Parker-Hannifin Corporation

Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press star zero and a member of our team will be happy to help you.

© transcript Emily Beynon ¶¶ ¶¶ ¶¶ Thank you for your continued patience your meeting will begin shortly.

If you need assistance at any time, please press star zero, and a member of our team will be happy to help you.

. . . ¶¶ ¶¶

Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press star zero, and a member of our team will be happy to help you.

¶¶ ¶¶ Please stand by.

Your meeting is about to begin. Good morning and welcome to Parker Hannafin Corporation's Fiscal 2026 Third Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question and answer session. To ask a question during this period, you will need to press star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star 2. please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to Todd Liam Bruno, Chief Financial Officer. Please go ahead.

Thank you, Chloe. I'd like to welcome everyone to Parker's Fiscal Year 2026 Third Quarter Earnings Release Webcast. As Chloe said, this is Todd Liam Bruno, Chief Financial Officer, speaking. And with me today, as usual, is Jenny Parmentier, our Chairman and Chief Executive Officer. Thank you all for your time and your interest in Parker. We truly appreciate it. Let's begin the call on slide two and address our disclosures on forward-looking projections and non-GAAP financial measures. Items listed here could cause our actual results to vary from our forecast. Our press release, this presentation, and reconciliations for any financial And all non-GAAP measures were released this morning and are available under the investor section on Parker.com. Today's agenda has Jenny reviewing our record third quarter performance. Then she will highlight two of our largest market verticals, that is aerospace and defense and transportation. I'm going to follow with some details on our third quarter financial results. And then Jenny and I will provide an update to our FY26 outlook and including an update to market verticals and financial performance. As usual, we will conclude with the Q&A session of the call, and we will try to address as many of the questions as we have as possible. With that, now I ask you to draw your attention to slide three, and Jenny, the floor is yours.

Thank you, Todd, and thank you to everyone for attending the call today. Q3 was a quarter of record performance enabled by the strength of our portfolio. We achieved top quartile safety performance with a 12% reduction in our recordable incident rate. This was our safest quarter ever and puts us in line with our goal of being the safest industrial company in the world. I did want to acknowledge the severe weather events that occurred in Texas earlier this week, where Parker team members live and work, some of whom may be listening to the call right now. We have a facility in Mineral Wells, Texas, where we employ over 300 team members. Their safety remains our top priority, and thankfully, those on site at the time of the severe weather are safe. However, there was damage to our facility, which we are still assessing. We are thankful to all our team members, as well as the responders and service providers who are assisting at our site and in the broader community. With that, let's share our results for the quarter. Our team delivered record Q3 sales of $5.5 billion, organic growth of 6.5%, and 40 basis points of margin expansion, resulting in 26.7% adjusted segment operating margin. Adjusted earnings per share grew 18%, and year-to-date cash flow from operations was $2.6 billion. Orders came in at 9%, with a record backlog of $12.5 billion. And we are continuing to make progress on the filtration group acquisition. Integration planning is underway using our proven playbook. Moving to slide four, please. Many of you on the call today have seen this slide before, why we WIN. First, the WIN strategy is our business system. We have a decentralized operating structure, 85 divisions run by general managers with full P&L responsibility, acting like owners, close to their customers, and executing the WIN strategy every day. Next, we have innovative products that solve customer problems, 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers. And finally, our distribution network is the best in the world. It is truly an extension of our engineering team, providing solutions to all those small to midsize OEMs that are participating in capital spending and investment. These partners are experts at applying our interconnected technologies. Moving to slide five. We have the number one position in the $145 billion motion and control industry, a growing space where we continue to gain share. As a reminder, these six market verticals represent greater than 90% of the company's revenue. We have a focused portfolio creating distinct value for our customers. Our powerhouse of interconnected solutions cuts across these market verticals and gives us a clear competitive advantage. Two-thirds of our revenue comes from customers who buy four or more technologies, and our growth is focused on faster-growing, longer-cycle markets and secular trends. As Todd mentioned, today I would like to talk about the aerospace and defense and transportation market verticals. Now on slide six, I'd like to highlight how we utilize our focused portfolio of core technologies to solve problems and create value for customers in aerospace and defense. our largest market vertical representing 35% of Parker's sales. We have been a trusted partner since the inception of the aerospace industry and today have products and technologies on every major aircraft program globally. Our portfolio is well balanced with approximately two-thirds of our sales from commercial programs and one-third from defense programs. We have proprietary designs across commercial transport, defense-fixed wing fighter, business jet, and helicopter platforms. With the MEGAD acquisition, we increased our global footprint and are now very well equipped to serve current and future demand from OEM and aftermarket customers in the Americas, EMEA, and Asia. Demand remains robust, orders continue to outpace shipments, and we are on track to finish our fourth consecutive year of double-digit organic growth. Parker is better equipped than ever before with complementary technologies to help shape the future of flight and deliver a compelling value proposition for our customers today and on next-gen commercial and defense programs in the years ahead. Moving to slide seven, featuring our transportation market vertical, which represents 15% of Parker sales. Our suite of differentiated and interconnected components and systems create value for customers across internal combustion, hybrid, and electric vehicles. We are truly energy agnostic and well positioned to meet changing customer needs. Today, we win with a focused portfolio of innovative products and our application engineers who work closely with customers to specify Parker technologies that improve the safety, reliability, and fuel efficiency of their equipment. Parker filtration provides protection to the engine and fluid power systems. Our power takeoffs provide reliable power-to-work functions. Our valves, hose, and fittings control the flow of safety-critical systems, and our engineered materials provide critical sealing, shielding, and thermal management. In addition, our robust network of channel partners serve the aftermarket needs of end users around the world. Lastly, we are seeing an increase in OEM orders for heavy-duty trucks, our largest platform within transportation, and as a result, are increasing fiscal year 26 sales guidance for this market. I'll turn it back to Todd to review third quarter highlights.

