Parker-Hannifin Corporation ($PH)

Good morning, and welcome to Parker-Hannifin Corporation's Fiscal 2026 Third Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Todd Leombruno, Chief Financial Officer. Please go ahead.

Thank you, Chloe. I'd like to welcome everyone to Parker's Fiscal Year 2026 Third Quarter Earnings Release Webcast. As Chloe said, this is Todd Leombruno, Chief Financial Officer speaking. And with me today, as usual, is Jenny Parmentier, our Chairman and Chief Executive Officer. Thank you all for your time and your interest in Parker. We truly appreciate it. Let's begin the call on Slide 2 and address our disclosures on forward-looking projections and non-GAAP financial measures. Items listed here could cause our actual results to vary from our forecast. Our press release, this presentation and reconciliations for any and all non-GAAP measures were released this morning and are available under the Investors section on parker.com. Today's agenda has Jenny reviewing our record third quarter performance. Then she will highlight 2 of our largest market verticals, that is aerospace and defense and transportation. I'm going to follow with some details on our third quarter financial results. And then Jenny and I will provide an update to our FY '26 outlook, including an update to market verticals and financial performance. As usual, we will conclude with the Q&A session of the call, and we will try to address as many of the questions as we have as possible. With that, now I ask you to draw your attention to Slide 3. And Jenny, the floor is yours.

Thank you, Todd, and thank you to everyone for attending the call today. Q3 was a quarter of record performance, enabled by the strength of our portfolio. We achieved top quartile safety performance with a 12% reduction in our recordable incident rate. This was our safest quarter ever and puts us in line with our goal of being the safest industrial company in the world. I did want to acknowledge the severe weather events that occurred in Texas earlier this week, where Parker team members live and work, some of whom may be listening to the call right now. We have a facility in Mineral Wells, Texas, where we employ over 300 team members. Their safety remains our top priority. And thankfully, those on site at the time of the severe weather are safe. However, there was damage to our facility, which we are still assessing. We are thankful to all our team members as well as the responders and service providers who are assisting at our site and in the broader community. With that, let's share our results for the quarter. Our team delivered record Q3 sales of $5.5 billion, organic growth of 6.5% and 40 basis points of margin expansion, resulting in 26.7% adjusted segment operating margin. Adjusted earnings per share grew 18% and year-to-date cash flow from operations was $2.6 billion. Orders came in at 9% with a record backlog of $12.5 billion. And we are continuing to make progress on the Filtration Group acquisition. Integration planning is underway using our proven playbook. Moving to Slide 4, please. Many of you on the call today have seen this slide before, why we win. First, the Win Strategy is our business system. We have a decentralized operating structure, 85 divisions run by general managers with full P&L responsibility, acting like owners, close to their customers and executing the Win Strategy every day. Next, we have innovative products to solve customer problems, 85% covered by intellectual property. Our application engineers provide the expertise that allows us to have a competitive advantage with our interconnected technologies that provide efficient solutions for our customers. And finally, our distribution network is the best in the world. It is truly an extension of our engineering teams, providing solutions to all those small to midsized OEMs that are participating in capital spending and investments. These partners are experts at applying our interconnected technologies. Moving to Slide 5. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. As a reminder, these 6 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. 2/3 of our revenue comes from customers who buy 4 or more technologies, and our growth is focused on faster-growing, longer cycle markets and secular trends. As Todd mentioned, today, I would like to talk about the aerospace and defense and transportation market verticals. Now on Slide 6. I'd like to highlight how we utilize our focused portfolio of core technologies to solve problems and create value for customers in aerospace and defense, our largest market vertical representing 35% of Parker sales. We have been a trusted partner since the inception of the aerospace industry and today have products and technologies on every major aircraft program globally. Our portfolio is well balanced with approximately 2/3 of our sales from commercial programs and 1/3 from defense programs. We have proprietary designs across commercial transport, defense fixed wing fighter, business jet and helicopter platforms. With the Meggitt acquisition, we increased our global footprint and are now very well equipped to serve current and future demand from OEM and aftermarket customers in the Americas, EMEA and Asia. Demand remains robust. Orders continue to outpace shipments, and we are on track to finish our fourth consecutive year of double-digit organic growth. Parker is better equipped than ever before with complementary technologies to help shape the future of flight and deliver a compelling value proposition for our customers today and on next-gen commercial and defense programs in the years ahead. Moving to Slide 7, featuring our transportation market vertical, which represents 15% of Parker sales. Our suite of differentiated and interconnected components and systems create value for customers across internal combustion, hybrid and electric vehicles. We are truly energy agnostic and well positioned to meet changing customer needs. Today, we win with a focused portfolio of innovative products and our application engineers who work closely with customers to specify Parker technologies that improve the safety, reliability and fuel efficiency of their equipment. Parker Filtration provides protection to the engine and fluid power systems. Our power takeoffs provide reliable power to work functions. Our valves, hose and fittings control the flow of safety critical systems, and our engineered materials provide critical sealing, shielding and thermal management. In addition, our robust network of channel partners serve the aftermarket needs of end users around the world. Lastly, we are seeing an increase in OEM orders for heavy-duty truck, our largest platform within transportation and as a result, are increasing fiscal year '26 sales guidance for this market. I'll turn it back to Todd to review third quarter highlights.

