Parker-Hannifin Corporation (PH) Earnings

Management highlights

### Safety and Culture - Achieved top quartile safety performance, with a 9% reduction in recordable incident rate; this was the safest year in company history, with an ongoing goal to become the safest industrial company in the world. - Alignment across the global team on the WIN strategy and long-term margin and growth targets is cited as a core driver of consistent outperformance. ### Capital Deployment and Acquisitions - Deployed/announced over $15 billion in capital in FY26, in line with the company's stated strategy of acquiring businesses where Parker is the best owner to expand interconnected technology offerings and compound earnings growth. - Completed the $1 billion acquisition of Curtis Instruments in September 2025 to enhance electrification capabilities. - Pending acquisitions: Filtration Group Corporation (expands proprietary filtration technologies, increases filtration aftermarket share by 500 bps) and Circor's commercial aerospace and defense business (adds complementary flight-critical capabilities). Both are expected to close in H1 FY27, subject to customary regulatory clearances. - Returned nearly $2 billion to shareholders: $1 billion in share repurchases and ~$1 billion in dividends. Net debt was reduced by $1 billion, bringing net debt to adjusted EBITDA to 1.4x, down from 1.7x YoY. ### Long-Term Target Update - Exceeded the original FY29 adjusted segment operating margin target two years early, and has now set a new target of 30% adjusted segment operating margin by FY31, a 300 bps increase from the prior target. This marks the fifth margin target increase in 10+ years. - Reaffirmed long-term commitments: 4% to 6% organic growth over the cycle, 17% free cash flow margin, and greater than 10% adjusted EPS growth over the cycle. ### Reporting Change - Beginning in FY27, the company will switch to rolling 12-month order rate reporting for all segments, aligned with the transformed business portfolio. Acquisitions over the last decade have grown longer-cycle, resilient end markets (aerospace, engineered materials, filtration) to ~65% of pro forma sales, up from 35% historically, and rolling 12-month orders provide a stronger correlation to long-term organic sales growth.

Guidance

- **Full year FY27 overall guidance**: Reports sales growth of 5.5% to 8.5% (7% at the midpoint), equal to ~$23 billion in total annual sales, does not include sales from pending Filtration Group and Circor acquisitions. Organic growth guidance is also 5.5% to 8.5% (7% at the midpoint), which marks the highest organic growth guide in modern company history, and is the first time the company has guided positive sales growth across all market verticals. - **Segment organic growth guidance (midpoint)**: North American Industrial: 6.5%, International Industrial: 5.5%, Aerospace: 8.5%. - **Margin guidance**: 27.7% adjusted segment operating margin at midpoint (40 bps above FY26), with margin expansion across all segments, and incremental margins expected near the top end of the 30% to 35% historical range. - **EPS guidance**: $34.75 adjusted EPS at midpoint, up 8% YoY, with a range of $34.25 to $35.25. 47% of full year EPS is expected in H1, 53% in H2. - **Free cash flow guidance**: $3.4 billion to $3.9 billion, with ~100% conversion, consistent with historical targets. - **Market vertical organic growth guidance**: Aerospace and defense: high single-digit (mid-teens for commercial OEM, mid-single-digit for commercial aftermarket, mid-single-digit for defense OEM and defense MRO); in-plant and industrials: mid-single-digit; transportation: mid-single-digit (led by strong heavy-duty truck growth, offset by slower automotive growth); off-highway: single-digit (strong construction/mining growth offset by soft agriculture); energy: mid-single-digit (strong long-cycle gas turbine power generation growth offset by flat oil and gas); HVAC and refrigeration: mid-single-digit (led by commercial HVAC, with residential improving as inventory stabilizes). - **Q1 FY27 guidance (midpoint)**: ~9% reported sales growth, ~8% organic growth, 27.7% adjusted segment operating margin, $8.07 adjusted EPS.

