Q4 2025 Earnings Call Transcript

Good morning, everyone. Welcome to the Parker Hannifin Corporation's Fiscal 2025 Fourth Quarter and Full Year Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. Todd Leombruno, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you so much, Bo. I'd like to welcome everyone to Parker's fiscal year 2025 Fourth Quarter and Full Year Earnings Release Webcast. As Bo said, this is Todd Leombruno, Chief Financial Officer speaking, and with me today, as usual, is Jenny Parmentier, our Chairman and Chief Executive Officer. We appreciate your interest in Parker, and we thank everyone for joining us today.

On Slide 2, we 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, this presentation and reconciliations for all non-GAAP measures were released this morning and are available under the Investors section on our website at parker.com. The agenda for today has Jenny starting out with the highlights to our record fiscal year 2025 performance.

She will then reiterate the strength of our transformed portfolio, the power of The Win Strategy, which is our business system, that drives performance in all economic climates, and then she'll provide some color on our recently announced acquisition of Curtis Instruments. I'm going to follow with a few details on our strong fourth quarter financial results. We did release our initial FY '26 guidance this morning, and we will discuss the assumptions, and provide some color on what we expect to be another record year for Parker. We'll conclude the call with a normal question-and-answer session, and we will do our best to take as many questions as possible.

Now I would ask everyone to call your attention to Slide 3, and Jenny, the floor is yours.

Thank you, Todd, and thank you to everyone for joining the call today. The Win Strategy and our culture of high performance delivered another record year. We had a 17% reduction in recordable incident rate, once again achieving top quartile safety performance and record engagement survey results. Top line sales finished at $19.9 billion, and this team achieved record adjusted segment operating margin of 26.1%, an increase of 120 basis points to prior year, and record adjusted EBITDA margin of 26.4%, an increase of 80 basis points to prior year.

We generated record cash flow from operations of $3.8 billion and delivered 7% adjusted EPS growth. We finished the year with a record $11 billion in backlog, and we remain committed to a disciplined, active and balanced capital deployment strategy. Next slide, please. Another year of outstanding performance from Aerospace with record sales of $6.2 billion.

That's 13% organic growth and 190 basis points of adjusted segment operating margin expansion. Orders continued to outpace sales growth as we finished the year at a record backlog of $7.4 billion. Today, we enjoy a balanced and diverse Aerospace portfolio. We finished FY '25 with 51% of our sales from serving the aftermarket, and 49% from serving our OEM customers.

Looking back to FY '19. I'd like to recognize our Aerospace team for navigating and managing through numerous industry challenges, successfully integrating the Parker and Meggitt Aerospace businesses together, and staying focused every day on the safety of our team members and improving the experience for all of our customers. The performance is impressive. Sales are approximately 2.5x higher, and we are on track to expand adjusted segment operating margin by 940 basis points from fiscal year '19 through our fiscal year '26 guidance, and we're not done yet. Our comprehensive offering of proprietary designs on premier programs, and our global footprint that supports a diverse customer base, well positions us for sustained growth and operating performance.

Next slide, please. The Industrial segment of our business has been a large part of our transformation and margin expansion story. Fiscal year '25 delivered record adjusted segment operating margin of 25.1%, a 90 basis point increase over prior year. Using The Win Strategy, our teams are on track to deliver 700 basis points margin expansion from fiscal year '19 through our FY '26 guide.

This is a testament of our ability to expand margins through the cycle, even in periods of negative organic growth. Our powerhouse of interconnected technologies, global distribution network, and global manufacturing footprint, our competitive advantages that will drive growth from secular trends across the market verticals. Our portfolio today is well balanced. Two-third is now longer cycle, secular trend and aftermarket.

We are poised for a return to growth. Next slide, please. Once again, the transformation of our portfolio further expanded longer cycle and secular revenue mix in fiscal year '25. Acquisitions in both Aerospace and Industrial, along with international distribution growth, have greatly contributed to this transformation. We see this transformation continuing and expect 85% of our portfolio to be longer cycle, secular and aftermarket by fiscal year '29. Next slide, please.

And on June 30, we announced our intent to acquire Curtis Instruments, further expanding our electrification offering and secular revenue mix. Curtis is the leader in low-voltage motor control solutions for zero emission and hybrid mobile equipment. This acquisition will add a complementary suite of control solutions to pair with Parker's electric motor and motion control portfolio. This will further enhance our capabilities for in-plant and off-highway applications.

Curtis has a strong market position across diverse and growing end markets. These are markets that we know, customers we have relationships with, and products that will be a great addition to our portfolio. We expect to close by end of the calendar year, and we look forward to welcoming the Curtis team to Parker. Next slide please.

