Q4 2025 Parker-Hannifin Corp Earnings Call
And here it could cause actual results to vary from our forecast. Our press release this presentation and reconciliations for all non-gaap measures were released this morning and are available under the investor section on Parker. The agenda for today, has Jenny starting out with the highlights to our record fiscal year, 2025 performance, she will then reiterate the strengths of our transformed portfolio, the power of the wind 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 the
details on our strong fourth quarter.
Financial results.
Uh 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. Uh, 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, Chad. And thank you to everyone for joining the call today.
The wind 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.
Outline 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 ebit margin of 26.4% and 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 and 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. Continue to outpace sales growth as we finish 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 fy19.
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 2.5 times higher, and we are on track to expand adjusted segment operating margins by 940 basis points.
from fiscal year, 19 through our fiscal year 26 guide
And we're not done yet.
Our comprehensive offering of proprietary designs on Premiere programs and our Global footprint that supports a diverse customer base. Well, positioned 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 delivery 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.
Interconnected Technologies, global distribution Network, and Global manufacturing Footprints are competitive advantages that will drive growth from secular Trends across the market verticals.
Our portfolio today is well, balanced.
2/3 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 Industrials. 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 cycled secular and aftermarket by fiscal year 29.
Next slide, please.
And on June 30th, 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 complimentary Suite of control solutions to pair with Parker's electric motor and motion control portfolio.
This will further enhance our capabilities for Implant and off-highway applications.
Curtis has a strong Market position across diverse and growing and 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.
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.
That 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-size oems.
These partners are experts at applying our interconnected Technologies.
Turn it back over to Todd, to go through our fiscal year 2025 highlights.
Thank you. Jenny fy2 was really a strong year. Um, I'm going to try and quickly wrap up at fy20 with a Q4 results and I'm on slide 10, uh 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, uh, really impressive, considering that sales rep 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 investors that we previously announced.
Uh, throughout the year uh, were 2% unfavorable to total sales.
Uh, adjusted segment operating margin was 26.9%, that's up 160 basis points from the prior year. Adjusted EBITDA margin was 26.8%, which is an increase of 50 basis points from the prior year. Adjusted net income was almost a billion dollars, at $999 million.
Uh in the quarter that was in the 18.9% return on sales and adjusted earnings per per share. We're up 14% and uh, they reached 7.69 cents per share, just a fantastic quarter. Really from all the businesses resulting in the best performance that we've had this fiscal year, uh, for sales for organic growth for adjusted segment margins and for adjusted eps,
Uh, we'd really like to thank our Global team for a strong finish of the fiscal year. We talked about this a lot internally finishing strong, and everyone's certainly delivered.
Uh, if you could move to
Slide 11 highlights the components in the year-over-year improvements and adjusted EPS. What I'm proud to say here is 60%.
Um, also, I just like to call attention that Q4 last year, was our highest tax rate of the year, so comps helped a little bit there.
Uh, interest expense continues to be favorable that was 12 cents. Favorable, that's really just based on our efforts to pay down debt.
Uh, throughout the year and discretionary share repurchases drove a $0.09 favorable impact. You can see that on share count per there.
Uh corporate GNA and other were unfavorable really uh combined 32 cents. That's a combination of less favorable pension expense versus prior year. But really, uh, a result of foreign currency exchange voluntarily, uh, year-over-year.
Growth story has been really consistent throughout the year just strong operating execution, very tight cost controls driving margin expansion and as Jenny mentioned, discipline Capital allocation. So just a great way to finish uh the year.
If we can go to slide 12, this just, uh, details the performance across our businesses. Uh, first, I'll start with orders orders, continue to be positive. It's plus 5, verse first. Prior year, Aerospace strength continues to drive backlog higher Jenny mentioned. That's a record.
We didn't see gradual Improvement in sales growth across uh, our Major Market verticals.
And once again, this quarter, every business delivered record segment operating margins. It's very nice to see that, and I already mentioned it, but in total, we were up 160 basis points from the prior year.
Looking specifically, uh, in the North America businesses sales were 2.1 billion. Uh, organic growth was just down 1% versus prior.
But we did continue to see a sequential Improvement in the organic growth and quite honestly that was better than our expectations coming into the quarter.
Uh, we did see Improvement across the market verticals in North America. So that was a positive and a distribution, send sentiment continues to be positive across the channel.