Well, thank you, Jenny. We are on slide nine, and I'm going to start with just the summary financial results. As Jenny said, our team delivered another set of new records this quarter for sales, adjusted segment operating margin, EBITDA, net income, and adjusted EPS. Total sales were up nearly 11%. Organic growth was 6.5%. Currency was favorable at 2.5%. and acquisitions added 1.5% to the total. Adjusted segment operating margins were 26.7, that is up 40 basis points from prior year, and adjusted EBITDA was up 20 basis points to reach 27.2. We have achieved two new first-time-ever milestones this quarter. Adjusted net income surpassed $1 billion for the first time ever, and that is a 19.1% return on sales. And in addition, the adjusted earnings per share of 817, that's the first time we've been above $8 for a single quarter ever. As Jenny said, that is a growth of 18% for this prior year. Our teams around the globe did an excellent job this quarter, resulting in another quarter of strong performance. That organic growth, those records across the board, and that 18% EPS growth, we're really proud of everyone for their efforts. We're well positioned and we remain confident in delivering another record year in 2026. So if we can move to slide 10, we'll just display the walk. The $1.23 of additional EPS, that's that 18% increase. Main driver continues to be increased segment operating income dollars. That added 96 cents or 14% of the growth versus prior year. If you go to the next bar, income tax was favorable, 18 cents. There was a couple discrete items that occurred within the quarter to drive the 18-cent favorable year-over-year comparison. Share count was also favorable. That drove 14% of improvement from prior year. That was really based on all the discretionary purchases that we've done. over the last year or so. Interest was just two cents unfavorable, and that was driven by just a slightly higher average debt balance that was slightly offset by lower rates. And corporate G&A and other were a little bit higher, just three cents, due to some favorable market-based benefits that really occurred in the prior year. So not a FY26 issue, that was FY25. The result is a record $8.17. It's just really driven by strong growth. and our team continuing to work the win strategy. I really appreciate the team's effort on safety. Jenny mentioned this was our safest quarter ever, really focusing on our customers, achieving that growth, and just really strong operating results. So thank you to all. If we can go to slide 11, let's look at the segment performance. If you look at orders, we were nine in total. with positive order rates across all of our businesses. Backlog increased to a record level of $12.5 billion. We generated record segment operating margins. That was 40 basis points of margin expansion. And overall, just a great Q3. If we look at North America specifically, sales were $2.1 billion. with organic growth of nearly 3%. That was slightly better than our expectations. Strongest markets within North America were in plant and industrial equipment, off highway, and followed by energy. Adjusted operating margins were up 10 basis points for a Q3 record of 25.3%, and orders remained robust at 7% compared to prior year. Looking at the international businesses, sales were a record, $1.5 billion. That was up 13% versus prior year, with organic growth attributing for 3% of that. Asia-Pac had another strong quarter of organic growth at plus 10. EMEA was flat, and Latin America was down versus prior year. Moving to margins, margins were up 20 basis points on the international businesses, achieved a record of 25.3 for the quarter, and international orders continue to be plus 6 versus some really challenging comps of plus 11 in the prior year. Aerospace, same story here, another fantastic quarter for the aerospace businesses, sales of $1.8 billion. That's up 15.5% versus prior year. Organic growth was 14.2% in aerospace. That is really driven on continued commercial strength in both the OE portions and also the aftermarket. Margins are up 80 basis points and reached 29.5% for the quarter. We had double-digit OEM and aftermarket order growth. That resulted in aerospace order rates of plus 14, and backlog increased 15% in this segment and reached a record of $8.4 billion. We continue to see strength in the aerospace businesses. Each of our aerospace market segments delivered positive sales growth for the quarter. Just a great quarter for aerospace. If I could draw your attention to slide 12, you'll see our year-to-date cash flow performance. Unit A cash flow from operations was 2.6 billion, or 16.7% of sales. That's up 14% versus prior year. Unit A free cash flow increased 17% and came in at 2.3 billion. That is almost 15% of sales, 14.9% of sales. Both the CFOA and the free cash flow dollars are all-time records at this point in the year. We just have great confidence in our ability to generate cash, and we are committed to actively deploying that cash to create value. You saw last week our board approved an 11% increase to our quarterly dividend. That quarterly dividend is now $2 per share, and that increase will extend our record of increasing annual dividends paid per share to an impressive 70 years. Seventy years. In addition, in the quarter, we repurchased another $275 million of shares, which brings our year-to-date share repurchases to $825 million. And that is a wrap on Q3 performance. So I'll ask you to draw your attention to slide 14. And, Jenny, I'll hand it back to you to talk about the market verticals.