And a reminder on 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. We have innovative products that solve customer problems. 85% covered by intellectual property.

Our application engineers provide the expertise that allows us to have a competitive advantage with our technologies to provide efficient solutions for our customers. And finally, our distribution network is the envy of the competition and the best in the world. It took us over 60 years to build it, and it is truly an extension of our engineering teams, providing solutions to small and mid- sized OEMs. These partners are experts at applying our interconnected technologies.

I'll now turn it back over to Todd to go through our fiscal year 2025 highlights.

Thank you, Jenny. FY '25 was really a strong year. I'm going to try and quickly wrap up FY '25 with the Q4 results, and I'm on Slide 10. Fourth quarter was another record-setting quarter. In fact, every number on this page is once again a record.

It was another quarter of continued margin expansion and a quarter of double-digit EPS growth. Really impressive considering that sales were up just 1% versus prior year. Organic growth was positive at 2%. That's the highest we've been all fiscal year.

Currency did turn favorable at 1%, and the divestitures that we previously announced throughout the year were 2% unfavorable to total sales. Adjusted segment operating margin was 26.9%. That's up 160 basis points from prior year, and adjusted EBITDA margin was 26.8%. That's an increase of 50 basis points from prior year.

Adjusted net income was almost $1 billion, was $992 million in the quarter. That was an 18.9% return on sales. And adjusted earnings per share were up 14%, and they reached $7.69 per share. Just a fantastic quarter, really from all the businesses, resulting in the best performance that we've had this fiscal year for sales, for organic growth, for adjusted segment margins and for adjusted EPS.

We'd really like to thank our global team for a strong finish to the fiscal year. We talk about this a lot internally, finishing strong and everyone certainly delivered. If you could move to Slide 11. This just highlights the components in the year-over-year improvements and adjusted EPS, what I'm proud to say here is 60% of the improvement in EPS in the quarter came from strong operating execution. Segment operating income dollars are up $96 million, or 7%.

That was $0.56 of our improvement. Income tax was a bit favorable in the quarter. That's $0.47 favorable. That was really a result of a few discrete tax benefits that were resolved in the quarter.

Also, I'd just like to call attention that Q4 last year was our highest tax rate of the year. So comps off a little bit there. Interest expense continues to be favorable. That was $0.12 favorable.

That's really just based on our efforts to pay down debt throughout the year and discretionary share repurchases drove a $0.09 favorable impact. You can see that share count par there. Corporate G&A and other were unfavorable, really combined $0.32. That's a combination of less favorable pension expense versus prior year, but really a result of foreign currency exchange volatility year-over-year. The EPS growth story has been really consistent throughout the year, just strong operating execution, very tight cost controls, driving margin expansion, and as Jenny mentioned, disciplined capital allocation.

So just a great way to finish the year. If we can go to Slide 12, this just details the performance across our businesses. First, I'll start with orders. Orders continue to be positive.

It's plus 5% versus prior year. Aerospace strength continues to drive backlog higher. Jenny mentioned, that's a record. We did see gradual improvement in sales growth across our major market verticals.

And once again, this quarter, every business delivered record segment operating margins. Very nice to see that. And I already mentioned it, but in total, we were up 160 basis points from prior year. Looking specifically in the North America businesses, sales were $2.1 billion.

Organic growth was just down 1% versus prior, but we did continue to see a sequential improvement in organic growth. And quite honestly, that was better than our expectations coming into the quarter. We did see improvement across the market verticals in North America. So that was a positive, and distribution sentiment continues to be positive across the channel.

Adjusted operating margins did increase 170 basis points to a record 26.7%, and that was just again driven by excellent, excellent operating execution, cost controls and a little bit of favorable mix. Gradual improvement in distribution kept orders in North America positive at plus 2% versus prior year. And I just want to note that this is the third consecutive quarter of positive order growth for North America. Moving to the Diversified Industrial International businesses.

Sales were up to $1.5 billion. That's up 4%. Organic growth was positive at 1%. It was really nice to see that turn positive.

In Asia Pac, organic growth was plus 6%. In Latin America, it was plus 4%, while EMEA did improve, it did remain negative 3% from an organic growth standpoint. Our international teams are really committed to using the tools of the Win Strategy to reduce cost, improve efficiency and drive margin expansion, no matter what's happening with the top line. And that resulted in adjusted operating margins achieving a record of 24.7%, which is an 80 basis point expansion from prior year.

On the order front. International orders were flat versus prior year, really against some tough comps. And just a reminder that orders in Q3 did benefit from a number of significant long-cycle orders that remain in the backlog. Lastly, if I look at Aerospace Systems, the momentum continues in Aerospace.