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.
Uh gradual Improvement in distribution kept orders in North America positive at plus 2 versus prior year. And uh just want to note that this is the third consecutive quarter of positive order growth for North America.
Uh, moving to the uh, Diversified industrial International businesses, sales were up.
Uh to 1.5 billion that's up 4%. Organic growth was positive at 1. Uh it was really nice to see that turned positive in Asia Pac organic growth was plus 6.
In Latin America, it was plus 4 uh, while EMA EMA did improve, it did remain negative 3 from an organic.
Standpoint.
Uh, our International Teams are really committed to using the tools of the win strategy to reduce cost to improve efficiency and drive. Uh 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 the prior year.
Um, on the order, front International orders uh, were flat versus prior year, uh, really against some tough comps.
And just a reminder that, uh, orders in Q3 did benefit from a number of significant, uh, long cycle.
Orders that remain in the backlog.
Uh 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. Uh that did exceed our expectations for the quarter organic growth. Was most of that 9% of. That growth is organic uh, really driven by strong strength in the aftermarket uh, channels, adjusted segment. Operating margins up, huge.
90 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 uh strong finish to a stellar year.
All right, on site 13. This is my last slide for the Year. This is a 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% to sales. Free cash flow, is also a record of 3.3 billion or 16.8% of sales with conversion at 109 after adjusting for some non-operating items.
Both cfoa and Pre-K 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, um, share repurchases amount to 1.6 billion.
On our record FY. 25 performance. So uh, I know everyone's 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 Dad.
Slide shows our fiscal year. 26 organic sales growth forecasts by key Market vertical.
So in Aerospace, we are forecasting, High single, digit, growth with higher growth and Commercial OEM than commercial aftermarket. We are forecasting, low, single digit growth and input and Industrial, and this is assuming a gradual industrial recovery.
A transportation, our most challenged Market this year. We are forecasting, a mid single digit organic decline.
and off Highway, we are forecasting, a low single digit decline, the a market has moved past trust, but uh, needs a little more time before returning to positive construction is stronger than a with a recovery underlying
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. Um I'm on slide 16, we'll just go over a few items um reported sales growth for the year is expected to be in the range of 2 to 5 that's 3 and a half percent. At the midpoint, that will be approximately 20.6 billion in annual sales, and we have model those sales 48% in the first half, 52% in the second half.
And consistent with our practice. Uh, this guidance does not include any impact from the Curtis instruments, acquisition. We will add, uh, Curtis to our, uh, guide, uh, once it closes
Uh, if you look at organic growth, Jenny mentioned this. But the forecast is the range of 1 and a half to 4 and a half 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% second half.
As usual is based on the June 30th spot rates. Uh, and based on our math here, it shows that that's expected to be favorable by 1 and a half percent.
Or roughly 260 million.
Um, 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 incremental, we have modeled uh, roughly 35% for the full year on incremental.
Uh, just a few things to note, uh, below segment. Operating income corporate GNA is approximately 200 million interest expense approximately 390 million and other expenses approximately, 80 million. All of those are at the midpoint.
Uh, tax rate, we are modeling a 22 and a half percent tax rate. Uh as usual we are not including any uh, unknown discreet and that number 22.5% is what we have modeled. And uh 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 50 cents on both sides of that 28.90. And the split on EPS is 46% first half
54% second half.
Uh lastly in respect to cash flow uh full year. Free cash flow is expected to be in the range of 3 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. Uh reported sales are roughly half a percent positive
Organic growth is 2%, positive, and we are forecasting 26.1% for adjusted segment, margins and an adjusted EPS of 651.
As usual, we have some further details in the appendix. If those are helpful for your model.
Is a headwind of 77 cents. Uh, compared to our uh the effective tax rate that we realize in fy2.
Once again, that does not include any discrete items. Uh, so in summary, uh, we are guiding FY 26 at 2890 and adjusted EPS that is up 6%.
And uh 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 departments team members for a fantastic fiscal year 25. And, um, I'm 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, tap core child performance.
And we remain committed to being great generators and deployers of cash.
Okay, B, we are ready to start the Q&A session.