Thank you, Jenny. We are on Slide 9, and I'm going to start with just the summary of financial results. As Jenny said, our team delivered another set of new records this quarter for sales, adjusted segment operating margin, EBITDA, net income and adjusted EPS. Total sales were up nearly 11%. Organic growth was 6.5%. Currency was favorable at 2.5% and acquisitions added 1.5% to the total. Adjusted segment operating margins were 26.7%, that is up 40 basis points from prior year, and adjusted EBITDA was up 20 basis points to reach 27.2%. We have achieved 2 new first-time ever milestones this quarter. Adjusted net income surpassed $1 billion for the first time ever, and that is a 19.1% return on sales. And in addition, the adjusted earnings per share of $8.17, that's the first time we've been above $8 for a single quarter ever. As Jenny said, that is a growth of 18% versus prior year. Our teams around the globe did an excellent job this quarter, resulting in another quarter of strong performance. That organic growth, those records across the board and that 18% EPS growth. We're really proud of everyone for their efforts. We're well positioned, and we remain confident in delivering another record year in 2026. So if we can move to Slide 10, we'll just display the walk, $1.23 of additional EPS, that's an 18% increase. Main driver continues to be increased segment operating income dollars. That added $0.96 or 14% of the growth versus prior year. If you go to the next bar, income tax was favorable, $0.18. There was a couple of discrete items that occurred within the quarter to drive the $0.18 favorable year-over-year comparison. Share count was also favorable. That drove 14% of improvement from prior year. That was really based on all the discretionary purchases that we've done over the last year or so. Interest was just $0.02 unfavorable, and that was driven by just a slightly higher average debt balance that was slightly offset by lower rates. And corporate G&A and other were a little bit higher, just $0.03 due to some favorable market-based benefits that really occurred in the prior year. So not an FY '26 issue, that was FY '25. The result is a record $8.17. It's just really driven by strong growth and our team continuing to work the Win Strategy. I really appreciate the team's effort on safety. Jenny mentioned, this was our safest quarter ever, really focusing on our customers, achieving that growth and just really strong operating results. Thank you to all. If we go to Slide 11, let's look at the segment performance. If you look at orders, we were 9% in total. with positive order rates across all of our businesses. Backlog increased to a record level of $12.5 billion. We generated record segment operating margins. That was 40 basis points of margin expansion. And overall, just a great Q3. If we look at North America specifically, sales were $2.1 billion with organic growth of nearly 3%. That was slightly better than our expectations. Strongest markets within North America were in-plant and industrial equipment, off-highway and followed by energy. Adjusted operating margins were up 10 basis points for a Q3 record of 25.3% and orders remained robust at 7% compared to prior year. Looking at the international businesses, sales were a record $1.5 billion. That was up 13% versus prior year, with organic growth attributing for 3% of that. Asia Pac had another strong quarter of organic growth of plus 10%. EMEA was flat and Latin America was down versus prior year. Moving to margins. Margins were up 20 basis points on the international businesses, achieved a record of 25.3% for the quarter. And international orders continue to be plus 6% versus some really challenging comps of plus 11% in the prior year. Aerospace, same story here, another fantastic quarter for the aerospace businesses. Sales of $1.8 billion. That's up 15.5% versus prior year. Organic growth was 14.2% in aerospace. That is really driven on continued commercial strength in both the OE portions and also the aftermarket. Margins are up 80 basis points and reached 29.5% for the quarter. We had double-digit OEM and aftermarket order growth. That resulted in aerospace order rates of plus 14% and backlog increased 15% in this segment and reached a record of $8.4 billion. We continue to see strength in the aerospace businesses. Each of our aerospace market segments delivered positive sales growth for the quarter, just a great quarter for Aerospace. If I could draw your attention to Slide 12, you'll see our year-to-date cash flow performance. Year-to-date cash flow from operations was $2.6 billion or 16.7% of sales. That's up 14% versus prior year. Year-to-date free cash flow increased 17% and came in at $2.3 billion. That is almost 15% of sales, 14.9% of sales. Both the CFOA and the free cash flow dollars are all-time records at this point in the year. We just have great confidence in our ability to generate cash, and we are committed to actively deploying that cash to create value. You saw last week, our Board approved an 11% increase to our quarterly dividend a quarterly dividend, it's now $2 per share, and that increase will extend our record of increasing annual dividends paid per share to an impressive 70 years. In addition, in the quarter, we repurchased another $275 million of shares, which brings our year-to-date share repurchases to $825 million. And that is a wrap on Q3 performance. So I'll ask you to draw your attention to Slide 14. And Jenny, I'll hand it back to you to talk about the market verticals.