Sales were a record $1.7 billion. That's up 10% versus prior year. That did exceed our expectations for the quarter. Organic growth was most of that, 9% of that growth is organic, really driven by strong strength in the aftermarket channels.

Adjusted segment operating margins up huge 190 basis points versus prior, and reached a record 29%. And Aerospace orders continue to be positive at plus 12%. Really want to commend our aerospace team members for another outstanding quarter and a strong finish to a stellar year. All right.

On Slide 13, this is my last slide for the year. This is cash flow. We finished FY '25 by achieving record cash flow generation. Cash flow from operations is a record at $3.8 billion, that's 19% of sales.

Free cash flow was also a record at $3.3 billion, or 16.8% of sales, with conversion at 109% after adjusting for some nonoperating items. Both CFOA and free cash flow increased by 12% versus prior year. And in addition, we did repurchase an additional $850 million in shares during the quarter, and that brought our year-to-date share repurchases amount to $1.6 billion. And that is a wrap on our record FY '25 performance.

So I know everyone is interested in guidance. We'll move on to FY '26 guidance. And Jenny, I'm going to hand it back to you on Slide 15.

Thanks, Todd. This slide shows our fiscal year '26 organic sales growth forecast by key market verticals. So in Aerospace we are forecasting high single-digit growth. With higher growth in commercial OEM than commercial aftermarket.

We are forecasting low single-digit growth in in-plant and industrial, and this is assuming a gradual industrial recovery. Transportation, our most challenged market this year, we are forecasting a mid-single-digit organic decline. In off-highway, we are forecasting a low single-digit decline. The ag market has moved past trough but needs a little more time before returning to positive.

Construction is stronger than ag with recovery underway. And we expect positive low single-digit growth in energy, as well as HVAC and refrigeration. At the midpoint, this results in 8% organic growth for Aerospace, approximately 1% organic growth for both Industrial North America and Industrial International, and approximately 3% total Parker organic growth. I'll give it back to Todd to go through more details of the guidance.

Okay. Thank you, Jenny. I'm on Slide 16. We'll just go over a few items. Reported sales growth for the year is expected to be in the range of 2% to 5%.

That's 3.5% at the midpoint. That will be approximately $20.6 billion in annual sales. And we have modeled those sales 48% in the first half, 52% in the second half. And consistent with our practice, this guidance does not include any impact from the Curtis Instruments acquisition.

We will add Curtis to our guide once it closes. If you look at organic growth, Jenny mentioned this, but the forecast is in the range of 1.5% to 4.5%, or 3% at the midpoint. Aerospace is again 8% at the midpoint and both North America and International, we expect 1%. Organic growth is modeled 2% first half, and 4% in second half.

Currency, as usual is based on the June 30 spot rates, and based on our math here, it shows that, that's expected to be favorable by 1.5%, or roughly $260 million. On margins, adjusted segment operating margin guidance is 26.5% at the midpoint. That is an increase of 40 basis points versus the FY '25 finish. And in respect to incrementals, we have modeled roughly 35% for the full year on incrementals.

Just a few things to note. Below segment operating income. Corporate G&A is approximately $200 million. Interest expense, approximately $390 million.

And other expenses, approximately $80 million. All of those are at the midpoint. Tax rate, we are modeling a 22.5% tax rate. As usual, we are not including any unknown discretes in that number. 22.5% is what we have modeled.

And EPS for the full year is expected to be $28.90 on an adjusted basis at the midpoint. That is an increase of 6% versus prior year. We have a range of $0.50 on both sides of that $28.90. And the split on EPS is 46% first half, 54% second half. Lastly with respect to cash flow.

Full year free cash flow is expected to be in the range of $3 billion to $4 billion, with conversion at approximately 100%. And lastly, on the far right column here, you could see what we have highlighted for Q1, FY '26. All of these numbers are at the midpoint. Reported sales are roughly 0.5% positive. Organic growth is 2% positive, and we are forecasting 26.1% for adjusted segment margins, and an adjusted EPS of $6.51. As usual, we have some further details in the appendix, if those are helpful for your model.

Lastly on Slide 17, this is just a bridge, and I'll just highlight as we walk through this. We are forecasting a 5% increase in adjusted segment operating income dollars which translates to $1.68 in additional EPS. Share count, based off of that year-to-date repurchase amount is roughly $0.37 of improvement in EPS for FY '26. Corporate G&A are forecasted to be $0.18 favorable. And again, interest rate will give a little bit of a tailwind, $0.11 for the year.

The forecasted tax rate of 22% is a headwind of $0.77 compared to our -- the effective tax rate that we realized in FY '25. And once again, that does not include any discrete items. So in summary, we are guiding FY '26 at $28.90 and adjusted EPS, that is up 6%. And with that, I'm going to ask you to move to Slide 18. And Jenny, I will hand it back to you.

