Parker-Hannifin Corporation 2026 Q4 Earnings Call

I would like to welcome everyone to Parker's fiscal year 2026 fourth quarter and full year earnings release webcast. As Beau said, this is Todd Leombruno, Chief Financial Officer speaking, and with me today, as usual, is Jennifer Parmentier, our Chairman and Chief Executive Officer. We have a number of exciting things to review with everyone today, and we appreciate your time this morning. Thanks for joining us. Let's move to slide two to address our disclosures on forward-looking projections and non-GAAP financial measures. Items listed here could cause actual results to vary from our forecast. Our press release, the presentation here, and reconciliations for all those non-GAAP measures were released this morning and are available under the Investors section on parker.com. Today, Jenny is going to start with our record FY 2026 performance.

She is going to share some highlights on what we did with capital deployment actions this year and introduce our new FY 2031 adjusted segment operating margin target. She is also going to address an upcoming change to our order rate reporting that will start in FY 2027. I am going to follow with some details on our record fourth quarter financial results. We also initiated our FY 2027 guidance today, and we will review all the assumptions for what we expect to be a new record year for Parker-Hannifin. We will conclude the call with our normal Q&A portion, and we will try to address as many questions as we have time for. Now let's move to slide three, and Jenny, I will turn it over to you.

Thank you, Todd, and thank you to everyone for attending the call today. Our global teams delivered record performance in fiscal year 2026, powered by our proven business system, The Win Strategy. We achieved top quartile safety performance with a 9% reduction in our recordable incident rate. This was our safest year ever, and we remain focused on being the safest industrial company in the world. We delivered record fiscal year 2026 sales of $21.5 billion, surpassing $20 billion for the first time in Parker's history. Organic growth accelerated to 6.6%, and adjusted segment operating margin expanded 120 basis points to a record 27.3%. Adjusted earnings per share increased 18% to a record $32.31, and cash flow from operations was also a record at $4.4 billion. Our first time over $4 billion.

I'd like to congratulate our team members around the world for achieving and surpassing our fiscal year 2029 adjusted segment operating margin target ahead of schedule. Thank you for everything you do to keep each other safe, create value for customers, and demonstrate operational excellence. Slide four, please. Fiscal year 2026 marks the biggest year in Parker's history, with over $15 billion in announced and deployed capital. We announced strategic acquisitions that further build our portfolio of interconnected technologies, giving our application engineers and channel partners more ways to create value for customers. We enhanced our electrification capabilities with the acquisition of Curtis Instruments, completed last September. In November, we announced the pending acquisition of Filtration Group Corporation, which expands our offering of proprietary filtration technologies and increases our filtration aftermarket by 500 basis points.

Just this past May, we announced the pending acquisition of CIRCOR's commercial Aerospace & Defense business, adding complementary flight critical capabilities. We are committed to actively deploying capital. These transactions are right in line with our stated strategy to acquire companies where we are the clear best owner, building on our interconnected technologies, creating value for customers, further compounding earnings growth. We look forward to welcoming our new team members into Parker. Moving to slide five. After setting our fiscal year 2029 targets just over two years ago, we are raising the bar once again and setting a new margin target. As I said earlier, we achieved our fiscal year 2029 margin target early. Now for the fifth time in just over 10 years, we are raising our adjusted segment operating margin target once again.

We are raising it by 300 basis points to 30% by fiscal year 2031. In addition, we remain committed to organic growth of 4%-6% over the cycle, 17% free cash flow margin, and greater than 10% adjusted EPS growth over the cycle. We are very proud of what the teams have accomplished over the last several years, and we are confident in achieving these targets. Parker has a fantastic track record of achieving and raising margin targets. Margin expansion has been an exciting part of the Parker story for over a decade. By using The Win Strategy to drive operational excellence in each of our divisions, margin expansion will continue at Parker-Hannifin. Slide six, please. Today, we are announcing a move to rolling 12-month order rates beginning in fiscal year 2027 for our industrial segment, aligning all businesses on a rolling 12-month calculation.

Parker's portfolio is profoundly different today than it was 20 years ago when we began disclosing quarterly order rate comparisons for the industrial business. Our portfolio has been shaped by strategic positioning, one of our organic growth enablers, has been transformed by acquisition. Over the last decade, these acquisitions have more than doubled the size of our aerospace and engineered materials businesses. When Filtration Group Corporation closes, we will have more than tripled the size of our filtration business. These technology platforms combined now represent approximately 65% of our pro forma sales today. This is clearly a different Parker, with greater exposure to longer cycle, secular trends, and more resilient end markets. Rolling 12-month orders provide a stronger correlation to near-term organic sales growth. I'll give it back to Todd to review fourth quarter highlights.