Thank you, Todd. So slide 14 shows our updated fiscal year 26 organic sales growth. by a key market vertical. So in aerospace, we are increasing our forecast from 11% to 12% organic growth as we continue to see, as Todd said, strength in commercial OEM and aftermarket. In plant industrial remains the same at a positive low single digit organic growth. Quoting activity remains strong. Customers are prioritizing spending on automation and productivity. And I would say distributor inventories are stable and continuing to order to demand. As I just mentioned in an earlier slide, we are raising our outlook on transportation from mid-single-digit organic decline to low single-digit organic decline. This is driven by stronger heavy truck orders while automotive demand challenges persist. Off-highway remains the same at positive low single-digit organic growth. We see construction growth from capital and infrastructure investment while ag remains under pressure. We are maintaining energy at positive low single-digit growth with strong PowerGen activity. We do see growth in midstream oil and gas, but it is offset by upstream, which remains soft. And we are maintaining HVAC and refrigeration at positive mid-single-digit growth. We see strength in commercial HVAC, refrigeration, filtration, and aftermarket. As a result of these changes, we are increasing our organic sales growth guidance from 5% to 5.5% at the midpoint. I'll give it back to Todd for some more guidance details.

Well, thank you, Jenny. I'm on slide 15. This is just some more details. You know, we have one quarter left here in our fiscal year, so I'm going to give you some midpoints. Don't read anything into that other than the fact that there's one quarter left and the ranges look a little silly when you're just talking one quarter. So for reported sales growth, the forecast has been increased to 7%. Currency based on March 31st spot rates is expected to be favorable 1.5%. Acquisitions are 1%, and divestitures are also 1%. For the full year, we're increasing organic growth to 5.5%. That's midpoint. Aerospace organic growth is increased to 12%, and industrial growth is now expected to be 2.5% for both North America and internationally. Adjusted segment operating margins, we're expecting to be 27.2 for the year. That is a forecasted increase of 110 basis points for this prior year, with margin expansion across all the businesses, and the forecast for incrementals for the full year is 40%. Assumptions for corporate G&A, interest, and tax are all detailed out in the appendix, really no changes there. Full-year adjusted EPS has been raised by 50 cents to 31.20 at the midpoint. That would be an increase of 14.2% versus prior. In addition, we're also raising our forecast for full-year free cash flow to $3.3 to $3.6 billion. That's $3,450,000,000 at the midpoint. That would be 16.2% of sales with conversion at approximately 100%. In respect to Q4 specifically, we are guiding reported sales to be nearly $5.5 billion. That is a 5.5% increase versus prior year. Organic growth will be approximately four. Adjusted segment operating margins will be 27.4. The effective tax rate we are expecting is 22%. And for the second time ever, adjusted EPS would be above $8.00. to be at $8.16. As usual, we've got some more details in the appendix. And with that, I will turn it back to you, Jenny, and ask everyone to turn to slide 16.

On our final slide, a reminder of what drives Parker. 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 that allows us to be great generators and deployers of cash.

Okay, Chloe, we are ready to start the Q&A portion of the call.

Absolutely. As a reminder to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Mig Dobre with Baird. Your line is open.

Thank you. Good morning, and thanks for the question here. Maybe I'll start with kind of the topical items of late. You haven't really called out what's been going on in the Middle East in any way that was material. So I'm curious, as you look at your business, has there been any disruption or anything that's different that we need to be aware of? And also, you know, there's an updated tariff framework. I'm curious if there's any impact to be known about as far as you're concerned.

So, first of all, I would say, you know, our first concern with the Middle East is the safety of our team members. And, you know, we're very, very happy that they're all safe. Direct revenue in the Middle East is very small, and there's really no manufacturing. It's primarily a sales organization. Our teams are doing a fantastic job managing the supply chain, handling logistics, and doing everything they can to minimize the disruption to our customers. At this point, we're not seeing any material impact to demand. tariffs and what's going on there. It continues to be very dynamic. And as always, our teams are doing a great job managing them to make sure that there's no impact to earnings. And as you know, price-cost management has been a core element of the wind strategy for us. This is a strong muscle for us for over 25 years, and we don't expect this to have any impact. When you're looking at changes in tariffs, again, I would say We're very close to it. We analyze it on a regular basis, and it's nothing that we're concerned about taking care of.

Hey, Meg, I would just add, this is Todd. Jenny mentioned it's a complex process. We're obviously doing everything we can there. We will not recognize any income on those tariffs until we receive them, so we're treating that as a contingency gain. So you won't see us forecast or recognize any income until we actually receive any refunds.

