Parker-Hannifin Q3 2025 Earnings Call Transcript

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Provided by Quartr
May 1, 2025
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Operator

Please note this conference is being recorded.

Operator

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

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

And Jenny, the floor is yours.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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%.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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%.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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%.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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%.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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%.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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%.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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

Operator

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

Mircea Dobre
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

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.

Mircea Dobre
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

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?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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%.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Mircea Dobre
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

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?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Mircea Dobre
Associate Director of Research & Senior Research Analyst at Robert W. Baird & Co

All right. Good luck.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Thanks, Nick.

Operator

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

Jamie Cook
Jamie Cook
Managing Director - Equity Research at Truist Securities

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.

Jamie Cook
Jamie Cook
Managing Director - Equity Research at Truist Securities

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Jamie Cook
Jamie Cook
Managing Director - Equity Research at Truist Securities

Okay, that's helpful. Thank you.

Operator

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

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

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?

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Second part of your question, Julien?

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

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?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

That's great. Thank you.

Operator

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

Scott Davis
CEO & Chairman at Melius Research LLC

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?

Scott Davis
CEO & Chairman at Melius Research LLC

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Scott Davis
CEO & Chairman at Melius Research LLC

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

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Scott Davis
CEO & Chairman at Melius Research LLC

Thank

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Scott Davis
CEO & Chairman at Melius Research LLC

Got you. Thank you. I'll pass it on.

Operator

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

David Raso
Senior Managing Director & Partner at Evercore

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?

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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%.

David Raso
Senior Managing Director & Partner at Evercore

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.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

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.

David Raso
Senior Managing Director & Partner at Evercore

All right, terrific. Thank you.

Operator

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

Andrew Obin
Andrew Obin
MD - Equity Research at Bank of America Merrill Lynch

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

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Good morning.

Andrew Obin
Andrew Obin
MD - Equity Research at Bank of America Merrill Lynch

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.

Andrew Obin
Andrew Obin
MD - Equity Research at Bank of America Merrill Lynch

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Andrew Obin
Andrew Obin
MD - Equity Research at Bank of America Merrill Lynch

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?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

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.

Andrew Obin
Andrew Obin
MD - Equity Research at Bank of America Merrill Lynch

Got you. And just a follow-up, how are you guys reconsidering your footprint after the second round of tariffs, if in any way? And are you adjusting CapEx down in the fourth quarter in response to tariffs in any way, shape or form? Thank you.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

No, we are not adjusting CapEx as a result of that. And we don't see any big need for supply chain realignment due to tariffs. Just that local for local model gives us global capacity around the world. We've been working with the multiple tiers throughout our supply chain. And we've got a lot of good actions leveraging our dual sourcing strategy.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

So I think we're in a good position here.

Andrew Obin
Andrew Obin
MD - Equity Research at Bank of America Merrill Lynch

Thanks so much.

Operator

Your next question comes from Nicole DeBlase with Deutsche Bank. Please state your question.

Nicole Deblase
Nicole Deblase
Lead Analyst at Deutsche Bank

Yes, thanks. Good morning,

Nicole Deblase
Nicole Deblase
Lead Analyst at Deutsche Bank

guys.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Good morning, Good morning,

Nicole Deblase
Nicole Deblase
Lead Analyst at Deutsche Bank

Maybe just first of all, with orders definitely kind of ahead of expectations this quarter, are you guys hearing or seeing any evidence at all of pre buy ahead of tariffs? Or was that not a factor the strength?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

No. I would say minimal evidence of pre buy activity. And as we've talked about with this increase in orders, it's all longer cycle strength.

Nicole Deblase
Nicole Deblase
Lead Analyst at Deutsche Bank

Okay. Got it. Thanks, Jenny. And then the margins have been a real bright spot in fiscal twenty twenty five despite a challenging volume environment, super impressive performance from Parker. Do you guys think you can continue to target like 30% to 35% incrementals as we kind of flip the calendar to 2026?

