Parker-Hannifin Corp (PH) — Q2 2026 Earnings Call Transcript

Thank you, Katie. Good morning, everyone, and thank you for joining Parker's fiscal year 2026 second quarter earnings release webcast. As Katie said, this is Todd Leombruno, Chief Financial Officer speaking. And with me today is Jenny Parmentier, our Chairman and Chief Executive Officer. We both appreciate your interest in Parker as well as your time today. Before we begin the call, I'd like to call your attention to our disclosures on forward-looking projections and non-GAAP financial measures, that is on Slide 2. 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 parker.com. The agenda for the call today has Jenny starting with an overview of our record FY '26 second quarter performance. She then will reiterate the strength of our interconnected technologies. In this quarter, she's going to highlight the distinct value we bring to one of our market verticals. That is the off-highway market. Jenny will also make a few comments on the recently announced agreement to acquire Filtration Group Corporation, and then I'll follow with some details on our strong second quarter financial results. We will both provide some details on the increase to our guidance that we released this morning. And then we'll move on to Q&A, and we'll try to address as many questions as possible within an hour. We know it's a busy day to everyone, so we will stick to the 1-hour time slot. Now I call your attention to Slide #3. And Jenny, I'll hand it over to you.

Thank you, Todd, and thank you to everyone for attending the call today. Q2 was another great quarter where our team and our strategy demonstrated our ability to compound performance. We achieved top quartile safety performance with an 8% reduction in our recordable incident rate. This performance is aligned with our goal to be the safest industrial company in the world. Our team delivered record Q2 sales of $5.2 billion, organic growth of 6.6% and 150 basis points of margin expansion, resulting in a 27.1% adjusted segment operating margin. Adjusted earnings per share grew 17%, and cash flow from operations was $1.6 billion. And in the quarter, we announced the acquisition of Filtration Group Corporation. Moving to Slide 4. Many of you on the call today have seen this slide before. Why do we win? The Win Strategy is our business system. We have innovative products that solve customer problems. Our application engineers provide the technical expertise that creates a competitive advantage and our distribution network serves global aftermarket and small to mid-sized OEMs. Today, I would like to highlight the interconnected technologies that provide efficient solutions for our customers across all of our market verticals. I'm on Slide 5 now. We have the #1 position in the $145 billion motion and control industry, a growing space where we continue to gain share. These six market verticals represent greater than 90% of the company's revenue. We have a focused portfolio, creating distinct value for our customers. Our powerhouse of interconnected solutions cuts across these market verticals and gives us a clear competitive advantage. 2/3 of our revenue comes from customers who buy four or more technologies, and our growth is focused on faster growing, longer cycle markets and secular trends. Moving to Slide 6. On this slide, I would like to highlight how our interconnect technologies come to life in the off-highway market vertical. Parker is a market-leading provider of highly engineered solutions for equipment used in construction, agriculture and mining applications. Our comprehensive offering of interconnected technologies, deep application expertise and embedded engineering relationships with OEMs are key to our success. We win with innovative and differentiated product technology, subsystems and full system capabilities designed to increase the capability and productivity of our customers. Our global footprint allows for in-region delivery and expertise for OEMs, and our extensive distribution network provides aftermarket support for end users. I'm now on Slide 7. We are making continued progress on the Filtration Group acquisition. Integration planning is underway using our proven integration playbook. We expect to close in 6 to 12 months from our November announcement date. This is a great company with a great culture, and we really look forward to welcoming everyone to the Parker team. The acquisition of Filtration Group adds complementary and proprietary technologies for critical applications, while expanding our presence in life sciences, HVAC and refrigeration and implant industrial market verticals. The combination of Parker Filtration and Filtration group creates one of the largest global industrial filtration businesses and increases Parker Filtration aftermarket sales by 500 basis points. We will leverage our business system, the Win Strategy to achieve approximately $220 million in cost synergies, and we expect this deal to meet our disciplined acquisition criteria of being accretive to organic growth, synergized EBITDA margin, adjusted EPS and cash flow. This strategic transaction continues our investment in high-quality businesses that continue to transform our portfolio, accelerate sales growth, improve profitability and drive shareholder value. Moving to Slide 8. CLARCOR, LORD, Exotic, and Meggitt have been a big part of our transformation. Curtis is still early days, and as I just mentioned, we are very excited about Filtration Group. Over the time period you see on this slide, we have compounded EPS at 16%, and approximately 60% of this has come from the win strategy and our legacy businesses, while approximately 40% has come from the acquisitions. The acquisition of Filtration Group will continue our track record of accretive acquisitions. I'll turn it back to Todd to review the second quarter highlights.

