the aerospace growth trends sort of in the fourth quarter as you see it just so we have the jumping off point into 2026 on the sort of OE versus aftermarket dynamics in commercial and military?

Sure. You bet. So we as we said, we've raised the full year guidance organic growth to 12%. We expect commercial OEM to be mid single digits and this obviously is as a result increases and some of the wide body recovery we're seeing as well. We expect defense OEM to be low single digit growth.

We expect commercial MRO of high teens growth. So again, even though there's been some reports of North America air traffic growth slowing, global growth is still increasing and we still see that we have an aging fleet out there. We expect defense MRO of high teens growth and this is really a focus on retrofits and upgrades and really some nice increases in the public private partnerships that we have with the Department of Defense.

Your next question comes from Scott Davis with Melius Research. Please state your question.

Hey, good morning. Again, congrats on the margins and getting through what's been kind of a slower time in the core industrial stuff. This may be an impossible question to answer, Jenny. But have you guys when you think about the margin gains you've made, obviously, mix has got to have a huge part of it. But is there any way to kind of tease out what kind of how much operational improvements have really helped you guys?

Even if you can't quantify it, just color around underlying operational improvements that could really help things snap back outside of aerospace? Let's just assume aerospace isn't as much of a tailwind incrementally 26%, twenty seven %. But I don't know, may just be an impossible question, but I'm curious to hear your response.

Well, would say that as I was mentioning in the presentation, you've heard us talk a lot about all the tools that we have in the Win Strategy and the nature of our decentralized operating structure, allowing those general managers to be completely in control of their business, right? So with our enhanced demand and capacity tools that we have, they have better visibility than they've ever So their planning ability around their operations, how they run their operations, how they control the cost of their operations is greater than it's ever been. So the operational improvements are going to continue to happen because they have the right tools in our toolbox and they have the ability to make these improvements even when the volume is down. So we expect that as the volume comes back we're going to use those same tools and we're going to be very mindful of how cost comes back into the business. And we're going to continue to do what we've been doing.

Makes sense. Just as a totally different follow on, but M and A, just again, I know you still talk about having a pretty strong pipeline, but any additional color on what we might expect to see, whether larger deals, midsize, small, more bolt ons? I mean, any if you can talk through that pipeline, you're back just a little bit of color

I mean, listen, the pipeline has deals of all sizes. It really does. I mean the timing is hard to predict right now. The big thing for us, you've heard me say this before, has to be strategic. The relationships and the analysis continue to be very active.

And we're still looking to acquire companies where we're the clear best owner that complements our interconnected technologies, follows the secular trends, all the same criteria that you've heard me talk about before. But it's active. It's the timing right now that's hard to predict.

would just add, Scott, I agree with everything Jenny said. The pipeline remains unbelievably active. It's just really kind of hard to predict timing on that. We have said we'd be active on capital deployment. You saw us do some share repurchase in the quarter.

We have committed to operate the company around 2 times net debt to adjusted EBITDA. We are still 1.7 today. So our commitment our preference certainly is to do acquisitions, but we are committed to be active in the deployment space.

And your next question comes from David Raso with Evercore ISI. Please state your question.

Hi, thank you for the time. The tariff 3% of COGS, is that a number that is expected to go up for the new fiscal year, meaning you would think the first quarter there's some inventory on the ground, there's some mitigating costs that already landed before tariffs? Or should we think of 3% of COGS as the run rate for fiscal twenty twenty six based off the tariffs as they are today?

Yes, David. Hey, this is Todd. That is an annualized number. So the way we calculated that is basically looking at every tariff that has been announced and what our current run rate is in those areas. So I don't expect that to go up unless there's some kind of other change in the tariff space.

And like Jenny said, our team is working feverishly around the globe to do everything we can to not just make sure that we protect earnings per share, but to make sure that we make the best decisions to mitigate that 3.75%.

And how much of the run rate is actually hitting calendar 2Q, fiscal 4Q? I'm just trying to understand, are we at full speed, 3% hit for these three months of this quarter? Or is it more of a and if it's helpful to say at the peak during this quarter, it's the 3% of COGS? I'm just trying to get a sense of the ramp and if other actions are needed to be taken for, say July 1 price increases or whatever it may be.

No, that is pretty much the run rate as it sits today. There is no ramp on that. And I would tell you the actions have already been in place.

Your next question comes from Andrew Obin with Bank of America. Please state your question.

Yes. Good morning, I guess. Bill, good morning. Yes. Good morning.

Yes. So a question, I guess, about a month ago, people were excited about potential for European recovery. International orders are improving. Can you just tell us what it is you are seeing in Europe? And also, we've been getting a lot of questions about your exposure to European defense budgets.

If you could just sort of give us color on, a, what are you seeing in Europe and specifically potential exposure within aero to European defense? Thank you.

Okay. So first Andrew, talking about let's just start with the European defense. We do have I think we talked about this the last time we were together. We do have content. We're well positioned globally in the defense market and we sell to both U.

S. And international defense prime. So many of The U. S. Built aircraft are exported.

And we expect that for instance with the F-thirty five, a third of that total fleet will be sold to the allied military. So that kind of gives you an idea of what our exposure is there. And sorry again, got distracted with the fee foreign military. Your first question please.

Yes. So the second question is just German elections at Hanover, I think nothing yet. People sort of seem to be excited about potential. What are you hearing from your partners in Europe?

Yes. So obviously, we expect this broad based softness across the end markets in Europe to continue. I mean, see that easing up. But what there is some positive sentiment out there about is the proposed stimulus and future defense spending as we were just saying. So you have the European Commission proposal on defense spending.

You have some big dollars out there for Germany infrastructure on energy transport and then overall defense spending. So that's longer term, but that's what the teams are talking about to be positive about in the future.

Parker-Hannifin Q3 2025 Earnings Call Transcript | Fortune

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Nino Paoli

Davenport, Florida, Starbucks Coffee, outside exterior drive thru through.

Parker-Hannifin (PH) Q3 2025 Earnings Call Transcript

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