Certainly, Mr. Liam Bruno, ladies and gentlemen. At this time, if you do have a question, please press *1 on your telephone keypad to draw your question. Please press *2 so others can hear your questions clearly. We ask that you please pick up your handset for the best sound quality. Additionally, please limit yourself to one question and one follow-up. We'll go first today to Joe Ritchie of Goldman Sachs.
Hey, good morning. Uh everybody and congrats on another great year.
T1 guide. Um you know it take a look at that relative to the last few years. It's a pretty meaningful sequential step down and 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 42 to 1 q and what's really changing on the margin? Um uh, embedded in your guide.
Well, I'll start Joe and then I'll let, um, but, uh, to follow up if he has any more comments. So, um, you know, first of all we have very little sales growth in, um, q1 and, you know, this uh, this EPS guidance for q1, um you know, is a is a 5% increase, um year-over-year and this margin um at 26.1 you know it does have 40 basis points of margin expansion and and is a q1 record will be a q1 record. So um I think um
I think this is a, a good good starting point for the year for us.
Yeah, Joe, I would add, you know, 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.
Uh, some of the stock comp that, uh, is a big hit in Q1. Um, if you look at that versus, uh, prior year, Jenny mentioned this, but we're.
Forecasting, 80 basis points of margin expansion, you know, Q1 2026 versus 2025.
And, uh, EPS is a little over 4% of an increase. 40, B. That's fine. Oh, I'm sorry. Yeah.
Okay. All right. Yeah, no, it's uh,
What's the, what's the, what's the touch conservative? But, um, hope that that's okay, I guess maybe just the broader question. Um, you know, it sounded like you were seeing, you know, some green shoots across your businesses. Maybe just kind of talk through, especially the, the industrial short cycle businesses. What you're seeing there and then and then also, you know, can you just touch on like the self-help opportunity for this year as well? Um, clearly it's been doing a great job from a margin perspective if you can just touch on those 2 points. Uh, that'd be great.
Sure so it's you know it's taking a look at um implant and Industrial um equipment guidance. So we we have that at a positive low single digit for the year and as I mentioned that does that does assume a gradual industrial recovery. I mean I would say Todd mentioned this already but distributor sentiment does remain positive. Um you know and I think we're we're in a good position to to benefit from some of
Um, the customer supply chain action. So, um, you know, we'll we'll benefit from increased mro activity. Any Factory retooling or spending that's going on in our Distributors will will participate in that. You know, they continue to tell us, I was on a distributor visit just uh in the last month they continue to tell us that they're um you know they're quoting and um you know, it's the activity is there just fill some of those delays that we've been talking about now you know, for a few quarters. Um when you look at uh Transportation, I I mentioned that that is, you know going to be our most challenged Market this year. Um there's some near-term pressure in both Auto and Truck markets, you know, we think there, you know, end users. They're delaying their, their purchasing decisions due to the uncertainty on on cost.
I think that's all, you know, buying into that. So again, we'll be a challenge market for us off Highway. Um, you know, our guidance is at negative low single digit, um, but you know there's Improvement here and 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, um, we see that recovery underway. Uh, a lot of the ongoing and announced infrastructure here is going to be a plus, but the ad Market. Um, while we do believe that it's um, you know, moved past a, a truck, we think that um it's going to be a little bit of time before it returns to positive. Again cost uncertainty interest rates.
Um, crop prices all factors here. So, um, you know, we see, we see Improvement. Um,
And you know, that's why we have the guide where it is. But, obviously, there's some opportunity here.
No, Joe. I would just add uh your your question on self-help. Obviously you know everything we have on the Wind strategy, is a self-help margin enhancing um 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 uh that may need attention. Yeah. We we still um, you know, you heard me say before, you know, we've we're very confident in our ability to expand margins with these tools. Um, it's obviously showed in what we've done and all of the business in this past fiscal year and the ones before. But um, we have, we have
Great teams that are using these tools on a regular basis and um, really delivering great results. It'll continue
great. Thank you.
Thank you. We go next now to Jeff, Sprag of Vertical Research Partners.
Hey thanks. Good morning, everyone.
