Parker-Hannifin Corp Q2 2026 earnings call

Thank you, Katie. Good morning, everyone, and thank you for joining Parker's FY 2026 Q2 Earnings Release Webcast. As Katie said, this is Todd Leombruno, Chief Financial Officer speaking, and with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. We both appreciate your interest in Parker as well as your time today. Before we begin the call, I'd like to call your attention to our disclosures on forward-looking projections and non-GAAP financial measures. That is on Slide 2. Items listed here could cause actual results to vary from our forecast. Our press release, this presentation, and reconciliations for all non-GAAP measures were released this morning and are available under the Investor section on Parker.com. The agenda for the call today has Jenny starting with an overview of our record FY26 Q2 performance. She then will reiterate the strengths of our interconnected technologies.

This quarter, she's going to highlight the distinct value we bring to one of our market verticals. That is the off-highway market. Jenny will also make a few comments on the recently announced agreement to acquire Filtration Group Corporation. Then I'll follow with some details on our strong Q2 financial results. We will both provide some details on the increase to our guidance that we released this morning. Then we'll move on to Q&A, and we'll try to address as many questions as possible within the hour. We know it's a busy day to everyone, so we will stick to the one-hour time slot. Now, I call your attention to Slide 3, and Jenny, I'll hand it over to you.

Thank you, Todd. And thank you to everyone for attending the call today. Q2 was another great quarter where our team and our strategy demonstrated our ability to compound performance. We achieved top quartile safety performance with an 8% reduction in our recordable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q2 sales of $5.2 billion, Organic Growth of 6.6%, and 150 basis points of margin expansion, resulting in 27.1% Adjusted Segment Operating Margin. Adjusted Earnings Per Share grew 17%, and cash flow from operations was $1.6 billion. In the quarter, we announced the acquisition of Filtration Group Corporation. Moving to Slide 4. Many of you on the call today have seen this slide before: Why We Win. The Win Strategy is our business system. We have innovative products that solve customer problems.

Our application engineers provide the technical expertise that creates a competitive advantage. Our distribution network serves global aftermarket and small to mid-size OEMs. Today, I would like to highlight the interconnected technologies that provide efficient solutions for our customers across all of our market verticals. I'm on Slide 5 now. We have the number one position in the $145 billion motion and control industry, a growing space where we continue to gain share. 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. Moving to Slide 6.

On this slide, I would like to highlight how our interconnected technologies come to life in the off-highway market vertical. Parker is a market-leading provider of highly engineered solutions for equipment used in construction, agriculture, and mining applications. Our comprehensive offering of interconnected technologies, deep application expertise, and embedded engineering relationships with OEMs are key to our success. We win with innovative and differentiated product technology, subsystems, and full system capabilities designed to increase the capability and productivity of our customers. Our global footprint allows for in-region delivery and expertise for OEMs, and our extensive distribution network provides aftermarket support for end users. I'm now on Slide 7. We are making continued progress on the Filtration Group acquisition. Integration planning is underway using our proven integration playbook. We expect to close in 6-12 months from our November announcement date.

This is a great company with a great culture, and we really look forward to welcoming everyone to the Parker team. The acquisition of Filtration Group adds complementary and proprietary technologies for critical applications while expanding our presence in life sciences, HVAC and refrigeration, and in-plant industrial market verticals. The combination of Parker Filtration and Filtration Group creates one of the largest global industrial filtration businesses and increases Parker Filtration aftermarket sales by 500 basis points. We will leverage our business system, the Win Strategy, to achieve approximately $220 million in cost synergies, and we expect this deal to meet our disciplined acquisition criteria of being accretive to organic growth, synergized EBITDA margin, adjusted EPS, and cash flow. This strategic transaction continues our investment in high-quality businesses that continue to transform our portfolio, accelerate sales growth, improve profitability, and drive shareholder value. Moving to Slide 8.

CLARCOR, LORD, Exotic, and Meggitt have been a big part of our transformation. Curtis is still early days, and as I just mentioned, we are very excited about Filtration Group. Over the time period you see on this slide, we have compounded EPS at 16%, and approximately 60% of this has come from The Win Strategy and our legacy businesses, while approximately 40% has come from the acquisitions. The acquisition of Filtration Group will continue our track record of accretive acquisitions. I'll turn it back to Todd to review the Q2 highlights.