Thank you, Todd. So Slide 14 shows our updated fiscal year 2016 organic sales growth by a key market verticals. So in Aerospace, we are increasing our forecast from 11% to 12% organic growth as we continue to see, as Todd said, strength in commercial OEM and aftermarket. Implant Industrial remains the same at a positive low single-digit organic growth. Quoting activity remains strong. Customers are prioritizing spending on automation and productivity. And I would say distributor inventories are stable and continuing to order to demand. As I just mentioned in an earlier slide, we are raising our outlook on transportation from mid-single-digit organic decline to low single-digit organic decline. This is driven by stronger heavy truck orders, while automotive demand challenges persist. Off-Highway remains the same at positive low single-digit organic growth. We see construction growth from capital and infrastructure investment, while ag remains under pressure. We are maintaining energy at positive low single-digit growth with strong power gen activity. We do see growth in midstream oil and gas, but it is offset by upstream, which remains soft. And 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 5% to 5.5% at the midpoint. I will go back to Todd for some more guidance details.

Well, thank you, Jenny. I'm on Slide 15. This is just some more details. We have 1 quarter left here in our fiscal year. So I'm going to give you some midpoints. Don't read anything into that other than the fact that there's 1 quarter left and the ranges look a little silly when you're just talking 1 quarter. So for reported sales growth, the forecast has been increased to 7%. Currency based on March 31 spot rates is expected to be favorable 1.5%. Acquisitions are 1 and divestitures are also 1. For the full year, we're increasing organic growth to 5.5% at the midpoint. Aerospace organic growth has increased to 12% and industrial growth is now expected to be 2.5% for both North America and International. Adjusted segment operating margins, we're expecting to be 27.2% for the year. That is a forecasted increase of 110 basis points versus prior year with margin expansion across all the businesses, and the forecast for incrementals for the full year is 40%. Assumptions for corporate G&A, interest and tax are all detailed out in the appendix, really no changes there. Full year adjusted EPS has been raised by $0.50 to $31.20 at the midpoint, that would be an increase of 14.2% versus prior. In addition, we're also raising our forecast for full year free cash flow to $3.3 billion to $3.6 billion. That's $3.450 billion at the midpoint. That would be 16.2% of sales with conversion at approximately 100%. In respect to Q4, specifically, we are guiding reported sales to be nearly $5.5 billion. That is a 5.5% increase versus prior year. Organic growth will be approximately 4%, adjusted segment operating margins will be 27.4%. The effective tax rate, we are expecting is 22%. And for the second time ever adjusted EPS would be above $8, to be at $8.16. As usual, we've got some more details in the appendix. And with that, I will turn it back to you, Jenny, and ask everyone to turn to Slide 16.

On our final slide, a reminder of what drives Parker. Safety, engagement and ownership are the foundation of our culture. With 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. Clearly, we are ready to start the Q&A portion of the call.

We'll take the first question from Micre Dobre with Baird.

Thank you. Thanks for the question here. Maybe I'll start with kind of the topical items of late. You haven't really called out what's been going on in the Middle East in any way that was material. So I'm curious as you look at your business, has there been any disruption or anything that's different that we need to be aware of? And also, there's an updated tariff framework I'm curious if there is any impact to be done about as far as you're concerned?

So first of all, I would say our first concern with the Middle East is the safety of our team members. And we're very, very happy they're all safe. Direct revenue in the Middle East is very small, and there's really no manufacturing. It's primarily a sales organization. So our teams are doing a fantastic job managing the supply chain, handling logistics and doing everything they can to minimize the disruption to our customers. So at this point, we're not seeing any material impact to demand. . And talking about tariffs and what's going on there. It continues to be very dynamic. And as always, our teams are doing a great job managing them to make sure that there's no impact to earnings. And as you know, price cost management has been a core element of the Win Strategy for us. This is a strong muscle for us for over 25 years, and we don't expect this to have any impact. When you're looking at changes in tariffs, again, I would say we're very close to it. We analyze it on a regular basis, and it's nothing that we're concerned about taking care of.