Um morning.
uh, Jenny or Todd, maybe you could just speak a little bit, uh, more to to Curtis
Um kind of where the margin profile is on a, you know, Parker comparable basis. What kind of improvement you can get uh in the business from a Synergy standpoint relative to the the deal plan that you must have internally. Um and and what's the the growth been like in that business recently? House it performing in 2025. Yeah, sure. Jeff be happy to we're, we're really excited about. Um, you know, bringing Curtis into
Uh the Parker team. So you know we chose not to disclose um their margins, you know, you know more about the size of this deal but um you know initially the margins will be diluted but we see a clear path to accretion with um with the wind strategy you know the the tools we were just talking about and um with Synergy you know we expect like you've seen with our past deals both synergies within 3 years.
Um, you know in relative size would be similar to the Lord in mega deals. That's what we're looking at right now. Um, historically Curtis sales have grown mid single digits to high single digits over the past, uh, 5 to ten years. So really nice, uh, growth profile with them.
Yeah. Jeff. The only thing I would add is um, the only thing I would add I would add is um, if you look at
What we were forecasting for Q4, you know, the segment operating income dollars.
Roughly $5.5 billion worth of second operating income that does not include Curtis.
So uh to Jenny's point, this will be slightly diluted but it is. Uh, it's small in scale. Compared to uh where it fits in the
Total company.
Right. It would be margin dilutive. I know you don't want to give any EPS number yet, but it looks like it's EPS secretive, right? Margin dilutive EPS. Secretive, correct?
Right, right. Uh, accretion in the first year.
Yeah, absolutely. Okay. Uh, and then just on International orders, uh, 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, you know, uh, sort of in the international order pipeline
Sure, Jeff. I'll uh, I'll take that 1. So, yes, I did did mention that, that we in Q3, we had very strong long cycle orders, um, in in international, we saw, you know, um, that in HVAC and Refrigeration power gen and, um, you know, Aerospace and defense, um, you know, they didn't repeat in Q4
In that drop that we saw.
Great. Thank you.
Thank you.
Thank you, we go next now to Scott Davis with Melius research.
Hey, good morning. Uh Jenny and Todd and congrats on a good year. Thanks Scott. Um,
The um, just wanted to follow on, on on just Curtis and then combine that with the, the big buyback or the 1.6 billion that you've done is, is that an indication that you expect m&a to continue to be more of kind of the smaller, bolt-on type stuff. Um,
Or am I reading too much into that?
In the past, uh, Scott, you know, um, we have deals of all sizes in our pipeline. Um, you know, it's it's, um,
It can be small in both on or there could be something larger out there. You know, as we said, timing is hard to predict but, um, obviously, our strategy Remains the Same, you know, we, we want to acquire companies where where 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, um, doesn't mean that. They'll, they'll all be this this size, but, um, we're going to continue to work that pipeline. It's, um,
It's uh, you know, building those strong relationships and and making sure that um, we're ready when they're ready.
Yes, Scott. I I would just I would just add, you know, you've heard us talk, you know, we want to operate with
Uh, you know, net, uh, gross debt to adjusted, even with the around 2, we finished the year at roughly 1.7. So we do have obviously capacity to do something even below to. But, um, you know, the, the cash flow Generation profile that the company has really gives us lots of optionality. Uh, you saw us be active with the share repurchase this year. And, um, you know, what constantly balance what, uh, the best use of our capital is, and, uh, that's what we expect to do throughout.
Yeah. Oh, that makes sense. Um, guys, I don't think you mentioned tariffs. I know it wasn't a big deal, even last quarter. Um, but just curious, is the lack of kind of mention of tariffs an indication that you've just been able to...
capture price to offset any, 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, um,
Uh, you know, both of those in some way and your answer if you can. Thanks, sure. Sure Scott. So, you know, I first, I would just say our teams are doing a, fantastic job managing, um, tariffs and, you know, making sure that there's no impact to earnings per share, but you, you probably, you know, heard us say, you know, pricing is something that is a strong muscle for us. I mean, this is a, this is a function within Parker Hannifin. And, um, these divisions have have pricing leaders and, um, there's a lot of coordination, um, within the groups and across the Enterprise, um, obviously, because a lot of our businesses share the same customers. Um, so, you know, it's, uh, 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. Um, but you know, they have this down pat, they've done really a great job with it and we have the analytics, we have these robust processes.
And um we've been able to, you know, navigate and act very quickly. So um we didn't talk about it because we feel like we have it covered and um it's going to continue to evolve and change but um we're going to make sure that doesn't impact Epps.