Thank you, Todd. So I'll close with a reminder on what drives Parker. And again, thank you to all the Parker's team members for a fantastic fiscal year '25 and a very, very promising FY '26. Safety and engagement and ownership are the foundation of our culture. It's our people and our purpose that drives top quartile performance, and we remain committed to being great generators and deployers of cash.

Okay. Bo, we are ready to start the Q&A session.

[Operator Instructions] We'll go first today to Joe Ritchie of Goldman Sachs.

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?

I'll start, Joe, and then I'll let Todd follow up if he has any more comments. So 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 -- will be a Q1 record. So I think this is a good starting point for the year for us.

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.

40 basis points.

I'm sorry, 40 basis points, yes.

Okay. All right. Yes. No, it looks a tad, it looks a touch conservative, but that's okay.

I guess maybe just a broader question. It seems -- sounded like you were seeing some green shoots across your businesses. Maybe just kind of talk through, especially the Industrial short cycle business is what you're seeing there? And then also, can you just touch on like the self-help opportunity for this year as well?

Clearly, you did a great job from a margin perspective. If you can just touch on those two points, that would be great.

Sure. So taking a look at In-plant & Industrial Equipment guidance. So we have that at a positive low single digit for the year. And as I mentioned, that does assume a gradual industrial recovery.

I mean, I would say, Todd mentioned this already, but distributor sentiment does remain positive. And I think we're in a good position to benefit from some of the customer supply chain actions. So we'll benefit from increased MRO activity. Any factory retooling or spending that's going on and our distributors will participate in that.

They continue to tell us -- I was on a distributor visit just in the last month. They continue to tell us that they're quoting. And the activity is there. Just fill some of those delays that we've been talking about now for a few quarters.

When you look at transportation, I mentioned that, that is going to be our most challenged market this year. There's some near- term pressure in both auto and truck markets. We think they're -- end users, they're delaying their purchasing decisions due to the uncertainty on cost, timing of new emission requirements, and current interest rate levels. We think that's all buying into that.

So again, it will be a challenged market for us. Off-highway, our guidance is at negative low single digit. But there's improvement here. It turned out to be a little bit better.

Construction was a little bit better in Q4 than we thought it would be, and we see that continuing. We see that recovery underway. A lot of the ongoing and announced infrastructure here is going to be a plus. But the ag market, while we do believe that it's moved past a trough, we think that it's going to be a little bit of time before it returns to positive.

Again, cost uncertainty, interest rates, crop prices, all factors here. So we see improvement, and that's why we have the guide where it is. But obviously, there's some opportunity here.

No, Joe, I would just add, your question on self-help. Obviously, everything we have on The Win Strategy is a self-help margin enhancing process of tools. But we are forecasting slightly higher restructuring this year versus what we did last year, just in some of those regions or some of those end markets that may need attention.

Yes. We still -- you've heard me say before, we're very confident in our ability to expand margins with these tools. It's obviously showed in what we've done in all of the business in this past fiscal year and the ones before. But we have great teams that are using these tools on a regular basis and really delivering great results. It will continue.

We go next now to Jeff Sprague of Vertical Research Partners.

Jenny or Todd, maybe you could just speak a little bit more to Curtis, kind of where the margin profile is on a Parker comparable basis, what kind of improvement you can get in the business from a synergy standpoint relative to the deal plan that you must have internally? And what's the growth been like in that business recently? How is it performing in 2025?

Yes. Sure, Jeff, I'd be happy to. We're really excited about bringing Curtis into the Parker team. So we chose not to disclose their margins, more about the size of this deal.

But initially, the margins will be dilutive, but we see a clear path to accretion with The Win Strategy. The tools we were just talking about and with synergies. We expect, like you've seen with our past deals, full synergies within 3 years, and relative size would be similar to the LORD and Meggitt deals. That's what we're looking at right now.

Historically, Curtis sales have grown mid-single digit to high single digit over the past 5 to 10 years. So really nice growth profile with them.

Yes, Jeff, the only thing I would add is if you look at what we were forecasting for '26, the segment operating income dollars roughly $5.5 billion worth of segment operating income. That does not include Curtis. So to Jenny's point, this will be slightly dilutive, but it's small in scale compared to where it fits in the total company.

Right. It would be margin dilutive. I know you don't want to give an EPS number yet, but it looks like it's EPS accretive, right? Margin dilutive EPS accretive?

Correct.

Yes. We expect EPS accretion in the first year.

Yes, absolutely. Okay. And then just on international orders. I guess, Todd, your comment alluded to the fact that maybe the softness here in Q4 was because you got some chunky orders in Q3. Maybe you could just elaborate a little bit more on that and what's going on sort of in the international order pipeline?