Understood. Then my follow-up, just kind of sticking with your comments on price-cost, I guess optically, even though this was a very good quarter, you guys put up optically the incrementals on the industrial side of the business work. a little bit lower than what we have seen of late. And I'm kind of curious if there is any lag whatsoever that you're experiencing in terms of either dealing with these thermodynamics or any other inflationary aspects within your business, you know, any delay relative to where you're able to implement pricing to offset that. Thank you.

I'll take that, Meg. No, no delays, no concerns there with price-cost management whatsoever. We were below what we had forecasted in North America and international. And in North America, this was really driven by stronger OEM growth, and notably this came from off-highway and transportation. Distribution did hold steady, but no real acceleration there yet. And while we aren't in the excuse-making business, as I tell the teams, the teams are always planning for various contingencies. This quarter we had to recover from more weather-related disruptions than normal, and that was mainly in North America. So we're very proud of the teams, as Todd mentioned, for responding and delivering to the customers. We did have a Q3 record margin for North America, and, you know, we're going to finish the year strong.

Super. Thank you so much. Thanks, Mick.

We'll move next to Jamie Cook with Truist Securities. Your line is open.

Good morning, and congrats on a nice quarter. I guess two questions just following Mick's question on the incremental margins. You know, for the full year, you're still expecting a 40% incremental margin, which is, you know, above a normalized range or what you laid out at the analyst day. So I guess as – Todd, while you don't want to talk about 2027, as we think about the setup for next year over the longer term, is there any reason why we shouldn't believe incremental margins can be in the 40% range? Or does mix on the mobile side or whatever impact that? Or can incrementals be structurally different? you know, better. And then I guess, you know, Jenny, my question to you, just because there's a lot of concerns, obviously, with the Middle East and macro, your orders in industrial still were very strong, in particular on international, like you said, with the tough comps. Anything notable on sort of the cadence of orders throughout the quarter or into April or Or just confidence level, sort of like last quarter, has it waned at all, you know, relative to last quarter when it felt like you've been pretty one of the first people to be more positive, I guess, on industrial short cycle? Thank you.

Jimmy, thanks for the congrats. I'll start. You know, we've been trained here to finish strong, and we're focused on finishing FY26 strong. So our focus right now is on Q4. But I tell you what, we like to set up for FY27. You're going to see us continue to do everything that we do here. You've seen our orders. You've seen our margin expansion over time. We are very much focused on creating great incrementals. You know, we hold the team to a target of 30% to 35%, and obviously that varies on where your business is. But really what we're focused on is growing those segment operating income dollars and compounding EPS, right? That's been very successful for us. And that is a factor of that. I think if you just do the math, you're going to get incremental somewhere where you're thinking. But we'll talk to you more about that in a couple weeks.

And for your second question, Jamie, you know, orders were strong throughout the quarter. And, you know, we saw – you know, I would say the industrial recovery continues. We saw more broad-based positivity on both short and long cycle than we did earlier this year. So, you know, we feel really good about – And as always, you know, we stay close with the customers, so we not only feel good about the guidance, but we're not seeing anything right now that concerns us.

Thank you. Congrats again.

Thank you.

We'll take our next question from Jeff Sprague with Vertical Research. Your line is open.

Hey, thanks. Good morning, everyone. Hey, Jenny or Todd, could you just maybe spend a little more time on Arrow? You know, the organic growth in Q4, I guess, will be sort of the slowest of the year against the easiest comp of the year. Are you dialing in some, you know, aftermarket pressure or, you know, maybe kind of what's underneath that outlook in the fourth quarter?

Yeah, I would say, Jeff, you know, the aerospace Q4 forecast is approximately 9%, and that was raised from our previous Q4 guidance of 7.5%. We're not baking in any slowdown here. You know, orders and backlogs continue to be very strong. Record backlog here in this long cycle business. And, again, as I mentioned earlier, this is going to be our fourth year in a row of double digits. organic growth for aerospace. But we're not building in any slowdown here.

And there's no indication in orders or anything that there's a shift between OE or aftermarket?

Say that again. I'm sorry.

Yes, the complexion of OE versus aftermarket in aero. I wonder if you could give a little more color there.

Well, if you look at how we performed in Q3, Commercial OEM was up 22%, and aftermarket was up 14%. But again, strong orders in both areas. So, you know, we feel real good about the mix and the forecast. We were at 51% OEM in Q3 and 49% aftermarket. So the teams are doing a really great job with the higher OEM mix and still being able to expand margins.

Jeff, I would just add... Aerospace specifically, the backlog increased 5% sequentially. $8.4 billion is the total backlog. That's an all-time record.

Great. Thank you. I'll leave it there.

Thanks, Jim.

We'll move next to Chris Snyder with Morgan Stanley. Your line is open.