Yeah, you know, it's pretty well. I would just say, Scott, you know it's pretty well. Pricing is one of the levers we're able to...
So flex, but it's also our Global footprint. It's our local for local model that we've had for years. Uh, it's really our supply chain team being creative with dual sourcing and, um, you know, the ability to ship from multiple regions. So, um, so pricing is a big piece of it, but uh, it's not the only tool. Yeah. Glo. Our Global capacity has been a, a really a big thing for us.
Thank you, I appreciate it. Thanks, Scott.
Thank you. We go next now to Amit Maroa of UBS.
Thanks, um, morning. Um, just just to follow up to that earlier, comment. I just want to see if you can help us sort of
And is there an opportunity for, you know, the Opex space or the cost base to actually?
Move down an absolute basis after the huge performance in 25 or we just entering a more maybe normalized period, where the cost base will mirror kind of normal inflation.
Well, it we um, you know, thanks for the question. Um, I you know it gives me the opportunity again to just talk about the power of the wind strategy and, you know, our teams, our focused on reducing costs, um, and expanding margin. Uh, like I said earlier, even when we have a negative organic growth environment,
So this is, you know, this is our continuous Improvement culture. Um, it's our culture of Kaizen. Um, you know, it's it's not, we're never been waiting for something to happen. This is just our ongoing way of running, our operations and running our businesses. Um, so yes, there is opportunity to further reduce costs, um, and our teams are working on that all the time, you know, that you just have a, a, you know, a great lean system and a very nice, uh, Suite of tools. Um, that helps each 1 of those general managers, uh, do what they need to do in their business, and they're not all the same. So, that's the nice thing about the wind strategy is you can pull from that, uh, toolbox as I like to say and improve your business in many ways. And, uh, obviously the teams are doing a great job of that.
Yeah, it is a testament to the decentralization of the organization. Those 85 PLS have Business Leaders that are making decisions constantly. We've been taking costs out of the business for over a decade.
And uh, you saw that on the charts that Jenny has shown. Um, we talked about this, a lot. We've changed our compensation structure to uh,
To reward and, uh, be flexible with the flexes of uh, business. And I think that's been a nice plus to the to the profile of the cost as well. So so just to follow up to that. If if that's all true, then why why is 35% incremental? Um, the right number for 26 because you're in the 40s in Arrow and international, uh, I mean, the decremental margins are, I think in North America or like 2% or something like that, it just would strike me as maybe an opportunity to, uh, overachieve when the volumes move up, just give them what the pricing base is and, and all that stuff that you just talked about and cost, is that just conservatism good placeholder, or is there something happening that, you know, maybe meets the incremental
Well, you know, it it is a a, a gradual movement to positive. It's a 1% organic growth in the industrial side of the business that is, you know, 70% of the company. Um, so uh, you know I don't look at this as being conservative normally, we say Model 30 you know, where 35% that's would have. So, um,
Yeah, I think we just need to see how it plays out.
Okay, all right. Thank you very much. Appreciate it.
Thank you.
We'll go next now to Andy kapitz of City.
Good morning, everyone.
Good morning.
Senior talk, could you give us a little more color on how you're thinking about A and D for 26? Where's our obviously? So strong Q4 with a stronger on the defense side versus commercial. When you look at that 8% growth for 26 it's a growth. Pretty balanced between defense and Commercial and aftermarket and OE. How are you thinking about that?
Um, and we see that on continued mro strength and gradual OEM recovery. We have commercial OEM to be low double digit growth.
Um 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, um, again, it's going to be another great year for Aerospace. We're coming off a 3 years of of double digit organic growth. Um, you know, we ended Q4 at about 9% and, uh, we have q1 at 8. And as I've said, we have the year models at, um, at about 8. So,
Um, again, it's going to be another good year.
Very helpful. And then, Todd, you're going 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 would get a little bit of cash tax help from the big, beautiful bill, so maybe just reconcile the forecast. Uh, yeah, we are digesting the one big beautiful bill for sure, um, and that will be a benefit.
To be honest with you, that's more of an FY 27.
Benefits for US versus an FY 26.
Um, this year, we do expect industrial to grow. So uh, 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. Um, I think you saw we called out 2 and a half percent 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 uh we are investing appropriately in Automation and Robotics.