Thank you, Jenny. This was another strong quarter of record performance. I'm on Slide 10, and we'll start with just a summary of the Q2 results. We are proud to have once again set new records for sales, adjusted segment operating margin, EBITDA, net income and EPS. Sales were up 9% versus prior. Organic growth was positive at nearly 7%. Currency was favorable 2%. Acquisitions were favorable by 1.5%, and divestitures were a 1% headwind. Just to note, it's been now 12 months since we've completed those divestitures. This was the last quarter, then we will have a divestiture adjustment going forward. Moving on to margin. Segment operating margin was 27.1%, that is up 150 basis points from prior year. Adjusted EBITDA margin was 27.7%. That's an increase of 90 basis points from prior year. And net income was $980 million. That's an 18.9% return on sales, just fantastic ROS performance. And lastly, adjusted earnings per share were $7.65. That's up 17% versus prior year. When you look at the quarter, this was just another quarter in which our team delivered high single-digit sales growth, solid margin expansion. And all of that resulted in mid-teens EPS growth. We do remain confident that we're going to be able to deliver another record fiscal year in 2026. If we move to Slide 11, this just displays the walk on adjusted EPS. You can see it was a clean quarter that delivered that 17% increase in adjusted EPS. Segment operating margin continues to be the main driver of our EPS growth. Dollars increased by $190 million or 16% that added $1.15 of our EPS growth. Share count was $0.16 favorable. That was really driven by the discretionary share repurchases that we completed over the last four quarters. And corporate G&A and income tax were favorable by just $0.1. Other was unfavorable by $0.18, that's really primarily due to foreign currency exchange that happened in the prior year period that did not happen this year. That was a prior period item. And interest is just slightly unfavorable by $0.03, and that is driven by just slightly higher average debt balance that was offset slightly by lower interest rates. The adjusted EPS of $7.65 is a record, and it's really driven by strong growth and great margin expansion. I really commend our team members around the world for just stellar operating performance across the company, and it's a pleasure to be able to share these results. If we go to Slide 12, let's take a look at the segments, starting with orders for the company and very strong. Orders were plus 9% versus prior year. And a positive note is order rates were positive in all of our reported businesses. Backlog increased to a record $11.7 billion. This was another quarter of strong incrementals for the company that created the record margins across the board and that 150 basis points of margin expansion, really nice to see. If we look at North America, sales were approximately $2 billion. Organic growth was positive of 2.5%. That was slightly better than our expectations. The slightly better was driven by strength in off-highway and the aerospace verticals in the North American businesses. Adjusted operating margins reached a record 25.4%. That is up 80 basis points from prior year with incrementals of 52%. And orders in North America took a big jump and increased to plus 7% compared to the prior year. A notable driver there were a few multiyear aerospace and defense orders within those North American businesses. Nice quarter for the North American businesses. International sales were up to a record $1.5 billion. That's up 12% versus prior year. Organic growth for the quarter was 4.6% in the international businesses. In Asia Pac, organic growth was the strongest at plus 9%. And Europe turned positive in the quarter to plus 2%. We were really glad to see Europe turn positive. And Latin America is just down slightly 3% versus prior year. It was really a positive to see Europe turn to positive organic growth. We were glad for that team to see that finally make the turn. When you look at margins, our record was achieved 26% margins in the international businesses. That's up 190 basis points from prior year. And that margin expansion came from great improvements in productivity and just solid operational execution across all of those businesses. Orders improved in the international businesses plus 6 with positive orders both in Europe and Asia Pac. Nice quarter for the international team. And lastly, Aerospace continues to perform exceptionally well. Sales for the quarter were a record $1.7 billion, that's up 14.5% versus prior year. Organic growth was $13.5 million. That was driven by great strength in the commercial markets, both OEM and aftermarket. Margins are up significantly. Adjusted segment operating margin increased by 200 basis points and reached 30.2% for the Aerospace Systems segment. Again, great productivity. The higher volumes actually helped productivity in that business. This was another strong quarter of commercial spares and repairs volume, and all of that translated to a fantastic performance on the margin line. Order rates remain impressive in Aerospace at plus 14%. Backlog also increased plus 14% and reached a record $8 billion for Aerospace for the first time in the history of the company. Aerospace and Defense remains robust, and that's really led by the commercial markets. Great performance across all of our businesses, glad to see these results. If we move to Slide 13, you can see our year-to-date cash flow performance, cash flow from operations, $1.6 billion, that's 16% of sales. Free cash flow came in at $1.5 billion, that's 14.2% of sales. Just to note here, in the first half, there's a slight drag from working capital and the timing of some tax payments. We expect that to be a first half only issue. I think everyone knows this, but as a reminder, our free cash flow is second half weighted. We remain committed to free cash flow conversion of greater than 100% for the year, and we'll talk a little bit more in guidance, we are increasing our guidance on cash flow for the year. Okay. That's the details on Q2. And Jenny, I will turn it back over to you on Slide 15 to talk about our increase to guidance.