Thank you. You know, I understand that as, you know, the industrial businesses turn to be more longer cycle exposure, that there's a lag between when, you know, the orders convert to revenue. But if we see industrial orders sustained here in this mid single digit, even maybe high single digit range for several quarters in a row, is there any structural reason why sales will not ultimately, you know, get to that same level of growth? Thank you.

Thanks for the question, Chris. I wouldn't say that there's any structural reason, but if you look at North America, orders have been, you know, plus 7% for the past two quarters. And we noted in Q2 that these included long-cycle, multi-year defense orders. And so, again, in Q3, we saw orders that are due beyond this fiscal year, including defense, energy, and even construction orders scheduled into FY27, which is, you know, usually shorter cycles. So, you know, we're valuing 3% organic growth for Q4, which would be the best performance so far for this year. And, you know, as Todd mentioned earlier, you know, we like the way the setup is looking for fiscal year 27.

Thank you. And then when you look across all of the various industrial end markets that the company serves, you know, Are you seeing the improvement in sales and in orders driven by end demand going higher, like what's being put out into the channel is being consumed? Or are there spots where you think distributors could be maybe building a little inventory in anticipation of a cycle, you know, maybe some concerns on supply chains or commodity inflation with the events in the Middle East? And yeah, just trying to see if there's any like end market differences on that. Thank you.

I wouldn't say we're seeing any of that yet. I think they're still ordering to demand for rather quick consumption. We're not seeing any real acceleration or any typical signs of restocking. Haven't heard of any supply chain fears within the channel or on the industrial side of the business.

Thank you, Jenny.

We'll move next to Amit Mehrotra with UBS. Your line is open.

Thanks, Operator. Morning, everybody. I wanted to just follow up on that point around, I guess, distributors versus OE mix. And, Jen, I think you made a comment about, you know, stable distributor inventories ordering to demand. you know, strong quoting. I'm just trying to triangulate those items to understand sort of the psychology around inventory stocking and kind of a more structural question. Are the distributors maybe getting a little bit more sophisticated around inventory management? And so maybe there's a mix more from growth towards OE, which has margin consequences. Maybe you could talk about that.

What I would say is that over the last several years, I think our distributors have become very sophisticated when it comes to inventory management. Even coming out of COVID, managing cash and really putting all of the processes in place to order what they need and use it and sell it for consumption. I think that is definitely something that has happened over the last several years. When we talk about ordering to demand, we're not seeing the increase that would tell us that there is a restocking going on. So they've been telling us for quite some time that quoting activity is strong. Their sentiment has been positive for quite some time. But again, they will tell us that their customers are being selective with capital investments and really focused on those that provide automation and productivity. We're not signaling anything changing, it's just not accelerating right now. We are seeing an increase in OEM with the raise to transportation outlook and off highway with construction. We are seeing increased OE, which is classically 10 to 15 points below distribution.

Great. And then you also mentioned historically over the last few quarters, you talked about the order strength really being centered on longer cycles, specific verticals. I think you kind of broadened it out a little bit this quarter. Maybe just talk a little bit more about that true short cycle piece and what your observations have been over the last few months.

Yeah. So, you know, when you look at long cycle, it continues to pull strong. We've been talking about that. You know, that's why we raised our aerospace and defense guidance. PowerGen, long cycle business, it's robust. You know, lots of activity in midstream oil and gas and electronics is also growing nicely. On the short side, as I mentioned before, you know, the industrial recovery continues. And we've been talking about a slow, gradual industrial recovery for some time now, and that's what we're seeing. The orders that we saw were more broad-based and positive on both short and long cycles. on the industrial side of business than we've seen, you know, really all of this fiscal year. So construction continues to improve. Heavy-duty truck improvement. In plant and distribution, which we just talked about. So we're continuing to see this positive low single-digit growth. And, again, you know, we'll say we're set up for a good fiscal year 27. Okay.

Thank you very much. Appreciate it.

We'll take our next question from Andy Kapowitz with Citigroup. Your line is open. Good morning, everyone.

Good morning. Good morning.

Jenny, could you talk about what you're seeing in the aerospace supply chain? As you know, one of your peers continues to have some issues there, but you've continued to execute well, seem to be absorbing like a little bit more difficult margin mix while still growing. So as we start to transition to FY27, is there any reason why you couldn't continue to grow margin even if mix is running a bit more against you?

Well, you know, I remained confident in our ability to expand margins and committed to that as well. So I don't have any change there. You know, the aerospace supply chain, I would say, you know, is obviously in much better shape than it has been. And we've seen, you know, the big air framers being able to increase their rates, which we're obviously participating in. And I would tell you that we have, over the last several years, invested quite a bit in our supply chain, and that has proved to be very beneficial for us. So I don't really have any concerns here.

And then, Jenny, continued strong performance in Asia-Pac, that plus 10 is impressive. So maybe talk about the durability of that growth. And EMEA flat, you know, it's kind of bouncing along there at kind of those rates. You know, I think last quarter was up a little bit. So do you see sort of improvement there, or is it just kind of bouncing along at flat in that region?