Sure. And Jeff, I'll take that one. So yes, Todd did mention that, that we -- in Q3, we had a very strong long-cycle orders in International. We saw that in HVAC refrigeration, power gen and Aerospace and Defense.

They didn't repeat in Q4, but we did see EMEA slightly positive with energy remaining really strong. And then in Asia, orders were slightly negative, and that was really more about a challenging comp to the prior year. But if you look at the order dollars, they were flat sequentially to Q3. So that really explains the difference between Q3 and Q4 and that drop that we saw.

We'll go next now to Scott Davis with Melius Research.

Jenny and Todd, 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?

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.

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.

Yes. Makes sense. I don't think you mentioned tariffs. I know it's not -- it wasn't a big deal even last quarter.

But just curious, is the lack of kind of mention of tariffs and indication that you've just been able to capture price to offset any impacts? I'm trying to kind of picture how 85 different P&Ls kind of manage something that's such a big, complex global issue, but maybe you can address both of those in some way in your answer, if you can?

Sure. Sure, Scott. So first, I would just say our teams are doing a fantastic job managing tariffs and making sure that there's no impact to earnings per share. But you probably heard us say pricing is something that is a strong muscle for us.

I mean this is a function within Parker-Hannifin. And these divisions have pricing leaders. And there's a lot of coordination within the groups and across the enterprise. Obviously, because a lot of our businesses share the same customers.

So it's a lot of work. I'm not going to say that it's not. It's been a whole lot of work for them. But they had this down path.

They've done really a great job with it, and we have the analytics. We have these robust processes, and we've been able to navigate and act very quickly. So we didn't talk about it because we feel like we have it covered and it is going to continue to evolve and change, but we are going to make sure that it doesn't impact EPS.

I would just add, you know us pretty well. Pricing is one of the levers we're able to flex, but it's also our global footprint. It's our local- for-local model that we've had for years. It's really our supply chain team being creative with dual sourcing and the ability to ship from multiple regions. So pricing is a big piece of it, but it's not the only tool.

Yes. Our global capacity has been really a good thing for us.

We go next now to Amit Mehrotra of UBS.

Just a follow-up to that earlier comment. I just wondered if you can help us sort of bifurcate the exceptional margin performance and resilience between price and lower costs. I know each of the 85 divisions has its own pricing managers. So obviously, pricing is a focus.

But one thing I noticed is the absolute cost base of the company also went down in fiscal '25, which was pretty amazing, just given just inflation has been a little bit higher. So can you help us kind of think about those two things? And is there an opportunity for the OpEx space, or the cost base, to actually move down on absolute basis after the huge performance in '25? Or are we just entering a more maybe normalized period where the cost base will mirror kind of normal inflation?

Well, we -- thanks for the question, Amit. It gives you the opportunity again to just talk about the power of The Win Strategy. And our teams are focused on reducing cost and expanding margin like I said earlier, even when we have a negative organic growth environment. So this is our continuous improvement culture.

It's our culture of Kaizen. It's not -- we've never been waiting for something to happen. This is just our ongoing way of running our operations and running our businesses. So yes, there is opportunity to further reduce cost, and our teams are working on that all the time.

We just had a great lean system and a very nice suite of tools that helps each one of those general managers do what they need to do in their business. And they're not all the same. So that's the nice thing about The Win Strategy is. You can pull from that toolbox, as I like to say, and improve your business in many ways.

And obviously, the teams are doing a great job of that.

It is a testament to the decentralization of the organization. Those 85 P&Ls have business leaders that are making decisions constantly. We've been taking costs out of the business for over a decade. And you saw that on the charts that Jenny has shown.

We've talked about this a lot. We've changed our compensation structure to reward and be flexible with the flexes of business. And I think that's been a nice plus to the profile and cost as well.

So just a follow-up to that. If that's all true, then why is 35% incrementals the right number for '26? Because you're in the 40s in Aero and International -- I mean, the decremental margins are, I think, in North America, were like 2% or something like that. It just would strike me as maybe an opportunity to overachieve when the volumes move up, just given what the pricing base is and all that stuff that you just talked about on costs.

Is that just conservatism, good placeholder? Or is there something happening that maybe meets the incrementals?

Well, it is a gradual movement to positive. It's a 1% organic growth in the Industrial side of the business that is 70% of the company. So I don't look at this as being conservative. Normally, we say model 30. We're 35% that's...

North of 35%...

We have -- I think we just need to see how it plays out.

We'll go next to now to Andy Kaplowitz of Citi.