Productivity. I did mention that we have a little bit more restructuring that we expect to do in FY 2026 versus 2025, and then Jenny mentioned Curtis. You know, we're going to have some one-time costs associated with...
the acquisition and the integration and the, uh,
Cost to achieve the synergies that we've had laid out there. So, uh, we still feel really good about the about the number. We still think it's very much top quartile from a cash flow standpoint. And, um,
you know, we're going to obviously try it out shoot that number
Appreciate all the call.
Thank you.
Thank you. We go next to Andrew Obin of Bank of America.
Yes, good morning.
Good morning, Andrew.
Hi, just a question on Aerospace. Uh, you had a re acceleration in Aerospace orders in the past couple of quarters I think from high single digit to 14% of the third quarter torque Center fourth quarter. Can you just talk about this re acceleration? What's driving? This
You know, I think uh, Andrew for the most part. You know what, we've what we've seen here is. Um,
You know, the, um, the commercial transport rate is increasing, um, and wide body rates are are growing to meet International traffic. So I think, you know, that's been some of it and, you know, as air traffic growth, overall continues the, um, you know, the aftermarket just continuing to grow. Uh, and then, you know, we have everything that's going on in defense as well. So, um, you know, there's there's been a continued demand for for all of the Legacy programs. There's continued growth in the Department of Defense budgets. So we've seen some nice nice orders, come in and as you know, those are all uh, longer cycle orders.
And I appreciate you gave some details here, but last year, you had 7% organic aerospace orders and you delivered 13% organic growth. This year, you had 12% organic orders and are guiding to 8% in the midpoint. Can you just help us understand the dynamic between orders and forecast a little bit better versus last year? Thank you.
Well, like, I like, I was just saying, Andrew, you know, these orders come in and, and they're longer cycle, right? You know, we have backlog coverage of over 100% right now in Aerospace and, and we have a record backlog, right? So, um, you know, the, the orders are coming in higher, um, there's, there's only so much they can be built at a time and, um, you know, as as rates increase will enjoy more of that. But, you know, we stay really close to our customers. Um, all of our customers, but in Aerospace, we know, you know, what they're planning on building. We know what those rates are. Um and we have really good visibility to the demand and their capacity. So we think, um, you know, Aerospace at 8%, you know, q1 a percent 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 in what we're forecasting here.
You know, every one of those numbers will be a quarterly record for Aerospace. So, um, the momentum continues.
All right, thanks so much.
We'll go next. Now to Julian Mitchell of Barkley's.
Hi, good morning. Um maybe. Um just wanted to start with the industrial um gross Outlook. So it sounds like Aerospace is sort of pegged at um 8% growth in the first quarter and and through the balance of the year.
Uh, maybe you help us understand within industrial. Um, you know what's dialed in for sort of the first quarter and and then the slope of that acceleration um on organic sales and anything you've seen around pull forward of of Demand by distributors or OEM customers because of tariffs.
Yeah, I I would first just start off saying Julian that I we're not, you know, seeing any evidence of of pull forward. Um, there's nothing that I could point to that. Would that would show that. Um, you know, for industrial um you know, for q1 in North America, we're forecasting, you know, negative uh 1 and a half percent, organic growth and positive half percent for international. So total Industrials, we're still showing it. Um,
1%. Um, you know, when we look at North America in particular, I talked about what we're seeing across the market verticals. In North America, we're seeing gradual industrial recovery. As I mentioned, there is positive sentiment from the distribution channel, with a lot of increased quoting activity. Um, but, you know, as I mentioned, transportation is challenged. So, um, in auto and trucks,
Construction getting better. A is still um weak uh, Power gen is strong in our energy vertical, um, oil and gas still a little weak um, and HVAC it's it's really coming off of a strong fiscal year 25 with a lot of the refrigerant changes. Um, we expect it to be low single digit growth in fiscal year 26, and that'll be more around, um, Commercial Refrigeration than it was residential and fiscal year 25.
Um, when we look at International Industrial International,
Um again we have that full year expected to be at about 1% to 1 again at about a half percent again same assumption on a gradual industrial recovery. Um the mea flat to slightly positive organic growth for the fiscal year. You know, uncertainty remains. Um, we expect continued weakness and transportation especially Auto and and EMA as well. But we also see that continued strength and energy. Boy the
Both oil and gas and power Jen.
Uh, and we think that 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. Uh we'll continue to see strong uh demand from electronics and semicon.