Mig, I would just add -- this is Todd. Jenny mentioned, it's a complex process. We're obviously doing everything we can there. We will not recognize any income on those tariffs until we receive them. So we are treating those at [indiscernible] so you won't those forecast or recognize any income that we actually received.

Understood. And then my follow-up, just kind of sticking with your comments on price cost. I guess, optically, even though this was a very good quarter, you guys put up to the incrementals on the industrial side of the business were a little bit lower than what we have seen of late. And I'm kind of curious there is any lag whatsoever that you're experiencing in terms of either dealing with the teridynamics or any other inflationary aspects within your business. any delay look as to where you're able to implement pricing to offset that? .

I'll take that, Mirc, no delays, no concerns there with Mike's cost management whatsoever. We were below what we had forecasted in North America and international. And in North America, this was really driven by stronger OEM growth. And notably, this came from off-highway and transportation. Distribution did hold steady, but no real acceleration there yet. And while we aren't in the excuse making business, as I tell the teams, the teams are always planning for various contingencies. This quarter, we had to recover from more weather-related disruptions than normal, and that was mainly in North America. So we're very proud of the teams, as Todd mentioned, for responding and delivering to the customers. We did have record margin for North America, and we're going to finish the year strong.

We'll move next to Jamie Cook with Truist Securities.

Congrats on a nice quarter. I guess 2 questions, just following Mig's question on the incremental margin on a or the outearn you're still expecting a 40% incremental margin, which is above normalized range or what you laid out at the Analyst Day. So I guess as Todd, while you don't want to talk about 2027, as we think about the setup for next year over the longer term, is there any reason why we shouldn't believe incremental margins just couldn't be in the 40% range? Or does mix on like the mobile side or whatever impact that or can incrementals be structurally better. And then, I guess, Jenny, my question to you just because there's a lot of concerns, obviously, with the Middle East and macro. Your orders in Industrial still were very strong, in particular, on international. Like you said, with the tough comps anything notable on sort of the cadence of orders throughout the quarter into April or just confidence level sort of like last quarter, has it waned at all relative to it last quarter, wouldn't have felt like you've been pretty -- one of the first people to be more positive, I guess, on industrial short cycle.

Jamie, thanks for the congrats. I'll start. We've been trained here to finish strong, and we're focused on finishing FY '26 strong. So our focus right now is on Q4. But I'd tell you what we like to set up for FY '27. You're going to see us to continue to do everything that we do here. You've seen our orders. You've seen our margin expansion over time. We are very much focused on creating great incrementals. We hold the team to a target of 30% to 35%. And obviously, that varies on where your business is. But really, what we're focused on is growing those segment operating income dollars and compounding EPS, right? That's been very successful for us. And that is a factor of that. I think if you do the math, you're going to get incremental somewhere where you're thinking. But we'll talk to you more about that in a couple of weeks.

And for your second question, Jamie, orders were strong throughout the quarter. And we saw -- I would say the industrial recovery continues. We saw more broad-based positivity on both short and long cycle than we did earlier this year. So we feel really good about the guidance. And as always, we stay close with the customers. So we we not only feel good about the guidance, but we're not seeing anything right now that concerns us. .

We'll take our next question from Jeff Sprague with Vertical Research.

Nominee. Jenny or Todd, could you just maybe spend a little more time on Aero? The organic growth in Q4, I guess, will be sort of the slowest of the year against the easiest comp of the year. Are you dialing in some aftermarket pressure? Or what -- maybe kind of what's underneath that outlook in the fourth quarter?

Yes. I would say, Jeff, the aerospace Q4 forecast is approximately 9%, and that was raised from our previous Q4 guidance of 7.5%. We're not baking in any slowdown here. Orders and backlog continue to be very strong, record backlog here in this long-cycle business. But -- and again, as I mentioned earlier, this is going to be our fourth year in a row of double-digit organic growth for aerospace. But we're not building in any slowdown here.

And there's no indication in orders or anything that has a shift between OE or aftermarket?

Say that again, I'm sorry? .

The complexion of OE versus aftermarket in Aero. I wonder if you could give a little more color there.

Well, if you look at how we performed in Q3 commercial OEM was up 22%, and aftermarket was up 14%. But again, strong orders in both areas. So we feel real good about the mix and the forecast. We were at 51% OEM in Q3 and 49% aftermarket. So the teams are doing a really great job with the higher OEM mix and still being able to expand margins. .

