Parker-Hannifin Corporation Q4 FY2025 earnings call

• The Win Strategy and high-performance culture delivered record fiscal year 2025 performance, including 17% reduction in recordable incident rate, top quartile safety, record engagement. - Top line sales $19.9 billion, record adjusted segment operating margin 26.1%, record adjusted EBITDA margin 26.4%, record cash flow from operations $3.8 billion, 7% adjusted EPS growth, $11 billion backlog. - Aerospace had record sales, 13% organic growth, orders outpacing sales, balanced portfolio. - Industrial segment part of transformation, margin expansion, well-balanced portfolio. - Announced acquisition of Curtis Instruments to expand electrification offering. - Strong fourth quarter financial results: sales up 1%, organic growth 2%, adjusted segment operating margin 26.9%, up 160 basis points, adjusted EBITDA margin 26.8%, up 50 basis points, adjusted net income $992 million, adjusted EPS up 14%.

Aerospace: Record sales of $6.2 billion, 13% organic growth, 190 basis points of adjusted segment operating margin expansion. 51% of sales from aftermarket, 49% from OEM. Industrial: Record adjusted segment operating margin of 25.1%, 90 basis point increase over prior year. Two-thirds of portfolio in longer cycle, secular trend, and aftermarket.

• Fiscal year 2026 organic sales growth forecast by key market verticals: Aerospace high single-digit growth (higher in commercial OEM than aftermarket), Industrial low single-digit growth (assuming gradual industrial recovery), Transportation mid-single-digit organic decline, Off-highway low single-digit decline, Energy, HVAC and refrigeration positive low single-digit growth. - Reported sales growth expected 2%-5% (midpoint 3.5%, ~$20.6 billion annual sales). - Organic growth forecast 1.5%-4.5% (midpoint 3%), Aerospace 8%, Industrial North America and International ~1%. - Adjusted segment operating margin guidance 26.5% midpoint, increase of 40 basis points vs FY '25. - EPS expected $28.90 midpoint, increase of 6%. - Full year free cash flow range $3 billion-$4 billion, conversion ~100%.

• Foreign currency exchange volatility affecting corporate G&A and other expenses. - Uncertainty in market verticals such as transportation (auto and truck markets facing delays due to cost, emission requirements, interest rates), ag market needing more time to return to positive, impact of tariffs on international operations. - Uncertainty in industrial recovery timing and impact on financial performance.

Q: Congrats on another great year. Can we just maybe talk about the Q1 guide? Take a look at that relative to the last few years, it's a pretty meaningful sequential step down in EPS relative to what you've seen even just like the last 3 years. So can you guys maybe just talk about like the bridge between 4Q to 1Q, and what's really changing on the margin embedded in your guide?

A: Jennifer A. Parmentier: First of all, we have very little sales growth in Q1, and this EPS guidance for Q1 is a 5% increase year-over-year. And this margin at 26.1% does have 40 basis points of margin expansion and is a Q1 record. Todd M. Leombruno: Yes, Joe, I would add, we do have -- sequentially, it's hard to go from Q4 to Q1. Q1 being obviously the start of our fiscal year, we do have to recognize some of the stock comp that is a big hit in Q1. If you look at that versus prior year, Jenny mentioned this, but we're forecasting 80 basis points of margin expansion, Q1 '26 versus '25, and EPS is a little over 4% of an increase.

Q: Congrats on a good year. Just want to follow-on on just Curtis and then combine that with the big buyback, or the $1.6 billion that you've done. Is that an indication that you expect M&A to continue to be more of kind of the smaller bolt-on type stuff? Or am I reading too much into that?

A: Jennifer A. Parmentier: Well, like you've heard me say many times in the past, Scott. We have deals of all sizes in our pipeline. It's -- it can be small and bolt-on, or there could be something larger out there. As we said, timing is hard to predict. But obviously, our strategy remains the same. We want to acquire companies. We're the clear best owner. Fits in with our interconnected technologies and follows the secular trends that we've talked about here for a while. So it doesn't mean that they'll all be this size, but we're going to continue to work that pipeline. It's building those strong relationships and making sure that we're ready when they're ready. Todd M. Leombruno: Yes, Scott, I would just add, you've heard us talk. We want to operate with net gross debt to adjusted EBITDA around 2. We finished the year at roughly 1.7. So we do have, obviously, capacity to do something even below 2. But the cash flow generation profile that the company has really gives us lots of optionality. You saw us be active with the share repurchase this year. And we'll constantly balance what the best use of our capital is, and that's what we expect to do throughout FY '26.