Thanks, Todd. This slide shows our updated fiscal year '26 organic sales growth forecast by market vertical. So in Aerospace, we are increasing our forecast from 9.5% to 11% organic growth. We continue to see strength in commercial OEM and aftermarket. Implant Industrial remains the same at positive low single-digit organic growth. Recovery continues while customer CapEx spending does still remain selective. Distributor inventories are stable, and our distributors are ordering to their demand. In transportation, our forecast stays the same at a mid-single-digit organic decline. Demand challenges persist in both truck and auto which is partially offset with some strength in aftermarket. We are raising our outlook in off-highway from neutral to positive low single digits. This is based on construction and mining growth, while agriculture remains under pressure. We are maintaining energy at positive low single-digit growth with robust power generation activity offset by upstream oil and gas, which remains soft. And we are maintaining HVAC and refrigeration at positive mid-single-digit growth. We see strength in commercial HVAC, refrigeration, filtration, and aftermarket. As a result of these changes, we are increasing our organic sales growth guidance from 4% to 5% at the midpoint. Back to Todd for some more guidance.

Okay. Thanks, Jenny. If you turn to Slide 16, you'll see some of the details that we're talking about based on what we've done in the first half, strong orders. We are raising our full year guidance really across the board here. Reported sales are going up to the range of 5.5% to 7.5%, more 6.5% at the midpoint. We expect currency to be a favorable 1.5%. That is based on December 31's spot rates. Previously completed acquisitions and divestitures basically offset each other at 1%. Jenny just mentioned this, but we are increasing organic growth to the range of 4% to 6%. That is 5% at the midpoint. If you look at the businesses, aerospace is being increased to organic growth of 11%. In the Diversified Industrial segment in the North America businesses, we are increasing organic growth to 2.5%. And finally, we are increasing international organic growth to plus 2%. Adjusted segment operating margins, we're raising guidance there by 20 basis points to 27.2% for the full year. That will now be a forecasted increase of 110 basis points versus the prior year. And the forecast for incrementals for the full year is 40%, full year incremental. A few other items just to note, corporate G&A remains unchanged at $200 million. Interest expense slightly tweaked down by $5 million. We're now expecting that to be $45 million for the year and other expenses down slightly to $85 million. On tax rate, the guide for the second half is forecasted to be 22.5%. The full year tax rate is expected to be 22.1%. That's with a second half of $22.5 million. And finally, when we look at EPS, we're raising EPS to $30.70 at the midpoint. That's an increase of 12.3% versus the prior year, and the range on that adjusted EPS is plus or minus $0.30. I mentioned it earlier, but we are raising our full year free cash flow guide to a range of $3.2 billion to $3.6 billion. That is about $3.5 billion at the midpoint, with conversion greater than 100%. Looking specifically at Q3, reported sales are expected to be nearly $5.4 billion. That is approximately 8.5% up. Organic sales growth, we are expecting 5%. Segment operating margins, we are expecting 27% and adjusted EPS for the quarter is expected to be $7.75. Each one of those is an increase to our prior guide. As usual, additional details can be found in the appendix here, and that is a wrap on our guidance. Jenny, I'll hand it back to you for Slide 17.