Thank you, Jenny. I'm going to jump through the fourth quarter. We couldn't have had such a great fiscal year without such a strong finish in the fourth quarter. It was record-setting numbers across the board. The team delivered new records for sales, adjusted segment operating margin, adjusted EBITDA margin, net income, and adjusted EPS, all in the quarter. Sales were up 10% versus prior. Organic was up 8%. That was the strongest quarter of the fiscal year when it comes to organic growth. Really finished the year strong. Currency was just slightly unfavorable at 0.3%, and the Curtis acquisition added 1.5% to the sales. When you look at margins, adjusted segment operating margin for the quarter was 28.0%. That is up 110 basis points from prior year. That is the first time the company has ever generated segment operating margins above 28.

Just a great way to finish the year. Adjusted EBITDA margin was 28.6%. That's up 180 basis points, adjusted net income was $1.2 billion, which is a 21% return on sales. That actually drove earnings per share up also 21%, and we achieved $9.27 for the quarter. That's the first time the company has ever generated over $9 in a single quarter. Just an outstanding way to finish the year. 8% organic growth, record margins across the board, and 21% EPS growth. Jenny said this already, but really, we can't thank our teams enough for their continued hard work and dedication throughout the quarter and really finishing the year strong. If we jump to slide nine, this just displays the walk, the $1.58 increase in EPS versus prior year. Really, you could just see what a high-quality quarter this was from the team.

Over 80% of the EPS growth came from increased segment operating income dollars. That added $1.29 or 17% of the EPS growth versus prior year. Corporate G&A and other, really it's other, contributed $0.25, and that was really the result of foreign currency exchange being favorable. Lower share count, we've done a significant amount of share buybacks over the last year. That added $0.09 to the quarter, and lower interest expense added $0.02. Income tax was favorable to our guide, but compared to last year, it was unfavorable by just $0.07, and that was really due to just higher favorable discrete items in the prior year. You look at all of that's how we got the $9.27 of adjusted EPS. Just a great way to end the year. If we could go to slide 10, let's take a look at the segments.

In total, I already mentioned this, organic growth was up 8%. We expanded margins across the board, 110 basis points in the quarter, incrementals were 40% for Q4. We are very pleased to see the order rates accelerate across all these businesses. Jenny just mentioned this, but beginning in FY 2027, we will convert to order reporting for all businesses using the 12-month rolling. I've provided the 3-month and the 12-month here, but this will be the last quarter we do this going forward for FY 2027. In the appendix of this deck and in our press release, we provided eight quarters of historical comparisons, if you're interested in that. In total, orders were up 19% on the 3-year comparison. Using the 12-month rolling, it was 12%. Backlog increased 16% versus prior year and is now a new record at $12.8 billion.

If we move to the North American businesses, sales were $2.2 billion. Organic growth was just about 5%. Really, this is just based on a broadening recovery across all those businesses. Margins are up 70 basis points to a record 27.4%. That also exceeded our expectations and really marked the highest quarter of margin performance for the North American businesses of the year. Orders in North America improved +16% on a 3-month comparison and 9% on a rolling 12. Just a great way to finish the year for the North American businesses. Moving to the International businesses, sales were a record $1.6 billion. Organic growth, really impressive at 6.5%. Asia Pac really leading the way for us there. Organic growth in Asia Pacific was 16%. EMEA was positive, but just 1% positive. Latin America was down 3% versus the prior year.

What's great here is adjusted operating margin is a new record at 26.8% for the International businesses. That is up 210 basis points versus prior year. Orders, amazingly strong here, 24% on a 3-month comparison, 10% on a rolling 12. Just a nice way to finish the year for our industrial team members based in our International businesses. Aerospace continues to lead the way here. A record $1.9 billion in sales for the quarter. Organic growth of 13.4% versus the prior year. This marks the fourth year, the fourth full fiscal year in a row of double-digit organic growth for Aerospace. The team has really outperformed and executed unbelievably well, generated $1.9 billion in sales. Margins are also up in Aerospace, up 80 basis points versus the prior year and reached 29.8% for the quarter. If you move to orders in Aerospace, order rates unbelievably strong here.