Jeff, I just add, aerospace, specifically, the backlog increased 5% sequentially, $8.4 billion is the total backlog. That's all-time record.

We'll move next to Chris Snyder with Morgan Stanley.

I understand that as the industrial businesses turn to be more longer cycle exposure that there's a lag between when the orders convert to revenue. But if we see industrial orders sustained here in this mid-single digit, even maybe high single-digit range for several quarters in a row because then why sales will not ultimately get to that same level of growth?

Thanks for the question, Chris. I wouldn't say that there's any structural reason. But if you look at North America, orders have been plus 7% for the past 2 quarters. And we noted in Q2 that these included long-cycle multiyear defense orders. And so again, in Q3, we saw orders that are due beyond this fiscal year, including defense, energy and even construction orders scheduled into FY '27, which is usually shorter cycle. So we're guiding 3% organic growth for Q4, which would be the best performance so far for this year. And as Todd mentioned earlier, we like the way to set up looking for fiscal year.

And then when you look across all of the various industrial end markets that the company serves. Are you seeing the improvement in sales and in orders driven by end demand going higher? Like what's being put out into the channel is being consumed? Or are there where you think distributors could be maybe building a little inventory in anticipation of a cycle maybe some concerns on supply chains or commodity inflation with the events in the Middle East. And I just want to see if there's any like end market differences on that.

Well, I wouldn't say we're seeing any of that yet. I think they're still ordering to demand. for rather quick consumption. We're not seeing any real acceleration or any typical signs of restacking. Haven't heard of any supply chain fears within it on the industrial side of the business.

We'll move next to Amit Mehrotra with UBS.

I wanted to just follow up on that point around, I guess, distributors versus OE mix. And Jenny, I think you made a comment about stable distributor inventories, ordering to demand, strong quoting. I'm just trying to triangulate those items to understand sort of the psychology around inventory stocking and kind of a more structural question are the distributors maybe getting a little bit more sophisticated around inventory management. And so maybe there's a mix more from growth towards OE, which has margin consequences. Maybe you could talk about that.

Yes. What I would say is that over the last several years, I think our distributors have become very sophisticated when it comes to inventory management. Even coming out of COVID, managing cash and really putting all of the processes in place to order what they need and use it and sell it for consumption. So I think that is definitely something that has happened over the last several years. . And when we talk about ordering to demand, it's -- we're not seeing the increase that would tell us that there is a restocking going on. So they've been telling us for quite some time. The quoting activity is strong. their sentiment has been positive for quite some time. But again, they will tell us that their customers are being selective with capital investments and really focused on those that provide automation and productivity. So we're not signaling anything changing. It's just not accelerating right now. And we are seeing an increase in OEM with the raise to transportation outlook, and off-highway with construction, we are seeing increased OE, which is classically 10 to 15 points below institution.

Great. And then you also mentioned historically over the last few quarters, you talked about the order strength really being centered on longer-cycle specific verticals. I think you kind of broaden it out a little bit this quarter. Maybe just talk a little bit more about that true short-cycle piece and what your observations have been over the last few months? .

Yes. So when you look as long cycle, it continues to pull strong. We've been talking about that. That's why we raised our aerospace and defense guidance. Power gen cycle business, it's robust. Lots of activity in midstream oil and gas and electronics is also growing nicely. On the short side, as I mentioned before, the industrial recovery continues. And we've been talking about a slow gradual industrial recovery for some time now, and that's what we're seeing. The order that we saw more broad-based and positive on both short and long cycle on the industrial side of the business than we've seen really all of this fiscal year. So construction continues to improve. Heavy-duty truck improvement in plants and distribution, which we just talked about. So we're continuing to see this positive low single-digit growth. And again, we'll say we're set up for a good fiscal year '27.

We'll take our next question from Andy Kaplowitz with Citi Group.

Jenny, could you talk about what you're seeing in the aerospace supply chain, as you know, 1 of your peers continues to have some issues there, but you've continued to execute well. You seem to be absorbing like a little bit more difficult margin mix, while still growing. So as we start to transition to FY '27, is there any reason why you couldn't continue to grow margin even if mix is running a bit more against you? .

I remain confident in our ability to expand margins and committed to that as well. So I don't have any change there. The aerospace supply chain, I would say, is obviously, a much better shape than it has been. And we've seen the big air framers be able to increase their rates, which we're obviously participating in. And I would tell you that we have, over the last several years, invested quite a bit in our supply chain, and that has proved to be very beneficial for us. So I don't really have any concerns here. .