Um, implant.
It's mixed. There are project delays that are continuing in China, but we do see some growth in India and Japan.
I'll probably still soft but um both in construction and Mining.
And I would just say, overall, continued uncertainty from tariffs to cross those markets.
In Latin America, Todd mentioned we see low single-digit organic growth for fiscal year 2026. And that's pretty much balanced growth across the verticals for them.
That's very helpful. Thank you and just my follow-up. Um maybe circling back to the operating margin expansion guide so it's up. I think 40 bits in first quarter and and up 40 for for the year as a whole. Um, and as you said that sort of despite um, volume leverage accelerating through the year. I just wondered maybe on that point. Um you know, maybe is there some sort of, you know, mixed effect in Aerospace perhaps that that weighs later in the year, um, maybe to do with, I don't know, make it synergies being front, half loaded or the outgrowth of commercial Aero, OE versus commercial Aero aftermarket
You know, anything like that sort of moving around in Arrow, or it's just pretty steady through the year.
You know, to be low, double digit growth and, um, mro of high single digit growth. So they kind of, you know, changing this year but, um, you know, we see it, we see it. Um, pretty much the same throughout the whole year.
Great. Thank you.
Thanks Julian.
We'll go next now to Jamie Cook with Truist.
Hi. Good morning uh nice quarter and nice year. I first question just the North American margins in the quarter. Struck me like the strength of the margins. I think it's like 1 of your highest margin quarters despite um you know, a decline uh, in sales in an organic growth. So, is there anything unusual in that mixed pricing or something? Um you know which drove the margins high with with Organic sales down. And then I guess just my um second question um just on the guide uh Todd or Jenny. Um if if we think about the past couple of years you the story with Parker's been wild industrial has been weaker Aerospace is making up for, you know, any delay and recovery and Industrial I guess as you think about 2026. Um, do you think there's greater risk that if if industrial doesn't inflect that Arrow can't make up for it or perhaps you're just more bullish on on Industrial just giving, you know, at least receive some Resurgence in orders. Thank
Thank you.
Okay. So, first question, um yeah, Q4 North America was just, uh, great. You know, expanded margins, 170 basis points year-over-year. Um, so really, you know, 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.
Groups and it when strategy execution across, you know the other groups as well not to take anything away from them, but we we had a nice favorable mix in those 2 areas.
Um, as far as, um, the risk in the future with industrial, you know, I would say, you know, we have 1% organic growth in industrial. Um, and I think, you know, our guide accurately reflects what we see in orders, what we see in backlog, and what we know about what's going on in these market verticals.
But all in all I would say that all of us, you know, want to be bullish on Industrial it's time, right? And as I said, we're we're poised for growth here. Um, I'm not concerned um, that you know, we won't be able to continue to expand margins and deliver this guide.
Um, I think that what we have here and what we've been able to do um in a negative organic growth environment and Industrial. Um, and even with Aerospace at an 8%, we're we're going to be okay. We can, uh, we can make this happen.
Great, thank you very much.
Thank you. We'll go next now to make do with Beard.
Thank you. Good morning. I only have one question, and it's about the guy, too. So, I don't know. Maybe just for your thought. Um, you know, if I look at the exit grade here, $0.769, it was a good fourth quarter. If we annualize that, we end up with something just under $31 of BPS, and what's interesting, my observation.
That going back over the past decade, you're able to do that or better. So you're able to do better than you are. Manualized, exit, fun, right?
on every single year with the exception of fiscal, 20, when you have to deal with culture,
So I guess my question to you is, why would this year fiscal 26 be any different than the norm? Thank you.
Nick, this is
We would love to take you for an annualized look at it; the math on that looks great. However, 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, that 52% is fully weighted by that. Uh that strong, uh Q4 result. Uh we also have, you know, those things that we talked about that we recognize at the early in the fiscal year as far as compensation and whatnot goes.
Um, you know, I feel really good about what we're guiding here for Q1. Um, you know, 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, um,
You know, I think the team is really focused on it. You know, you’ve got to remember every number that we put up in Q4 was an all-time record.
And, uh, when you look at what we are guiding here for Q1, every one of these numbers will be a Q1 record.