Thank you, Jenny. This was another strong quarter of record performance. I'm on Slide 10, and we'll start with just a summary of the Q2 results. We are proud to have once again set new records for sales, adjusted segment operating margin, EBITDA, net income, and EPS. Sales were up 9% versus prior. Organic growth was positive at nearly 7%. Currency was favorable 2%. Acquisitions were favorable by 1.5%. And divestitures were a 1% headwind. Just to note, it's been now 12 months since we've completed those divestitures. This was the last quarter that we will have a divestiture adjustment going forward. Moving on to margins. Segment operating margin was 27.1%. That is up 150 basis points from prior year. Adjusted EBITDA margin was 27.7%. That's an increase of 90 basis points from prior year. And net income was $980 million. That's 18.9% return on sales. Just fantastic ROS performance.

Lastly, Adjusted Earnings Per Share were $7.65. That's up 17% versus prior year. When you look at the quarter, this was just another quarter in which our team delivered high single-digit sales growth, solid margin expansion, and all of that resulted in mid-teens EPS growth. We do remain confident that we're going to be able to deliver another record FY in 2026. If we move to Slide 11, this just displays the walk on adjusted EPS. You could see it was a clean quarter that delivered that 17% increase in adjusted EPS. Segment operating margin continues to be the main driver of our EPS growth. Dollars increased by $190 million, or 16%. That added $1.15 of our EPS growth. Share count was $0.16 favorable. That was really driven by the discretionary share repurchases that we completed over the last four quarters.

Corporate G&A and income tax were favorable by just $0.01. Other was unfavorable by $0.18. That's really primarily due to foreign currency exchange that happened in the prior year period. That did not happen this year. That was a prior period item. And interest is just slightly unfavorable by $0.03, and that is driven by just slightly higher average debt balance that was offset slightly by lower interest rates. The adjusted EPS of $7.65 is a record, and it's really driven by strong growth and great margin expansion. I really commend our team members around the world for just stellar operating performance across the company. It is a pleasure to be able to share these results. If we go to Slide 12, let's take a look at the segments. Starting with orders for the company, very strong. Orders were +9 versus prior year.

A positive note is order rates were positive in all of our reported businesses. Backlog increased to a record $11.7 billion. This was another quarter of strong incrementals for the company that created the record margins across the board, and that's 150 basis points of margin expansion. Really nice to see. If we look at North America, sales were approximately $2 billion. Organic growth was positive of 2.5%. That was slightly better than our expectations. The slightly better was driven by strength in off-highway and the aerospace and defense verticals in the North American businesses. Adjusted operating margins reached a record 25.4%. That is up 80 basis points from prior year with incrementals of 52%. Orders in North America took a big jump and increased to +7% compared to the prior year.

A notable driver there were a few multi-year aerospace and defense orders within those North American businesses. Nice quarter for the North American businesses. International sales were up to a record $1.5 billion. That's up 12% versus prior year. Organic growth for the quarter was 4.6% in the international businesses. In Asia-Pac, organic growth was the strongest at +9%. Europe turned positive in the quarter to +2%. We were really glad to see Europe turn positive. Latin America is just down slightly 3% versus prior year. It was really a positive to see Europe turn to positive organic growth. We were glad for that team to see that finally make the turn. When you look at margins, a record was achieved, 26% margins in the international businesses. That's up 190 basis points from prior year.

That margin expansion came from great improvements in productivity and just solid operational execution across all of those businesses. Orders improved in the international businesses to +6% with positive orders both in Europe and Asia-Pac. Nice quarter for the international team. Lastly, aerospace continues to perform exceptionally well. Sales for the quarter were a record $1.7 billion. That's up 14.5% versus prior year. Organic growth was 13.5%. That was driven by great strength in the commercial markets, both OEM and aftermarket. Margins are up significantly. Adjusted segment operating margin increased by 200 basis points and reached 30.2% for the Aerospace Systems segment. Again, great productivity. The higher volumes actually helped productivity in that business. This was another strong quarter of commercial spares and repairs volume. All of that translated to fantastic performance on the margin line. Order rates remain impressive in aerospace at +14%.