And then, Jenny, continued strong performance in Asia Pac that plus 10% is impressive. So maybe talk about the durability of that growth and be a flat kind of bouncing along there at kind of those rates. I think last quarter was up a little bit. So do you see sort of improvement there? Or is it just kind of so long flat.

Well, this is primarily, as we said earlier, the growth is coming from Asia Pacific. The total backlog coverage in industrial did increase to the high 20s and international orders were plus 6% for the third quarter in a row. But again, driven by electronics and some defense bookings. So EMEA, slightly negative on a tough comp when it comes to orders, but strength in aerospace and defense, some mining, some implant in industrial, but Asia orders are strong, coming from electronics. -- data center in there and implant and energy. .

We'll take our next question from Julian Mitchell with Barclays.

Maybe, Jenny, just wondered if you could flesh out the subsegment sort of assumptions on aerospace. Just kind of what you're expecting in the fourth quarter for the major pieces kind of year-on-year and how they did in Q3. I think you have the commercial bits for Q3, but not military. .

Yes. Let me give you a Q3 rundown and then I'll go to what we have for Q4 guidance. So as Todd mentioned, aerospace organic growth was 14.2%. And commercial OEM was 22%. And obviously, this is driven by production rate increases in both narrow and widebody. Commercial aftermarket was 14% and, even though we were seeing to see -- we're starting to see global air traffic growth begin to normalize, we still saw nice growth in Q3 and strong spares and repair shipments. Defense OEM, the positive 13%. We see demand for the legacy programs continuing. And then defense aftermarket was positive 8%. So fleet upgrades and service extensions are contributing to that. And I mentioned earlier, aftermarket mix at 49% and OE at 51%. When we look at Q4 guidance, again, we're increasing full year to 12%, and we're raising commercial OEM to be the low 20s growth, we previously had that at 20% -- approximately 20%. We are raising commercial MRO of low teens growth, was previously low double digit. We expect defense OEM to be mid-single-digit growth. That's the same as before and defense or low single-digit growth, also the same as our last guidance.

That's very helpful. And then just to try and circle back again to that point on industrial kind of orders and sales and the fact you've had several quarters of orders in both industrial segments outstripping the revenue growth pace. Maybe just another way to look at, I wanted to confirm that, that industrial the diversified industrial overall backlog? It looks like was that just over $4 billion at the end of March. So you had a decent sort of year-on-year and sequential increase. So I guess I just want to say, it looks as if that orders outpacing of sales isn't just a sort of comp phenomenon or something like you -- there should be some recoupling of the sales to those orders, even though from the outside, we can't see the kind of dollars of orders you've been booking?

Yes, Julian, you're absolutely right. The -- both the industrial and the aerospace backlogs improved and we obviously see that as a good sign.

Okay. We'll move next to Andrew Obin with Bank of America.

Just to check my math on industrials. I guess organically, it does imply that Q4 will be a midpoint will be a tad lower than Q3 industrials Americas? Is that okay? Is that correct? .

No. We've got it pretty much the same.

Okay. Fine. And a question on pricing. In the quarter. We've been hearing about sort of industry talking about rebates, pushback. Now all of this has been before S232, and I know maybe not a direct impact for you guys. National pricing change, given that the industry now does have to deal with S232, and maybe just -- can you just talk about pricing trends in Q1 and what pricing looks for the remainder. Well, I guess your fiscal year, but any commentary on pricing would be great.

I would say that conversations haven't changed. Obviously, when it comes to the tariffs, as I mentioned earlier, it's dynamic and it requires a lot of analysis and coordination and the teams are doing a great job of that. on the industrial side of the business, as we've mentioned in the past, we're back to -- especially with distribution, we're back to a normal pricing environment, so we'll do that as we have in the past. With aerospace, there's still some opportunity for pricing and the teams are executing on that. But we've been doing this for a long time. And I think we've done a great job of covering inflation and making sure that the tariffs have impacted our earnings, and we'll continue to do that.

And maybe just sneak one in on defense aftermarket. Why not raise the guide given what's happening in the Middle East, I would imagine a lot of wear and tear on key platforms year on, sorry.

Yes. This is a long lead time product, right, even in defense. So you're looking anywhere from 9 to 15 months. So we have the guide out there based on the deliveries that our customers want, and that's what's really driving that number.

We'll move next to Tim Thein with Raymond James.

The first question is just on the mix dynamics within the industrial businesses in '26. I'm just trying to -- you can see if you can help kind of summarize in terms of distributions growth and what you're expecting next year relative to the total, and more forward thinking. I'm just trying to think if that business begins presumably to pick up, does that potentially portend a mix tailwind in '27. Can you help on that?