Jenny or Todd, could you give us a little more color on how you're thinking about A&D for '26? Or is there obviously so strong in Q4? Were they stronger on the defense side versus commercial? When you look at that 8% growth for '26, is the growth pretty balanced between defense and commercial and aftermarket and OE? How are you thinking about that?

Yes. So I'll take that, Andy. So again, full year organic growth at 8% and we see that on continued MRO strength and gradual OEM recovery. We have commercial OEM to be low double-digit growth, commercial MRO of high single-digit growth, defense OEM, we have at mid-single-digit growth, and defense MRO, we have at mid-single-digit growth.

So again, it's going to be another great year for Aerospace. We're coming off of 3 years of double-digit organic growth. We ended Q4 at about 9%, and we have Q1 at 8%. And as I said, we have the year modeled at about 8%.

So again, it's going to be another good year.

Very helpful. And then, Todd, you're guiding to call it mid-single-digit plus EPS growth at the midpoint for '26, but free cash flow at the midpoint is slightly lower. I would have thought that you get a little bit of cash tax help from The Big Beautiful Bill. So maybe just reconcile the forecast?

Yes, we are digesting The One Big Beautiful Bill, for sure. And that will be a benefit, to be honest with you, that's more of an FY '27 benefit for us versus an FY '26 benefit. But on cash flow, there's a few things. Obviously, when you're looking at net income, we had a few onetime items.

We had some divestitures. We had some discrete tax items. We had some facility sales that helped build up the as reported net income. This year, we do expect Industrial to grow.

So in the previous years, we were getting a benefit from working capital. We do think there'll be some investment there to support growth there. I think you saw we called out 2.5% CapEx. That's higher than what we've historically done.

This is really all making sure we have capacity in the businesses that need it, and that we are investing appropriately in automation and robotics and productivity. I did mention we do have a little bit more restructuring that we expect to do in FY '26 versus '25. And then Jenny mentioned Curtis, we're going to have some onetime costs associated with the acquisition and the integration, and the cost to achieve the synergies that we've had laid out there. So we still feel really good about the number. We still think it's very much top quartile from a cash flow standpoint, and we're going to obviously try to outshoot that number.

We go next now to Andrew Obin of Bank of America.

Just a question on Aerospace. You had a re-acceleration in Aerospace orders in the past couple of quarters. I think, from high single digit to 14% in the third quarter, 12% in fourth quarter. Can you just talk about this re-acceleration what's driving this?

I think, Andrew, for the most part, what we've seen here is the commercial transport rate is increasing and wide-body rates are growing to meet international traffic. So I think that's been some of it. And as air traffic growth overall continues, the aftermarket is continuing to grow. And then we have everything that's going on in defense as well.

So there's been a continued demand for all of the legacy programs. There's continued growth in the Department of Defense budget. So we've seen some nice orders come in. And as you know, those are all longer cycle orders.

And I appreciate you gave some detail here. But last year, you had 7% organic Aerospace orders, and you delivered 13% organic growth. This year, you had 12% organic aero orders and guiding to 8% at the midpoint. Can you just help us understand the dynamic between orders and forecast a little bit better versus last year?

Well, like I was just saying, Andrew, these orders come in and they're longer cycle, right? We have backlog coverage of over 100% right now in Aerospace, and we have a record backlog, right? So the orders are coming in higher. There's only so much that can be built at a time.

And as rates increase, we'll enjoy more of that. But we stay really close to our customers, all of our customers, but in Aerospace, we know what they're planning on building. We know what those rates are. And we have really good visibility to the demand and their capacity.

So we think Aerospace at 8% -- Q1, 8% versus Q4 at 9%. We think it's really right in line.

Andrew, we're expecting that to be pretty consistent throughout the year. There's no real ramp on what we're forecasting here. And every one of those numbers will be a quarterly record for Aerospace. So the momentum continues.

We'll go next now to Julian Mitchell of Barclays.

Maybe just wanted to start with the industrial growth outlook. So it sounds like Aerospace is sort of pegged at 8% growth in the first quarter and through the balance of the year. Maybe help us understand within Industrial, what's dialed in for sort of the first quarter, and then the slope of that acceleration on organic sales? And anything you've seen around pull forward of demand by distributors, or OEM customers because of tariffs?

Yes. I would first just start off saying, Julian, that we're not seeing any evidence of a pull forward. There's nothing that I could point to that would show that. For industrial, for Q1 in North America, we're forecasting negative 1.5% organic growth and positive 0.5% for International.

So total Industrial, we're still showing it slightly negative here at approximately 1%. When we look at North America, in particular, I talked about what we're seeing across the market verticals. But in North America, we're seeing gradual in-plant industrial recovery. And as I mentioned, positive sentiment from the distribution channel, a lot of increased quoting activity.