Segment performance

For the full fiscal year 2026: Total company sales hit a record $21.5 billion, with 6.6% organic growth, 27.3% adjusted segment operating margin (up 120 bps year-over-year), $32.31 adjusted EPS (up 18% YoY), and $4.4 billion operating cash flow (record). Q4 FY26 performance by segment: 1. **North American Industrial**: $2.2 billion in sales, 5% organic growth, 27.4% adjusted segment operating margin (up 70 bps YoY, a new record). Orders were up 16% (3-month) / 9% (rolling 12-month). It contributed 38.6% of total Q4 sales. 2. **International Industrial**: $1.6 billion in sales (a new record), 6.5% organic growth led by 16% organic growth in Asia-Pacific, 1% in EMA, -3% in Latin America. Adjusted segment operating margin hit 26.8% (up 210 bps YoY, a new record). Orders were up 24% (3-month) / 10% (rolling 12-month). It contributed 28.1% of total Q4 sales. 3. **Aerospace**: $1.9 billion in sales (a new record), 13.4% organic growth (the fourth consecutive full fiscal year of double-digit organic growth). Adjusted segment operating margin reached 29.8% (up 80 bps YoY). Orders were up 18% with double-digit growth across commercial OEM, commercial aftermarket, and defense OEM. Aerospace backlog hit a record $8.5 billion, up 15% YoY. It contributed 33.3% of total Q4 sales. Total company Q4 FY26: 8% organic growth, 28.0% adjusted segment operating margin (up 110 bps YoY, first time ever above 28%), 21% adjusted EPS growth to $9.27 (first time ever over $9 per quarter). Total backlog hit a record $12.8 billion, up 16% YoY.

Risks & headwinds

No material new operational risks or failures were explicitly discussed on the call. Management acknowledged that the 30% FY31 margin target is challenging, but expressed confidence in achieving it based on the company's track record of meeting or exceeding prior targets. Uncertainty referenced includes: unknown discrete tax items for FY27, and timing of future M&A opportunities is not controlled by Parker. All pending acquisitions are subject to standard regulatory and closing conditions, with no unresolvable hurdles identified.

Analyst Q&A

• Q: What are the remaining hurdles to close the Filtration Group and Circor acquisitions, and how confident is management in hitting the new 30% FY31 margin target? /

  A: No major hurdles remain; both transactions are on track to close in H1 FY27, pending standard regulatory clearances. While the 300 bps margin target is ambitious, management notes strong team alignment and a proven track record of raising and meeting margin targets, and includes the pending acquisitions in the target, with confidence the company will deliver. (192 chars)

• Q: What drove the strong 24% 3-month order growth in international businesses in Q4, and why the switch to rolling 12-month order reporting? /

  A: Strength was broad-based across verticals, led by double-digit electronics and industrial plant growth in Asia-Pacific and mid-single-digit growth in EMEA, with an easier year-over-year comparison also contributing. The switch comes as longer-cycle end markets (aerospace, filtration, engineered materials) now make up 65% of pro forma sales, up from 35% historically, and rolling 12-month orders provide a more accurate, less volatile view of underlying trends. (354 chars)

• Q: What is Parker's appetite for additional M&A in FY27 after closing these two large transactions? /

  A: Parker remains committed to active capital deployment, the pipeline of potential targets is always being developed, and management is not in control of when targets become available. Leverage will rise temporarily with the two pending deals and is expected to return to target levels in six quarters, but management will remain disciplined and pursue deals that make strategic sense for the company. (271 chars)

• Q: How will margin expansion to 30% by FY31 be split between segments? Will industrial segments close the gap with aerospace? /

  A: All business segments are expected to contribute to margin expansion, as they have for prior target periods. Aerospace has delivered outsized expansion in recent years and will continue to grow margins, but management expects North American and international industrial segments to deliver faster margin expansion than aerospace over the period, as aerospace faces ongoing next-generation investment and OEM mix pressures. (296 chars)