Yes. Tim, this is Todd. You look at our industrial business, it is exactly 50% OEM, 50% aftermarket. So as these things rise depending on what market they're in, there really is a nice diversified balance across there. When we see something pop it last quarter, I think we mentioned slightly there was a little bit of a mix issue. But these are small in comparison to the total. What we look at is positive. We're looking at those orders. We've had positive orders in the industrial business now for 6 quarters in a row. And again, what that does is that helps us compound dollars, and that leads to EPS growth.

Yes. distribution sits in our -- primarily sits in our implant industrial market vertical. And our forecast remains the same for that for the rest of the fiscal year, positive low single-digit growth. .

And then again, this is a little bit out of left field, but there was -- one of your big European-based competitors. They really flagged certain to see more competition from some of the competitors in Asia starting to make some more inroads into their markets. I'm just curious, made some broad questions just in terms of the competitive dynamics as you think about that globally. Have you your results wouldn't suggest it, but I'm just curious if you -- what you would say to that in terms of any changes that you've seen globally on that.

I've seen any changes, but I would say that our teams are very focused on taking any and all competition very seriously. We have a lot of a lot of pride in the products that we have and the value that they bring to the customers, the quality, we manufacture and many regions of the world that allows us to be very competitive locally. So while competition is always something that something we have to keep an eye on, our performance is what ensures that not only that we keep what we have but that we gain share. .

We'll take our next question from Joe O'Dea with Wells Fargo.

Can you give a little bit more color on what you're seeing in Industrial International. We've seen very steady mid-single-digit order growth. You touched on the tough comp in Q3. So I think kind of pick any stack period you want, looked pretty good in the third quarter. And so Europe, Asia, kind of what you're seeing, any verticals you would call out there?

Sure. So we are increasing full year organic growth to 2.5% for international versus our prior guide of approximately 2%. So in EMEA, we're maintaining a slightly positive low single-digit we're seeing a gradual improvement in plant and in transportation, primarily heavy to truck. And we have seen continued strength in mining and energy, both oil and gas and power gen. In Asia Pacific, increasing full year to positive high single digit versus positive mid-single digit we had in our prior guide. And this is continued strength in electronics and semicon demand. implant orders and shipments progress, but remain a little bit mixed. Minis strong, and there have been improvements in energy. So it's really kind of a mix between EMEA and Asia Pacific, but we're going to end this year at 2.5%.

And then just on Filtration Group, I think you initially talking about a 6- to 12-month window. I think it seems like some deals have taken a little bit longer to work through regulatory processes, I'm not sure if the way you're thinking about it maybe favors the 12-month side of that versus 6 month. And then just any color, recognizing really good margin business, what you're working on in preparation for that is the highest priorities post close? .

Sure. So we still anticipate that we're going to close within the 12 months of announcement date. And just as you said, the closing remains subject to the customary closing conditions receipt of our pending regulatory clearances. So that progress is happening there. It's ongoing. I would tell you that the integration planning is under rate teams that both sides have been formed. So those teams are working together. And we'll put our integration playbook into place as soon as we do close and get the Win strategy into the organization as soon as possible. We did announce $220 million in synergies by the end of year 3. That is 11%. The majority of those synergies are going to come from the tools in the Win Strategy that you hear us talk about, lean, supply chain, and simplification. We're not providing, at this time any information on the phasing of those synergies, but we're very, very confident in our ability to achieve those. So announcement was last November, and we still anticipate that it will be within the 12 months.

Joe, I would just add on the funding side of it. We have our funding plan in place. There is no prefunding that's required for this transaction. So you won't see any interest before we close the transaction. And you're going to see us do exactly what we've done on the past transaction. A little over half of this will be serviceable debt. The rest will be short to medium-term notes, and we do not expect leverage to surpass 3 when we close. And our delevering plan will be in place that we get back to around 2% faster than we ever have before.

We'll move next to Andrew Buscaglia with BNP Paribas.

Just looking across broader coverage group and broader industrials looking at what life is like if energy prices persist above $100 going forward. I would think Parker would stand to benefit. I'm wondering, you haven't probably gotten this question in a while, but where do you -- obviously, you have that direct energy exposure or maybe there's a nice benefit, but I would think there would be a ripple effect some animal spirits brewing in some other areas, maybe off-highway plant. But what is the net impact for you guys if we still see energy prices sitting here 6 months for now? .

Well, I think it's probably too early to forecast right now, but where we're at today, and what we have in our guide. I think that's representative of the impact today and how it impacts overall Parker Hannifin. We'll have to see how this plays out. But I don't have any forecast to share with you today. .