So there is uh, Improvement across every 1 of the businesses and um you know that's that's what not a lot of help from the top line. So uh, I think the team is executing unbelievably well and uh, I'd be really happy if they were able to post these numbers.
That's it for me, thanks.
We'll go next now to Joe. Oh, the day of Wells Fargo.
Hi, good morning, Joe. Um,
Can can you talk about the um sort of complexion of the, you know, call it 8% organic Arrow growth over the course of the year and and how that shifts between commercial OE and and aftermarket and you know, really getting at kind of the margin mix considerations uh within that. I think you know for a while. Now that's been a focused topic. Clearly with arrow margins up again this year. That's that's pretty good. Um, and and maybe I'll weave into the question, just any color on on Mega Synergy contributions for the year.
Well, first of all, I, you know,
We don't go into that much detail and disclose all of that mix within the year. I would tell you, as I said with my slides earlier, we ended the year at 51%. Aftermarket was 49% OEM. We're showing OEM to be low double digits this year and aftermarket to be high single digits.
Um, but we again have, um, you know, 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, um, appropriate for what we've seen now.
Uh, for the last three years, all is going unbelievably well with Megan, and that's in the mix as well.
And and then just I I think that the the sentiment from North America, distributor Partners has been a little bit better over the last few quarters, um, anything that you're having in, in terms of kind of developments there getting, you know, areas where it's a little bit better. But then in particular you know what you think the gating factor is to seeing you know quoting really accelerate into orders and the degree to which that's tariffs or its other factors.
Yeah, so you know, I mentioned that I had, you know, uh, been on some distributor visits recently and, um,
Again, it's um, it's it's a common, it's a common theme, you know, quoting activity is High, um, no project cancellations delays but you know, then there's other Pockets where some of them are participating in some, you know, some retooling.
Um, and automotive, and just some, you know, refurbishments that are happening. So, you hear about those pockets where they're, um, you know, really having some wins.
Um, you know, I think, um, I think, you know, they were overall very, you know, bullish on the future. That's what we continue to hear.
And the second part of your question, again, I'm sorry.
It was just, you know, what gets some of the, you know. Oh yeah, I think encouraging signs on quoting to orders.
Things, I think it's uncertainty right on tariffs.
Um, and, you know, interest rates, right? I think those two things are, you know, what? Maybe holding up projects and holding up purchasing decisions.
Uh, but, as I mentioned before, you know,
Distributions were bullish, and we were ready. You know, it's time for an industrial return.
Thank you. Thanks, Joe. Hey, Bo, I think we've got time for one more. Can we take one more question here?
Certainly, Mr. Leam Bruno, we’ll take that final question today from Nigel, Co. of Wolfe Research.
Oh, thanks for fitting me in here. That's great, and Jenny, I agree. It is time for this recovery. Uh, bring them on. Um, so I just want to dig into the free cash flow. Um,
So, um, Todd, you mentioned CapEx. Turn off the sand. That's about half a billion dollars of CapEx, so that's about a hundred million dollars higher. No big deal, but I'm just wondering, do you think that's sort of a medium-term shift in CapEx? Um, and the reason I'm asking is because, you know, we have to do this in some others.
And I'm curious if you know your 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 FY26.
Yeah, I think the capex. Um, 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.
And the North American region, um, but I think that's more of a one-off type of thing versus a run rate going forward.
Um, on restructuring. We did about $50 million in '25. Right now, we're forecasting about $70 million in '26, so that's $20 million more. Um, but again, really I don't want you to read too much into this. This is just, uh, you know, 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 um,
Uh, making sure that we, uh, 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, um, in FY26, it seems like you're done in.
Flat to maybe slightly down in the first half of the year and then, you know, obviously you know, 2 3% in the back half would that be directionally consistent? That is exactly what we have roughly flat first half 2, uh, second half, that's Total Industrial.
Great. Okay. Thanks guys.
I appreciate your time and attention.
Thank you for joining us today. Our IR team will be available: Jeff Miller, Jenna Stuckey, and Chantel. Kelly, if there's any need for follow-ups or clarifications, please let us know. Thank you all again, and have a fantastic day.
Thank you Mr. Julian Bruno and thank you Miss. Parmentier again ladies and gentlemen's fiscal 2025 Force quarter and full year earnings and conference call on webcast. Again that will conclude our call. Thank you all so much for joining us and we wish you all a great day. Goodbye.