Backlog also increased +14% and reached a record $8 billion for aerospace for the first time in the history of the company. Aerospace and defense remains robust, and that's really led by the commercial markets. Great performance across all of our businesses. Glad to see these results. If we move to Slide 13, you can see our year-to-date cash flow performance. Cash flow from operations, $1.6 billion. That's 16% of sales. Free cash flow came in at $1.5 billion. That's 14.2% of sales. Just to note here, the H1, there's a slight drag from working capital and the timing of some tax payments. We expect that to be a first-half-only issue. I think everyone knows this, but as a reminder, our free cash flow is second-half weighted. We remain committed to free cash flow conversion of greater than 100% for the year.

We'll talk a little bit more in guidance. We are increasing our guidance on cash flow for the year. Okay. That's the details on Q2. And Jenny, I will turn it back over to you on Slide 15 to talk about our increase to guidance.

Thanks, Todd. This slide shows our updated FY 2026 organic sales growth forecast by market vertical. So in aerospace, we are increasing our forecast from 9.5%-11% organic growth. We continue to see strength in commercial OEM and aftermarket. In-plant and industrial remains the same at positive low single-digit organic growth. Recovery continues while customer CapEx spending does still remain selective. Distributor inventories are stable, and our distributors are ordering to their demand. In transportation, our forecast stays the same at mid-single-digit organic decline. Demand challenges persist in both truck and auto, which is partially offset with some strength in aftermarket. We are raising our outlook in off-highway from neutral to positive low single digit. This is based on construction and mining growth while ag remains under pressure.

We are maintaining energy at positive low single-digit growth with robust power gen activity offset by upstream oil and gas, which remains soft. 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 4%-5% at the midpoint. Back to Todd for some more guidance details.

Okay. Thanks, Jenny. If you turn to Slide 16, you'll see some of the details that we're talking about. Based on what we've done in the H1, strong orders, we are raising our full-year guidance really across the board here. Reported sales are going up to the range of 5.5%-7.5%, or 6.5% at the midpoint. We expect currency to be a favorable 1.5%. That is based on December 31 spot rates. Previously completed acquisitions and divestitures basically offset each other at 1%. Jenny just mentioned this, but we are increasing organic growth to the range of 4%-6%. That is 5% at the midpoint. If you look at the businesses, Aerospace is being increased to organic growth of 11%. In the Diversified Industrial segment, in the North America businesses, we are increasing organic growth to 2.5%.

And finally, we are increasing international organic growth to +2%. Adjusted segment operating margins, we're raising guidance there by 20 basis points to 27.2% for the full year. That will now be a forecasted increase of 110 basis points versus prior year. The forecast for incrementals for the full year is 40%, full-year incrementals. A few other items just to note. Corporate G&A remains unchanged at $200 million. Interest expense slightly tweaked down by $5 million. We're now expecting that to be $415 million for the year. Other expenses down slightly to $85 million. On tax rate, the guide for the H2 is forecasted to be 22.5%. The full-year tax rate is expected to be 22.1%. That's with a H2 of 22.5%. And finally, when we look at EPS, we're raising EPS to $30.70 at the midpoint. That's an increase of 12.3% versus prior.

The range on that adjusted EPS is ±30 cents. I mentioned it earlier, but we are raising our full-year free cash flow guide to a range of $3.2 billion-$3.6 billion. That is about $3.5 billion at the midpoint with conversion greater than 100%. Looking specifically at Q3, reported sales are expected to be nearly $5.4 billion. That is approximately 8.5% up. Organic sales growth, we are expecting 5%. Segment operating margins, we are expecting 27%. And adjusted EPS for the quarter is expected to be $7.75. Each one of those is an increase to our prior guide. As usual, additional details can be found in the appendix here. And that is a wrap on our guidance. Jenny, I'll hand it back to you for Slide 17.

Thanks, Todd. Just a reminder on 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. Katie, we are ready for the Q&A portion of the call, and we'll take first one in queue.