Yes, Andrew, I would just add, the diversification of portfolio is really one of the strengths of the company. And we often say we're agnostic when it comes to the power source. When you look at the market verticals that we call out, there will be some pluses and some minuses across those. But I think overall, the company will be able to capitalize on any opportunities that come from changes in energy prices.

And then your free cash flow nudge that up a little bit. I'm just wondering in light of the Filtration Group deal closing, are you still evaluating M&A into year-end? Would you rather preserve some capital just to get through the deal and then see where you're at? .

We've been very active. We've been very direct with our commitment to do that. You saw us increase the dividend. You saw us do $825 million of share repurchases. You look at our leverage, it's very, very manageable where it sits today. I just mentioned the full funding of the Filtration Group. We will not -- we might get near 3, but we're not going to cross 3. So that pipeline is always active. It's always being worked on. It's always being measured. And I would tell you the capacity that the company has, you mentioned it. We're raising our free cash flow. If you look at CFO, we're going close to $4 billion of cash generation this fiscal year. It gives us a lot of options, and we're going to be very diligent when it comes to deploying those that optionality.

I don't think I can consider.

We'll move next to Joe Ritchie with Goldman Sachs.

Todd, maybe a longer-term question on margins within the industrial business. So absent volumes, obviously, you guys have done a great job expanding margins in both of those businesses. But as you kind of think about the opportunity here, where do you see is like the biggest levers absent volumes to continue to expand margins in the industrial segment?

Yes. Really, it is our commitment to lean and continuous improvement. Kaizen across the organization, we were just at some of our aerospace facilities. And you look at the margin that those aerospace businesses are putting up. But you listen to our team members and you walk the shop floor and you see the kaizen activity that's happening and the efficiency that it's driving, it is so energizing to see that. We've said this before. We are very confident Jenny said it multiple times today that we're very confident in our ability to continue to expand margin, and that's what you're going to see Parker Hannifin do over the long term.

We're -- our team members have a mindset of we're never done. And some of those visits as Todd was just talking about you're seeing fantastic improvements that they've made and the next breath, they're telling you what comes next. So again, just to reiterate, our confidence in the team, our confidence in our tools and the win strategy. and our ability to really create shareholder value there.

That's good to hear. And look, I know we'll get a guide in early August when you report -- but I guess as you kind of see your end markets right now, Jenny, you sound pretty sanguine on what's happening in the industrial end markets. I mean is it fair to say, just given where we sit today, that the expectation for next year be lease a couple of points better than what you're seeing in '26?

That's a question to try and get a guidance. Listen, it's a fair question. We purposely transformed Parker into a less cyclical, faster growing and more resilient company. And many of our industrial markets turn positive bring this fiscal year, and orders are strong. As we were just talking about, the Win Strategy is clearly working. It's going to continue to drive growth, margins and earnings even higher. We're going to welcome the filtration group into this fiscal year. So I'm confident that we're going to be able to guide to you.

For one more question before the -- we hit the top of the hour.

We take our last question from Nigel Coe with Wolfe Research.

Great. Thanks for being here, the pressure the last question. Lots of questions on orders. Todd, maybe just what was the industrial backlog? I'm getting $4.1 billion. Is that the right number.

Your maths is good, that's right.

Correct, correct.

Yes, that's why I got to pay the big books gain. Just a quick one on the Texas facility. Obviously, really bad news. But just wondering the scale of that facility and any disruption you factored in.

Listen, we're still assessing what the impact is, but we don't expect this to have any material impact to overall Parker.

That's great news. And then just 1 quick one. The DC business, data center business, I know it's small, but it's growing like a weed. So I'm assuming it's moving the needle on growth rates. So just -- any update on the size and growth profile of data center? .

Yes. It's still approximately 1% of our sales, but a great exposure here. It's growing nicely. It's just not large enough to have its own vertical right now. But this is just a great example of how all of our technologies, our interconnected technologies come together to really provide great value to the customers. So listen, we're working with all the industry leaders. You're right, very fast growing. We can provide liquid cooling systems, subsystem components. And with the increase in data centers, there's a secondary benefit there around power gen and automation in construction. So this is a great overall impact for our partner.

Okay. This concludes our FY '26 Q3 earnings release webcast. We appreciate your time and attention, and thank everyone for joining us today. As usual, our Investor Relations team of Jeff Miller and Jenna Stuckey will be available for any follow-ups or clarifications that anyone may have. Thank you all, and have a wonderful day.

Thank you. This concludes today's call. We appreciate your time and participation. You may now disconnect.