But as I mentioned, transportation is challenged. So -- in auto and trucks. Construction getting better. Ag is still weak.

Power gen is strong, in our energy vertical, oil and gas still a little weak. In HVAC, it's really coming off of a strong fiscal year '25 with a lot of the refrigerant changes. We expect it to be low single-digit growth in fiscal year '26, and that will be more around commercial and refrigeration than it was residential in fiscal year '25. When we look at International, Industrial International, again, we had that full year expected to be at about 1%. Q1, again, at about 0.5%.

Again, same assumption on a gradual industrial recovery. EMEA, flat to slightly positive organic growth for the fiscal year. Uncertainty remains. We expect continued weakness in transportation, especially auto and EMEA as well.

But we also see that continued strength in energy, both oil and gas and power gen. And we think that this -- a lot of the proposed stimulus that we hear about in future defense spending is really going to be a long-term positive. Asia Pacific, low single-digit positive organic growth for fiscal year '26. We'll continue to see strong demand from electronics and semicon. In-plant is mixed.

There's project delays that are continuing in China, but we do see some growth in India and Japan. Off- highway still soft, but both in construction and mining. I would just say just overall continued uncertainty from tariffs across those markets. In Latin America, Todd mentioned, we see low single-digit organic growth for fiscal year '26, and that's pretty much balanced growth across the verticals for them.

That's very helpful. And just my follow-up, maybe circling back to the operating margin expansion guide. So it's up, I think, 40 bps in first quarter, and up 40 for the year as a whole. And as you said, that's sort of despite volume leverage accelerating through the year.

I just wondered maybe on that point, maybe is there some sort of mix effect in Aerospace, perhaps, that weighs later in the year maybe to do with Meggitt synergies being front half loaded, or the outgrowth of commercial aero OE versus commercial aero aftermarket? Anything like that sort of moving around in aero, or it's just pretty steady through the year?

That's just -- it's steady through the year. We are expecting commercial OEM to be low double-digit growth and MRO of high single- digit growth. So they're kind of changing this year. But we see it pretty much the same throughout the whole year.

We'll go next now to Jamie Cook with Truist.

Nice quarter and nice year. The first question. Just the North American margins in the quarter struck me like the strength of the margins. I think it's like one of your highest margin quarters despite a decline in sales and in organic growth.

So was there anything unusual in that mix, pricing or something, which drove the margins high with organic sales down? And then, I guess, just my second question, just on the guide, Todd or Jenny. If we think about the past couple of years, the story of Parker has been while Industrial has been weaker, aerospace is making up for any delay in recovery in industrial. I guess as you think about 2026, do you think there's greater risk that if industrial doesn't inflect that aero can't make up for it?

Or perhaps you're just more bullish on Industrial, just given at least we're seeing some resurgence in orders?

Okay. So first question, yes. Q4 North America was just -- was great, expanded margins, 170 basis points year-over-year. So really a nice quarter for them.

We really had a favorable sales mix, specifically in our engineered materials group and our filtration group. So just exceptional performance with those two groups. And with strategy execution across the other groups as well, not to take anything away from them, but we had a nice favorable mix in those two areas. As far as a risk in the future with industrial, I would say we have 1% organic growth in Industrial.

And I think our guide accurately reflects what we see in orders, what we see in backlog, what we know about what's going on in these market verticals. But all in all, I would say that all of us want to be bullish on Industrial. It's time, right? And as I said, we're poised for growth here.

I'm not concerned that we won't be able to continue to expand margins and deliver this guide. I think that what we have here, and what we've been able to do in a negative organic growth environment in Industrial, and even with Aerospace at an 8%, we're going to be okay. We can make this happen.

We'll go next now to Mig Dobre of Baird.

I only have one question, and it's about the guide, too. So I don't know, maybe just for you Todd. If I look at the exit rate here, $7.69, really a good fourth quarter. If we annualize that, we end up with something just under $31 of EPS.

And what's interesting in my observation here is that going back over the past decade, you're able to do that or better. So you're able to do better than your annualized exit run rate. On every single year with the exception of fiscal '21, when you had to deal with COVID. So I guess my question to you is, why this year, fiscal '26 be any different than the norm?

Mig, this is Todd. Yes, we would love to take Q4 and annualize that. The math on that looks great. The reality is that's not the way the business operates, right?

If you look back over decades, our sales mix is 48% first half, 52% second half. Obviously, that 52% is fully weighted by that strong Q4 result. We also have those things that we talked about that we recognized early in the fiscal year as far as compensation and whatnot goes. I feel really good about what we're guiding here for Q1. Jenny mentioned this, we still expect the industrial businesses to be challenged from the top line.