Well, you know, this is, you know, primarily, as we said earlier, you know, the growth is coming from Asia-Pacific. You know, the total... Total backlog coverage in industrial did increase to the high 20s, and international orders were plus 6% for the third quarter in a row, but again, driven by electronics and some defense bookings. So, you know, EMEA, slightly negative on a tough top when it comes to orders, but strength in aerospace and defense, some mining, some implant industrial, but Asia orders are strong coming from electronics. data center in there and in plant and energy.

Appreciate the color. Thanks, Sandy.

We'll take our next question from Julian Mitchell with Barclays. Your line is open.

Hi, good morning. Maybe, Jenny, just wondered if you could flesh out the sub-segment sort of assumptions on aerospace, just kind of what you're expecting in the fourth quarter for the major pieces kind of year on year and how they did in Q3. I think you have the commercial bits for Q3, but not military bits.

Yeah, let me give you a Q3 rundown, and then I'll go to what we have for Q4 guidance. So as Tom mentioned, aerospace organic growth was 14.2%. Commercial OEM was 22%, and obviously this is really driven by production rate increases in both narrow and wide body. Commercial aftermarket was 14%. You know, and even though we We're starting to see global air traffic growth begin to normalize. We still saw some nice growth in Q3 and strong spares in repair shipments. Defense OEM is a positive 13%. We see demand for the legacy programs continuing. And then defense aftermarket was positive 8%. So fleet upgrades and service extensions are continuing. contributing to that. And I mentioned earlier aftermarket mix at 49% and OE at 51%. When we look at Q4 guidance, again, we're increasing full year to 12%, and we're raising commercial OEM to be the low 20s growth. We previously had that at 20%, approximately 20%. We are raising commercial MRO of low teens growth. That was previously low double-digit. We expect defense OEM to be mid-single-digit growth. That's the same as before. And defense MRO, low single-digit growth, also the same as our last guidance.

That's very helpful. Thank you. And then just to try and circle back again to that point on industrial kind of orders and sales and the fact you've had several quarters of orders in both industrial segments outstripping the revenue growth pace. Maybe just another way to look at it, I wanted to confirm that that industrial, the diversified industrial overall backlog, it looks like was that just over $4 billion at the end of So you had a decent sort of year-on-year and sequential increase. So I guess I'm just trying to say it looks as if that orders outpacing of sales isn't just a sort of comp phenomenon or something. Like there should be some recoupling of the sales to those orders, even though from the outside we can't see the kind of dollars of orders you've been booking. Okay.

Yeah, Julian, you're absolutely right. Both the industrial and the aerospace backlogs improved, and we obviously see that as a good sign.

Got it. Thank you.

Thanks, Julian.

We'll move next to Andrew Obin with Bank of America. Your line is open.

Hi, guys. Good morning.

Morning, Andrew.

Just to check my math on industrials, I guess organically it does imply that Q4 will be at the midpoint, will be a tad slower than Q3. Industrials, Americas, is that okay? Is that correct?

No, we've got it pretty much the same.

Okay, fine. And maybe a question on pricing. In the quarter, we've been hearing about sort of industry talking about rebates, pushback. Now, all of this has been before S232. And I know maybe not a direct impact for you guys. But has conversation on pricing changed, given that the industry now does have to deal with S232? And maybe you can just talk about pricing trends in Q1 and what pricing looks for the remainder of well, I guess of your fiscal year, but any commentary on pricing would be great.

I would say that conversations haven't changed. Obviously, you know, when it comes to, you know, the tariffs, as I mentioned earlier, it's dynamic and it requires a lot of analysis and coordination, and the teams are doing a great job of that. You know, on the industrial side of the business, as we've mentioned in the past, you know, we're – We're back to, especially with distribution, we're back to a normal pricing environment, so we'll do that as we have in the past. You know, with aerospace, there's still some opportunity for pricing, and the teams are executing on that. But, you know, we've been doing this for a long time, and, you know, I think we've done a great job of covering inflation and making sure that the tariffs haven't impacted our earnings, and we'll continue to do that.

And maybe just sneak one in on defense aftermarket. Why not raise the guide given what's happening in the Middle East? I would imagine a lot of wear and tear on key platforms that you're on. Sorry.

Yeah, you know, this is long lead time product, right, even in defense. So, you know, you're looking anywhere from, you know, nine to 15 months. So we have the guide out there based on – you know, the deliveries that our customers want, and that's what's really driving that number.

Terrific. Thank you.

Thanks, Andrew.

We'll move next to Tim Thien with Raymond James. Your line is open.

Great. Thank you. Good morning. First question is just on the mixed dynamics within the industrial businesses in 26. I'm just trying to you can see if you can help kind of summarize in terms of what distribution's growth and what you're expecting next year relative to the total. And, you know, more forward thinking, I'm just trying to think if that business begins presumably to pick up, does that potentially portend a mixed tailwind in 27? Do you need help on that?