Nicole Deblase
Nicole Deblase
Lead Analyst at Deutsche Bank

Or at some point, does it become tougher to expand margins to that extent? Thank you.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Yes, Nicole, is Todd. That is the number that we hold our team members accountable for across the organization. We think that is best in class number. It's not a always 30%, right? It depends on what's going on with the top line.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

If the top line is more robust, we think we can do better. If the top line is a little bit lower, you know, we try to manage that as well. So I would tell you that's one of the things that I don't worry about for our team members across the globe is managing incrementals whether we're in a growth environment or if we're in a challenged top line.

Nicole Deblase
Nicole Deblase
Lead Analyst at Deutsche Bank

Thanks Todd. I'll pass it on.

Operator

Your next question comes from Joe O'Dea with Wells Fargo. Please state your question.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

Hi, good morning. Jenny, I'm sure you anticipated a question on '26 and so encouraging in terms of your comments around industrial and potential for growth. I think my question is really around as you've seen some of that recovery push out this year, what it is that you're seeing that gives you confidence in seeing that growth next year, particular in light of an elevated uncertainty kind of macro backdrop?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Well, of all, I would say the longer cycle orders that we see coming in there, what we see is going to hit We have a really good visibility of all our orders. When they come in we know when they're going to hit, right. So we've seen very few cancellations through the last several quarters. We're getting to the point if you want to consider the last couple of years of recession, a much shallower one at that on the industrial side of the business, we're getting to the point where we are at the average or above the average amount of quarters that this Industrial business would be negative.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

So I'm an optimist here, as you've seen our guide throughout the whole year, I mean, we've kept planning for it the next quarter. The next quarter, we're not able to put that in this fourth quarter, but we believe that it's going to come. And when it does, we're not only going be ready, but I think we're all going enjoy it.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

And that kind of waiting for it next quarter kind of dynamic, is that a matter of are there things like the adjustment to guide, it's guess the question is, are there demand trends that you're seeing soften sequentially? Or is it more a matter of things that you thought would get better sequentially just didn't happen? And that's probably COGS per

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

maybe there's a little

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

bit of everything, but any color there would be helpful.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Yes. Things that we thought would get better just didn't happen. So we had to pull it down in Q4.

Joseph O'Dea
Joseph O'Dea
Managing Director at Wells Fargo

Okay. Thank you.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Thanks, Joe.

Operator

And your next question comes from Jeff Sprague with Vertical Research Partners. Please state your question.

Jeffrey Sprague
Managing Partner at Vertical Research Partners

Hey, thanks. Good morning, everyone. Hey, Jenny, just back to sort of the footprint and the like. Maybe I misinterpreted what you said, but it sounds like you're not really looking at making any significant footprint changes. That just sort of surprises me, right?

Jeffrey Sprague
Managing Partner at Vertical Research Partners

Like I wouldn't think you want to eat $375,000,000 in tariffs. I get you've got plans to action it. But are you basically saying that you can handle it with dual sourcing and then that leaves open the option to kind of flip back maybe to China at some point in the future? Probably oversimplifying a complex question, but just your view on really kind of mitigating this maybe permanently as opposed to temporarily?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Yes. So first of all, I'd say this much. We are always looking at our structure and our footprint, right? That's just part of what we do either through Kaizen or Parker Lean system. So we're constantly looking at that and we make sure that we're making the best use of all our resources.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

So that's something that's ongoing. If you look back in time at what we've done, there's good numbers on that. I would say that because we've always had this local for local model, we have the advantage of having capacity around the world, right? So we can leverage that capacity when we need to. So it's not just footprint or turning one supplier off and another supplier on that's going to mitigate all these actions.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Is the dual sourcing strategy. It's working closely with suppliers on cost negotiations and further improvements. It's really making sure that all of our teams continue to use these tools that have provided this margin expansion all along. And they're really good at it. So I would tell you that those are the supply chain actions in addition to the Win Strategy cost actions and then the pricing actions that you know we have a strong muscle in doing that.

Jeffrey Sprague
Managing Partner at Vertical Research Partners

So are the pricing actions actually smaller than the win and sourcing actions collectively?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

I wouldn't say that they're smaller. I would say that it's a little bit different for every business, but it is a collection of all of those actions that gives us the confidence to say we can fully mitigate the tariff.