Aerospace is performing extremely well. We are calling for roughly 5% EPS growth year-over-year in Q1. And I think the team is really focused on it. If you remember, every number that we put up in Q4 was an all-time record. And when you look at what we are guiding here for Q1, every one of these numbers will be a Q1 record.

So there is improvement across every one of the businesses, and that's with not a lot of help from the top line. So I think the team is executing unbelievably well, and I'd be really happy if they're able to post these numbers.

We'll go next now to Joe O'Dea of Wells Fargo.

Can you talk about the sort of complexion of, call it, 8% organic aero growth over the course of the year? And how that shifts between commercial OE and aftermarket? And really getting at kind of the margin mix considerations within that, I think, for a while now, that's been a focus topic clearly, with Aero margins up again this year. That's pretty good.

And maybe I'll weave into the question, just any color on Meggitt synergy contributions for the year?

Well, first of all, we don't go into that much detail and disclose all that mix within the year. I would tell you, as I said with my slides earlier, we ended the year at 51% aftermarket, 49% OEM. We're showing OEM to be low double digit this year and aftermarket to be high single digits. But we, again, have confidence in continuing to expand our margins.

So we think that what we have here for the Aerospace guide at 8% for the whole year is appropriate for what we see now.

Joe, I would just add to that. In respect to the synergies, you had a question about synergies for Meggitt. We still believe there's $50 million of synergies left to achieve on Meggitt. We would expect that to be ramped throughout the year, just like we've seen it for the last 3 years. So all is going unbelievably well with Meggitt, and that's in the mix as well.

And then just -- and I think that the sentiment from North America distributor partners has been a little bit better over the last few quarters. Anything that you're observing in terms of kind of developments there, getting areas where it's a little bit better. But then in particular, what you think the gating factor is to seeing, quoting really accelerate into orders and the degree to which -- that's tariffs or it's other factors?

Yes. So I mentioned that I had been on some distributor visits recently. And again, it's a common theme. Quoting activity is high.

No project cancellations, delays. But then there's other pockets where some of them are participating in some retooling in automotive and just some refurbishments that are happening. So you hear about those pockets of where they're really having some wins. So I think they were overall very bullish on the future.

That's what we continue to hear. And the second part of your question again, sorry.

It was just what gets some of the encouraging signs on quoting to orders?

Yes. I think one of the things -- a couple of things, I think it's uncertainty, right, on tariffs and interest rates, right? I think those two things are what may be holding up projects, holding up purchasing decisions. But as I mentioned before, distribution's bullish. We're ready, and it's time for an industrial return.

Bo, I think we've got time for one more. Can we take one more question here.

We'll take that final question today from Nigel Coe of Wolfe Research.

Jenny, I agree, it is time for this recovery. Bring it on. So I just want to dig into the free cash flow. So Todd, you mentioned CapEx 2.5%.

That's about $0.5 billion of CapEx. So that's about $100 million higher, and not a big deal. But I'm just wondering, do you think that's sort of medium-term shift in CapEx? And the reason I am asking is because we have heard this from some others.

I'm curious if you're sort of reinvesting in the U.S. and if that's what's driving it? Maybe just put a finer point as well on the cash restructuring you expect for FY '26?

Yes. I think the CapEx, I don't -- I can't say that that's going to be a go-forward rate. We do have a few projects this year that we're investing in. Most of those are in North America, in the North American region.

But I think that's more of a one-off type of thing versus a run rate going forward. On restructuring, we did about $50 million in '25. Right now, we're forecasting about $70 million in '26. So it's $20 million more. But again, really, I don't want you to read too much into this. This is just working capital investments for growth.

This is making sure we integrate Curtis according to our schedule, and obviously paying all those fees with it. And making sure that we continue our multi- decade year of free cash flow conversion.

Great. And then just a quick one on the profile of the industrial recovery you're seeing in FY '26. It seems like you've down and flat to maybe slightly down in the first half of the year and then obviously 2%, 3% in the back half. Would that be directionally consistent?

That is exactly what we have, roughly flat first half to second half. That's total Industrial. Okay. That concludes our FY '25 earnings release webcast.

We appreciate your time and attention, and thanks again for joining us today. Our IR team will be available. That's Jeff Miller, Jenna Stuckey and Chantelle O'Kelly. If there's any need for any follow-ups or clarifications.

And thank you all again. Have a fantastic day.

Thank you, Mr. Leombruno, and thank you, Ms. Parmentier. Again, ladies and gentlemen, thank you for joining Parker Hannifin's Corporation's Fiscal 2025 Fourth Quarter and Full Year Earnings Conference Call and webcast. Again, that will conclude our call. Thank you all so much for joining us, and we wish you all a great day. Goodbye.