Todd M. Leombruno
Executive Vice President and Chief Financial Officer at Parker-Hannifin
Thanks, Jenny. Okay, everyone. I'm going to begin with results on Slide 10 and then we'll get to some more details on the outlook that Jenny just touched on. As Jenny mentioned, the second-quarter was a strong quarter, lots of records. It was another quarter of strong margin expansion and EPS growth despite some real top-line pressures. Sales were down 1.6% versus prior. Most of that decline is the result of the divestitures that we announced. The divestiture impact in the quarter was an unfavorable 1.4%. Currency also flipped on us this quarter. While we were forecasting a slight positive 90 days ago, it turned out to be unfavorable at 0.9%. And on a good note, organic growth was positive at almost 1%. If you look at segment operating margins, 25.6% is a Q2 record. That's an increase of 110 basis-points versus prior year and adjusted EBITDA margins was also a record of 26.8 happens to also be an increase of 110 basis-points from prior year. Adjusted net income of 853% or 18%, our return on-sales, both of those are also records. And lastly, adjusted earnings per share were up 6% to a Q2 record of $6.53. Jenny mentioned this also, but the strong second-quarter performance was consistent across all of our businesses and really just a nice solid finish to the first-half of our fiscal year. If we could move to Slide 11, this shows the walk for that $0.38 or 6% increase in adjusted EPS. And again, it was just a nice high-quality quarter from an operating standpoint. Segment operating income dollars did increase by $33 million or $0.20 despite the 1.6% lower top-line. And while strong aerospace performance was the primary driver, the industrial businesses delivered record segment operating margins despite negative organic growth pressure and FX pressures as well. In total, interest expense was $0.17 favorable. That was driven by our continued focus on debt reduction. Income tax and other both contributed $0.03, which was mostly offset by slightly higher corporate admin and share count. So the adjusted EPS of $6.53 already said it, it's a record. And I really commend our team members around the world for strong operating performance, really diligent cost actions where necessary and really a focus on cash-flow that helped us achieve these results. If we move into the segments, if I look on Slide 12, it really is a testament to the Wind strategy that our team members were able to deliver such broad-based margin expansion. We're so proud of the hard work and all of their efforts. Every business delivered record segment operating margins, whether they had a positive 14% organic growth or whether they were negative 5%. Our margin expansion for the entire company was 110 basis-points. And another positive sign was that orders moved to plus 5% versus prior year, mainly off of longer-cycle end-market strength. If you look at the diversified Industrial North-America businesses, sales were $1.9 billion. That equated to an organic growth of negative $5 bill versus prior. That was lower than our expectations going into the quarter, we continue to see delays in the industrial recovery, specifically in transportation and off-highway markets. A recovery has also yet to materialize in the distribution channel. But if you look at adjusted segment operating margins, we were able to increase those by-40 basis-points to a record 24.6 driven by just unbelievable operating execution. A nice positive sign in North-America where orders did turn positive after a few quarters of negative. So we are happy to see that. And again, it's specifically driven by some of our longer-cycle verticals. If we move to the industrial international businesses, sales were $1.3 billion. Organic growth in international came in at negative 3%. Asia-Pac was a positive 3%. That's similar to what we had last quarter. Latin-America positive at plus 10%, while EMEA remains challenged with organic growth at negative 8%. But if you look at adjusted segment operating margins, the international team achieved a record-high of 24.1% and expanded margins by 110 basis-points. As Jenny mentioned, it's really just the power of the win strategy in action. Our international team continues to focus on productivity, cost controls, all things in the wind strategy to expand margins and really are operating with unbelievable resiliency in a very tough growth environment. Order rates here also moved further positive from plus 1% last quarter to plus 4% and that was mainly driven by improvement out of Asia-Pacific. If we look at aerospace, aerospace continues to outperform. Sales were a record $1.5 billion in aerospace, that is up 14% versus prior year. And that did exceed our expectations for the quarter. All of that growth was organic, 14% organic growth and that was really driven by 20% plus growth in the aftermarket area and mid-single-digit positive growth in the OEM markets. Adjusted segment operating margin same-store here, a record 28.2%, that is an increase of an incredible 170 basis-points versus prior. Just really robust top-line, favorable aftermarket mix continues to drive this great margin performance and aerospace orders continue at a positive clip of plus 9%. So just great job across all of our businesses in the quarter. On Slide 13, just to touch on our year-to-date cash-flow performance, year-to-date cash-flow from operations was 17.4% of sales. That equates to about $1.7 billion in CFOA, that is a record and it's also an increase of 24% versus prior year. Our year-to-date free-cash flow increased 17% from prior year. We finished at $1.5 billion or 15.2% of sales for free-cash flow. Jenny mentioned some of that divestiture activity. Divestiture activity in the quarter generated cash proceeds of approximately $620 million and an as-reported post-tax gain of $223 million, we have excluded that gain from our adjusted results in the quarter. And 100% of the proceeds from those transactions were used to further reduce debt. Jenny mentioned in the quarter, we paid down $1.1 billion. That moves our year-to-date debt reduction to $1.5 billion and our gross debt-to-adjusted EBITDA is now $1.7 billion. So good work on cash-flow across all elements of the business. Okay. Moving to Slide 14 and guidance. Let me give you some more details on this. Our reported sales growth for the year is now forecasted to be in the range of minus 2 to positive 1 with 0.5 negative at the midpoint. Keep in mind, divestitures are 1.5% of that unfavorable impact and 100% of that divestiture activity is from the Industrial North-America businesses. Our currency headwinds are now expected to be a 1% negative headwind. That is based on December 31st exchange rates as we always do. That did flip from what we were expecting 90 days ago, just currency rates continue to show significant volatility. In respect to organic growth, we have raised the aerospace organic growth midpoint by 100 basis-points to now 11% for the full-year. But the offset is on industrial segment. The midpoint has been decreased as followed in Industrial North-America, organic growth is now forecasted to be negative 2.5 at the midpoint for the year and the midpoint of the industrial -- international organic growth is now forecasted to be flat. For the full-year, we expect Parker's organic growth to be a positive 2% at the midpoint. Despite all of that, we are raising our adjusted segment operating margin guidance by an additional 10 basis-points for the full-year and moving our expectations to 25.8 for the year. That is now a forecasted margin expansion of 90 basis-points versus our FY fiscal year finish of last year. Our tax-rate is now slightly down to approximately 22%. We are modeling 22.5% for the second-half of the year and that there's more details of that in the appendix, along with assumptions we're using for corporate G&A interest and other as we usually provide those. Despite the currency headwinds and the delayed industrial recovery that Jenny talked about, we are maintaining our full-year adjusted EPS midpoint at $26.70. Full-year as-reported EPS is now expected to be $24.76. And like I just said, adjusted EPS midpoint is expected to be $26.70, both of those have a range of plus or minus $0.30 on either side. We also remain committed to our free-cash flow forecast in the range of $3 billion to $3.3 billion for the full-year. If we look specifically at the 3rd-quarter for FY '25, our reported sales are expected to be approximately $4.9 billion with organic growth of positive 1.5 billion. Adjusted segment operating margin is 25.6% and adjusted EPS for the quarter is expected to be $6.65. So Jenny, that's all I have. I will hand it back to you and I'll drive attention to Slide 15.