Jeffrey Sprague
Managing Partner at Vertical Research Partners

And then just maybe a little follow on on that. Is the $375,000,000 just simply tariffs? I assume there's other just inflation that might not be directly tariff, but perhaps is indirect. I'm sure it's included in your guide. But just curious if that $375,000,000 is a just a mathematical tariff kind of gross number?

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Yes, Jeff, you're exactly right. That $375,000,000 is solely tariff costs. No other cost changes included

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

in that.

Jeffrey Sprague
Managing Partner at Vertical Research Partners

Great. Thank you, guys. Appreciate it.

Operator

Your next question comes from Joe Ritchie with Goldman Sachs. Please state your question.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Hey, Good morning.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Good morning.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Jenny, can you just double click

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

a little bit on the implant project delays and what you're seeing there? I get the disconnect a little bit with the order rates that you're seeing, but I'd be curious maybe if you can just tell us a little bit more about that bidding activity and how you see it playing out in the coming quarters?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

So when we look at implant and industrial, like I mentioned, we did have that at positive low single digit, slightly positive low single digit and we took it to negative low single digit. And really this is about the industrial recovery delays just persisting. Our previous guidance as we just mentioned assumed that we were getting some recovery and we're not seeing that yet. Again, would tell you that quoting is still active even though there are project delays. And we're not seeing a lot of cancellations.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

It's really more of delays. So it's not one big thing or even a small collection of any event or any area. It's just continued delays.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Okay. That's helpful. And if I can maybe just ask a follow-up on that. As you think about the type of work that you're bidding on and what that pipeline looks like, there's a lot of activity that's happening in The U. S.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

That's already been started from a mega project standpoint. I'm just curious like how much of this is like new construction versus what you would normally kind of see as like maintenance or renovation repair type projects?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

I don't have a specific split for you, but I would tell you I mean, when we talk to the channel, they tell us how they're participating in some retrofitting and plants upgrades in plants and then also with some new construction. So it's a mix of both.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Okay, great. Thank you.

Operator

Your next question comes from Andy Kaplowitz with Citigroup. Please state your question.

Andrew Kaplowitz
Andrew Kaplowitz
Managing Director at Citi

Hey, good morning everyone.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Good morning.

Andrew Kaplowitz
Andrew Kaplowitz
Managing Director at Citi

So Jenny, I know you talked about Europe a bit more, but Asia seems to be holding up well for Parker and specifically China seems to be holding up. Maybe you can give us a little more color on what you're seeing there. And Latin America has continued to be a source of strength for Parker, so how sustainable is that growth going into 2026?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

So for Asia Pacific, in Q3 that was up 2% as Todd mentioned and that growth was mainly driven by electronics and semicon. And we did see some gradual improvement in plant. China, just a reminder, it's 5% of our sales and Q3 sales were positive, I would say low single digits over prior year. And we're continuing to see that really be driven by electronics and semicon. Some EV, some distribution, but it's again, just a reminder, it's 5% of our sales.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

And then in Latin Latin America, yes.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Latin America continues to be robust. I would say it's really broad based. The team there really has been focusing on areas they win. It's a big filtration market for us with a lot of motion systems activity and the team just really continues to manage a really volatile situation extremely well.

Andrew Kaplowitz
Andrew Kaplowitz
Managing Director at Citi

And then Todd, I just want to ask you about the corporate G and A, the bridge on Slide 10, the $08 positive. I think you talked about relatively significant cost containment in your prepared remarks. Is any of that temporary? You should be thinking about any of it coming back. How does that line item look moving forward?

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Yes. I mean, there was a couple of things there that we talked about market based benefits. Those obviously fluctuate with market activity. But I think the team has done a really good job looking at what we can control. I don't foresee any significant amount of that rolling back into the business.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

I think I pride ourselves on being a very SG and A frugal in that space.

Andrew Kaplowitz
Andrew Kaplowitz
Managing Director at Citi

Appreciate all the color.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Thanks, Andy.

Operator

Your next question comes from Steven Volkmann with Jefferies. Please state your question.