Yeah, Tim, this is Todd. You know, you look at our industrial business, it is exactly 50 percent OEM, 50 percent aftermarket. So, as these things rise and fall, depending on what market they're in, there really is a nice diversified balance across there. You know, when we see something pop like last quarter, I think we mentioned slightly there was a little bit of a mix issue. But, you know, these things are small in comparison to the total. What we look at is positive. We're looking at those orders. We've had positive orders in the industrial business now for six quarters in a row. And, again, what that does is that helps us compound dollars, and that leads to EPS growth.

Yeah, and, you know, distribution, you know, primarily sits in our implant industrial market vertical. And, you know, our forecast remains the same for that for the rest of the fiscal year. It's positive low single-digit growth.

Okay. All right. Understood. And then, again, this is a little bit out of left field, but there was one of your big European-based competitors. They recently flagged some – had seen more competition from some of the competitors in Asia starting to make some more inroads into their markets. I'm just curious. It's a broader question just in terms of the of the you know competitive dynamics if you think about that globally have you i mean your results wouldn't suggest it but i'm just curious if you what you would say to that in terms of any changes that you've seen globally on that i wouldn't say that i've seen any changes but i i would say that you know our teams are very focused on um you know taking any and all competition very seriously you know we have a lot of

a lot of pride in the products that we have and the value that they bring to the customers, the quality. We manufacture in many regions of the world that allows us to be very competitive locally. So while competition is always something we have to keep an eye on, our performance is what ensures that not only that we keep what we have, but that we gain share.

All righty, thank you.

We'll take our next question from Joe O'Day with Wells Fargo. Your line is open.

Hi, good morning. Thanks for taking my questions. Can you give a little bit more color on what you're seeing in industrial international? We've seen very steady mid-single-digit order growth. You touched on the tough comp in Q3, so I think kind of pick any stack period you want. It looked pretty good in the third quarter. And so Europe, Asia, kind of what you're seeing, any verticals you would call out there?

Sure. So we are in increasing full-year organic growth to 2.5% for international versus our prior guide of approximately 2%. So in EMEA, we're maintaining a slightly positive low single digit. We're seeing gradual improvement in plant and in transportation, primarily heavy-duty trucks. And we have seen continued strength in mining and energy, both oil and gas and PowerGen. In Asia Pacific, increasing full year to positive high single digit versus positive mid single digit we had in our prior guide. And this is continued strength in electronics and Semicon demand. Implant orders and shipments progress but remain a little bit mixed. Mining is strong and there have been improvements in energy. So it's really kind of a mix between EMEA and Asia Pacific, but we're going to end this year at 2.5%.

Okay, that's helpful. And then just on filtration group, I think initially talking about a 6- to 12-month window, I think it seems like some deals have taken a little bit longer to work through regulatory processes. I'm not sure if the way you're thinking about it maybe favors the the 12-month side of that versus six. And then just any color, you know, recognizing really good margin business, what you're working on, you know, in preparation for that is the highest priorities post-close.

Sure. So, you know, we still anticipate that we're going to close within the 12 months of announcement date. And just as you said, you know, the closing remains subject to the customary closing conditions receipt of our pending regulatory clearances. That progress is happening there. It's ongoing. I would tell you that the integration planning is underway. Teams on both sides have been formed, so those teams are working together. We'll put our integration playbook into place as soon as we do close and get the win strategy into the organization as soon as possible. We did announce $220 million in synergies by the end of year three. That is 11%. The majority of those synergies are going to come from the tools and the wind strategy that you hear us talk about, lean supply chain and simplification. We're not providing at this time any information on the phasing of those synergies, but we're very, very confident in our ability to achieve those. So, you know, announcement was last November, and we still anticipate that it will be within the 12 months.

John, I would just add on the funding side of it, we have our funding plan in place. There is no pre-funding that's required for this transaction. So you won't see any interest before we close the transaction. And you're going to see us do exactly what we've done on the past transaction. A little over half of this will be serviceable debt. The rest will be short to medium term notes. And we do not expect leverage to surpass 3 when we close. and our delevering plan will be in place that we get back to a round two faster than we ever have before.

That's great. Thank you.

Thanks.

We'll move next to Andrew Biscaglia with BNP Paribas. Your line is open.

Hey, good morning, everyone. Good morning. I'm just looking across broader coverage group and broader industrials looking at what life is like if energy prices persist above $100 going forward. And I would think Parker would stand to benefit. I'm wondering, you haven't probably gotten this question in a while, but where do you, obviously you have that direct energy exposure, or maybe there's a nice benefit, but I would think there would be a ripple effect, some animal spirits brewing in some other areas, maybe off highway and plant. But what is the net impact for you guys if we still see energy prices sitting here six months from now?

Well, I think it's probably too hard to forecast right now, but with where we're at today and what we have in our guide, I think that's representative of the impact today and how it impacts overall Parker-Hannifin. We'll have to see how this plays out, but I don't have any forecast to share with you today.

