I'd like to welcome everyone to Parker's fiscal year 2026 third quarter earnings release webcast. Today's agenda has Jenny re-reviewing our record third quarter performance, then she will highlight two of our largest market verticals, that is aerospace and defense and transportation. Q3 was a quarter of record performance enabled by the strength of our portfolio. Our team delivered record Q3 sales of $5.5 billion, organic growth of 6.5% and 40 basis points of margin expansion, resulting in 26.7% adjusted segment operating margin.
Adjusted earnings per share grew 18%, year-to-date cash flow from operations was $2.6 billion. Orders came in at 9% with a record backlog of $12.5 billion. It is truly an extension of our engineering teams, providing solutions to all those small to midsize OEMs that are participating in capital spending and investment. As a reminder, these six market verticals represent greater than 90% of the company's revenue.
2/3 of our revenue comes from customers who buy four or more technologies, and our growth is focused on faster-growing, longer-cycle markets and secular trends. With the Meggitt acquisition, we increased our global footprint and are now very well equipped to serve current and future demand from OEM and aftermarket customers in the Americas, EMEA, and Asia. Orders continue to outpace shipments, and we are on track to finish our fourth consecutive year of double-digit organic growth. Lastly, we are seeing an increase in OEM orders for heavy-duty truck, our largest platform within transportation, and as a result, are increasing fiscal year 2026 sales guidance for this market.
| Metric | Period | Current guidance |
|---|---|---|
| Organic sales growth (full year) | FY2026 | 5.5% at midpoint (Raised) |
| Reported sales growth (full year) | FY2026 | 7% (Increased) |
| Aerospace organic growth | FY2026 | 12% (Raised) |
| Transportation organic growth | FY2026 | Low single-digit decline (Raised) |
| Industrial growth (North America and international) | FY2026 | 2.5% (Raised) |
| Adjusted segment operating margin | FY2026 | 27.2% (up 110 bps vs prior year) (Expansion) |
| Adjusted EPS (full year) | FY2026 | $31.20 at midpoint (up 14.2%) (Raised by $0.50) |
| Free cash flow (full year) | FY2026 | $3.3B-$3.6B ($3.45B midpoint, ~100% conversion) (Raised) |
| Full-year incremental margin | FY2026 | 40% |
| Q4 sales | Q4 FY2026 | Nearly $5.5 billion (up 5.5%) |
| Q4 organic growth | Q4 FY2026 | ~4% |
| Q4 adjusted segment operating margin | Q4 FY2026 | 27.4% |
| Q4 adjusted EPS | Q4 FY2026 | $8.16 |
| Q4 effective tax rate | Q4 FY2026 | 22% |
| Aerospace Q4 organic growth | Q4 FY2026 | ~9% (Raised) |
| Commercial OEM (aerospace) | FY2026 | Low-20s growth (Raised) |
| Commercial MRO (aerospace) | FY2026 | Low-teens growth (Raised) |
| Asia Pacific organic growth | FY2026 | Positive high single-digit (Raised) |
| Metric | YoY | Note |
|---|---|---|
| Total sales | Up nearly 11% | Organic growth of 6.5%, favorable currency of 2.5%, and acquisitions adding 1.5%. |
| Adjusted segment operating margin | Up 40 bps to 26.7% | Strong operating results and execution of The Win Strategy across the businesses. |
| Adjusted EPS | Up 18% to $8.17 | Higher segment operating income ($0.96), favorable income tax ($0.18 from discrete items), and favorable share count, partly offset by interest and corporate G&A. |
| North America sales | Organic growth nearly 3% | Strength in in-plant and industrial equipment, off-highway, and energy; margins up 10 bps to a Q3 record 25.3%. |
| International sales | Up 13% (3% organic) | Asia Pacific organic growth of +10%, while EMEA was flat and Latin America declined; margins up 20 bps to a record 25.3%. |
| Aerospace sales | Up 15.5% (14.2% organic) | Continued commercial strength in both OEM and aftermarket; margins up 80 bps to 29.5%. |
| Commercial OEM (aerospace) | Up 22% | Production rate increases in both narrow body and wide body. |
| Commercial aftermarket (aerospace) | Up 14% | Strong spares and repair shipments despite global air traffic growth beginning to normalize. |
| Defense OEM | Up 13% | Continuing demand for legacy programs. |
| Defense aftermarket | Up 8% | Fleet upgrades and service extensions. |
| Cash flow from operations (YTD) | Up 14% to $2.6 billion | Strong cash generation, an all-time record at this point in the year at 16.7% of sales. |
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Aerospace and defense strength | — | Largest vertical at 35% of sales, on track for a fourth consecutive year of double-digit organic growth with record $8.4 billion backlog | Rising |
| Industrial recovery (orders outpacing sales) | Order strength centered on longer-cycle verticals | Recovery broadening to both short and long cycle, six straight quarters of positive industrial orders | Rising |
| Tariffs and price-cost management | Core element of The Win Strategy for over 25 years | Dynamic environment managed with no expected impact to earnings; tariff refunds treated as contingency gains | Steady |
| Filtration Group acquisition | Announced November with six-to-12-month close window | Integration planning underway, still expected to close within 12 months; $220 million synergy target by year three | Steady |
| Margin expansion confidence | — | Management repeatedly expressed confidence in continued margin expansion driven by lean and continuous improvement | Rising |
| Distributor inventory behavior | Quoting activity strong, sentiment positive | Distributors ordering to demand for quick consumption with no signs of restocking | Steady |
| Data center exposure | — | Approximately 1% of sales, growing fast via liquid cooling and subsystem components | Rising |