Stephen Volkmann
Equity Analyst at Jefferies & Company Inc

Hey, good morning guys. Thank you for fitting me in. Two follow ups from me. One, I guess I want turn this whole tariff thing completely around. And I feel like if I was a North American manufacturer trying to figure out how to have a more local supply chain, you guys might be my first call given you're kind of local for local.

Stephen Volkmann
Equity Analyst at Jefferies & Company Inc

So I'm curious if you're seeing more inquiries as other manufacturers try to rejigger their supply chains.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Actual people like reaching out to us for advice?

Stephen Volkmann
Equity Analyst at Jefferies & Company Inc

No, more reaching out to

Stephen Volkmann
Equity Analyst at Jefferies & Company Inc

you for product. Sorry to interrupt. But given that a lot of your competitors are international and you're not as much. I wonder if there's an opportunity for you there.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Well, we do think that there could be some shared gain opportunities for us here. I mean, as I was mentioning, having this capacity globally and being able to serve the customers really well, we think that there are some opportunities here.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Yes, Steve, were just talking about that the other day. I don't want to be overly bold on this. But for any business that we could potentially lose because of tariff, is obviously some opportunity on business that we could win. So that's what the team is focused on. And I think it's still early days, but I like our chances there.

Stephen Volkmann
Equity Analyst at Jefferies & Company Inc

Okay, fine. And then maybe for you, Todd, I'm curious, again, stepped up the repo here. It feels like this may be a period where it's a little tougher to get deals done in general. I'm not really speaking for you, but there's a lot of uncertainty around outlooks and cost basis and recessions and so forth. So is the fact that you stepped up on repo maybe telling us that the M and A is a little maybe further out and we should factor in a little more repo near term?

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

No, Jenny mentioned this, our team continues to work the pipeline. The one thing that does become difficult is just really being able to accurately predict the timing of a yes. I would tell you there's many targets of various sizes in that pipeline. The reason we ramped up the repo was really because of our stated commitment to operate around a two times leverage. And we had been below that really for the full part of FY twenty twenty five.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

And we just took a little chunk out there, really just trying to fulfill our commitment to being active in that space. So we're going to balance that decision depending on what we see within each given month going here. But our commitment to everyone is that we will be active in the space.

Stephen Volkmann
Equity Analyst at Jefferies & Company Inc

Much appreciated. Thanks.

Operator

Your next question comes from Tim Thaine with Raymond James. Please state your question.

Tim Thein
Tim Thein
Managing Director & Research Analyst at Raymond James Financial

Great. Thank you. Maybe the first one for Jenny. I'm curious as to the kind of the tenor of conversations that you're having with customers. And as we've gone from kind of hopes of animal spirits being unleashed after the U.

Tim Thein
Tim Thein
Managing Director & Research Analyst at Raymond James Financial

S. Election to now fears of recession and concerns around trade policy. I'm curious if you think the damage is sort

Tim Thein
Tim Thein
Managing Director & Research Analyst at Raymond James Financial

of done for the year in terms

Tim Thein
Tim Thein
Managing Director & Research Analyst at Raymond James Financial

of customers pulling the trigger on those more discretionary capital decisions? Or if we're having this conversation in three months and you're looking ahead to your FY 2026, is there a potential that those kind of reverse and there's more optimism? Just curious as what you hear from your big customers.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

But yes, there's just there's a lot of uncertainty, right? So I think everybody's going to be smart, but at the same time, I think everybody believes that as we do that, that we'll get through this and that when we get through it we want to be able to operate at our best. So I think people are cautious, but just kind of waiting to see what happens in some cases. But I wouldn't say there's been anything overly negative that I'm hearing from the customers.

Tim Thein
Tim Thein
Managing Director & Research Analyst at Raymond James Financial

Okay. And then just on tariffs, and the question is just in terms of the pricing flexibility that you have in aerospace specifically, just given typically you have more longer term agreements. So I'm just curious your ability to react and adjust there. We've seen some suppliers announce force majeure clauses, but anyway, just kind of the as you think about the tariff ability to offset that industrial versus aero, if there's any notable difference between the two segments?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

We're using the same pricing tools and strategies on in aerospace that we use in the industrial segment. You are correct. There are some there are longer term agreements in aerospace, but we're having conversations. We've been having those conversations even prior to tariffs with the high inflationary times. So we're doing everything that we do on the industrial side of the business and getting through what we can get through.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

And obviously we have a little bit more pricing availability on the aftermarket side.