Andrew, I would just add the diversification of the portfolio. is really one of the strengths of the company, and we often say we're agnostic when it comes to the power source. But you look at the market verticals that we call out, there will be some pluses and some minuses across those, but I think overall the company will be able to capitalize on any opportunities that come from changes in energy prices.

Okay, fair enough. Yeah, and then – You know, your free cash flow, you know, nudge that up a little bit. I'm just wondering, in light of the filtration group deal closing, are you still evaluating M&A into year end? Would you rather preserve some capital, you know, just to get through the deal and then see where you're at?

You know, we've been very active. We've been very direct with our commitment to do that. You saw us increase the dividend. You saw us do $825 million a share. As you look at our leverage, it's very, very manageable where it sits today. I just mentioned even at full funding of the filtration group, we might get near three, but we're not going to cross three. So that pipeline is always active. It's always being worked on. It's always being measured. And I would tell you the capacity that the company has, you mentioned it. We're raising our free cash flow. If you look at CFOA, we're going to be close to $4 billion in cash generation. This fiscal year, it gives us a lot of options, and we're going to be very diligent when it comes to deploying that optionality.

I don't think I could have said it. Thanks, Todd. Thanks.

We'll move next to Joe Ritchie with Goldman Sachs. Your line is open.

Thanks. Good morning, guys. Good morning. Todd, maybe a longer-term question on margins within the industrial business. So absent volumes, obviously you guys have done a great job expanding margins in both of those businesses. But as you kind of think about the opportunity from here, where do you see as like the biggest levers, you know, absent volumes to get you to expand margins in the industrial segment?

Yeah, really, it is our commitment to lean and continuous improvement. Kaizen across the organization. You know, we were just at some of our aerospace facilities, and you look at the margins that those aerospace businesses are putting up, but you listen to our team members and you walk the shop floor and you see the Kaizen activity that's happening and the efficiency that it's driving. It is so energizing to see that. You know, we've said this before. We are very confident. Jenny said it multiple times today. that we're very confident in our ability to continue to expand margins. And that's what you're going to see Parker Hannafin do over the long term.

You know, our team members have, you know, a mindset of we're never done. And, you know, in some of those visits that Todd was just talking about, you know, you're seeing, you know, fantastic improvements that they've made. And in the next breath they're telling you what comes next. So, you know, again, just to reiterate, our confidence in the teams, our confidence in our tools and the wind strategy and, you know, our ability to really create shareholder value there.

That's good to hear. And, look, I know we'll get a guide in early August when you report. But I guess as you kind of see your end markets right now, Jenny, you sound pretty sanguine on what's happening in the industrial end markets. I mean, is it fair to say, just given where we sit today, that the expectation for next year would be at least a couple points better than what you're seeing in 26?

That's a question to try and get a guide, I think. Listen, it's a fair question. We've purposely transformed Parker into a less cyclical, faster-growing, and more resilient company. And many of our industrial markets turned positive during this fiscal year, and orders are strong. As you were just talking about, the wind strategy is clearly working. It's going to continue to drive growth, margins, and earnings even higher. You know, we're going to welcome the filtration group into this fiscal year, so I'm confident that we're going to be able to guide fiscal year 27 to another record year.

Great question. Had to try, Jenny. Thank you.

Okay, okay. Chloe, this is Todd. I think we have time for one more question before we hit the top of the hour.

Absolutely. We'll take our last question from Nigel Coey with Wolf Research. Your line is open.

Great. Thanks for putting me in here. The pressure of the last question. Okay. Lots of questions on orders. Todd, maybe just what was the industrial backlog? I'm getting $4.1 billion. Is that the right number?

Your math is correct. Your math is correct.

Yeah, yeah. That's why I get to pay the big bucks, I guess.

That's right.

And then just a quick one on the Texas facility. Obviously, You know, really bad news, but just wondering the scale of that facility and any disruption you're factoring in for 4Q.

You know, listen, we're still assessing, you know, what the impact is, but we don't expect this to have any material impact to overall Parker.

Well, that's great news. And then just one quick one. The D.C. business, data center business, I know it's small. but it's growing like a weed. So I'm assuming it's moving the needle on growth rates. So just any updates on the size and growth profile of Data Center?

Yeah, it's still approximately 1% of our sales. But we have great exposure here. It's growing nicely. It's just not large enough to have its own vertical right now. But this is just a great example of how all of our technologies, our interconnected technologies, come together to really provide great value to the customers. So, listen, we're working with all the industry leaders. You're right, very fast-growing. We can provide liquid cooling systems, subsystem components. And, you know, with the increase in data centers, there's, you know, a secondary benefit there around PowerGen and automation and construction. So, this is a great overall impact for Parker.

Great. Thanks, Annie.

Cheers. Thanks, Nigel. Okay, this concludes our FY26 Q3 earnings release webcast. We appreciate your time and attention and thank everyone for joining us today. As usual, our investor relations team of Jeff Miller and Jenna Stuckey will be available for any follow-ups or clarifications that anyone may have. Thank you all and have a wonderful day.

Thank you. This concludes today's call. We appreciate your time and participation. You may now disconnect.