Tim Thein
Tim Thein
Managing Director & Research Analyst at Raymond James Financial

Great. Thank you.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Thanks, Tim. Hey, Diego, I think we've got time for maybe one short question here. So let's get a good one and finish strong.

Operator

Absolutely. And our final question comes from Brett Linzey with Mizuho Securities. Please state your question.

Brett Linzey
Brett Linzey
Executive Director at Mizuho Financial Group, Inc.

Hey, good morning all. Thanks. Yes, so I guess maybe just yes, just one more on M and A. And I understand it's just an episodic process, but I am surprised there hasn't been at least a smaller bolt on type deal, given you've been on your front foot. I guess, is it fair to say you're really targeting something larger, more medium sized type assets?

Brett Linzey
Brett Linzey
Executive Director at Mizuho Financial Group, Inc.

And then have there been any priority assets that have actually just fallen out of the funnel completely?

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

Well, mean, I'm going to just repeat myself again. I mean, are strategic assets in the pipeline of all sizes. We are not focused on one size versus the other. It really does have a lot to do with timing. And we are very committed to making sure strategic fit.

Jennifer Parmentier
Jennifer Parmentier
Chairman of The Board & CEO at Parker-Hannifin

So we always are looking at different assets and we're evaluating them and we'll continue to do so. The pipeline is robust and active.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Hey, Brett, I just leave you with this. The capacity that the company has, has never been greater. We're going to generate over $5,000,000,000 of EBITDA this year. I already mentioned we're going to do over $3,000,000,000 of cash flow. So it really is not an issue of capacity.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

It's really just making sure it's the right strategic or series of strategic deals that make sense for us and that we model a future that we could generate returns on those. So it's really just a combination of that.

Brett Linzey
Brett Linzey
Executive Director at Mizuho Financial Group, Inc.

All right, great. Thanks. And I'll leave that as my strong question.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Appreciate it. Thanks so much.

Operator

Thank you. You. Now hand back to Kyle Ambruno for closing remarks. Thank you.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Thank you, Diego. This concludes our FY twenty twenty five Q3 earnings release webcast. We appreciate your time and attention. We thank you for joining us today. Our Investor Relations team of Jeff Miller, Jenna Stuckey and Chantel O'Kelly will be available today and tomorrow for any follow ups or clarifications.

Todd Leombruno
Todd Leombruno
Executive VP & CFO at Parker-Hannifin

Thank you everyone and have a wonderful day.

Operator

Thank you. This concludes today's conference.

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Key Takeaways

  • Parker delivered record Q3 results with an adjusted segment operating margin of 26.3% (up 160 bps), a record adjusted EBITDA margin of 27%, and adjusted EPS of $6.94 (up 7%) despite a 2% sales decline.
  • Cash flow remained robust with year-to-date operating cash flow of $2.3 billion (up 8%), free cash flow of $2.0 billion, a 10% dividend increase to $1.8 per share, and $650 million in share repurchases in the quarter.
  • Order rates rose 9% companywide (international +11%, North America +3%), driven by long-cycle strength and a record aerospace backlog of $7.3 billion (orders +14%).
  • The Win Strategy, portfolio transformation via Clarcor, LORD, Exotic and Meggitt, and a local-for-local supply chain have expanded margins across all cycles and fully offset announced tariffs (~3% of COGS, $375 million annually).
  • FY25 guidance factors in modest headwinds (reported sales -1%, organic +1%), raises aerospace organic growth to 12%, targets full-year segment margin of 25.9% (up 100 bps), and assumes all tariff costs are fully mitigated.
AI Generated. May Contain Errors.
Earnings Conference Call
Parker-Hannifin Q3 2025
00:00 / 00:00

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