Thanks, Todd. Just a reminder on what drives Parker, safety, engagement and ownership are the foundation of our culture. It's our people and living up to our purpose that drives top quartile performance that allows us to be great generators and deployers of cash.

Okay. Katie, we are ready for the Q&A portion of the call, and we'll take the first one in queue.

Congratulations on a nice quarter. I guess two questions, Jenny. First, when I look at your technology platforms, if we look at the technology platforms within diversified industrial motion systems, flow processing control and filtration and engineering materials, I think it's the first quarter since June of 2023, where you saw positive organic growth across all three technology platforms. So just wondering, do you think that's something specific to Parker-Hannifin, or do you think it's more a function of the cycle? Just very encouraging signs there. And then I guess my second follow-on question to that is it's the first quarter that filtration has seen positive growth. Just wondering how you're thinking about that relative to the acquisition that's coming on filtration group signs that you bought that at a bottom? Or is there any reason why they wouldn't be seeing understanding the aftermarket and a little different end market mix, why they wouldn't be seeing positive momentum there as well.

Yes. Well, thanks, Jamie. Thanks for the question. So yes, first of all, we do think that, obviously, you're right, those businesses did see positive organic growth, and it's great to see the teams have worked very hard for that, and they're performing well. I would say that it's a combination of what we're seeing in some of our short-cycle businesses that we've pointed out. While all of them are not returning to positive growth, we did see some nice improvement in off-highway. And then I would say the aerospace business that sits inside of these industrial businesses is performing very well. So to that point, what you said, some of this is specific to Parker and some of it is seeing some of the short-cycle business return. Our distribution did have low single-digit organic growth in the quarter. So we're encouraged by what we see, encouraged by the orders. So I think that's part of it. Your filtration group question was a long one. So I'm going to ask you to repeat that for me.

No. Sorry, my comment was just that interesting timing may be a complement that it's the first quarter we've seen positive growth in your filtration group business. Wondering what that implies for the acquisition of the Filtration Group, implying that potentially you bought that business at a cyclical bottom, understanding there's a difference in mix because they're aftermarket. I'm just wondering, could their sales also be improving organically just like we're seeing within your Filtration Group business?

Yes, we do believe that, that will be the case. Now historically, Filtration Group's organic growth from pre-COVID to now has been mid-single-digit CAGR. So this is higher than Parker's Filtration Group. But many of the areas where we have the complementary technologies in the same markets with some of the same customers that we play, we do see that their growth will be increasing just as it is with ours. So again, we think that this is just a great fit for Parker because of the complementary and proprietary technologies that it adds and because they play in the markets that we know, where we expect to see growth. And again, they have this decentralized structure that's very, very similar to Parker. So we see upside here.

Jenny, could you give us a little more color on what you're seeing by region? I think Todd's comments around Europe were very interesting. Do you see that sort of turn as durable? And then your partners continue to do very well in APAC. Do you see still a good outlook for that in '26 and beyond?

Certainly. Here's an overview of some market verticals by region. In North America, we're raising our full year organic growth estimate to 2.5% from the previous 2%. Industrial, aerospace, and defense growth is notably strong, with a gradual recovery in plant industrial, positive sentiment from our distribution channels, and continued quoting activity. Capital expenditures remain selective, as many customers are focusing on productivity and automation initiatives rather than significant capacity expansions. We anticipate that increased infrastructure spending will lead to higher demand for in-plant industrial equipment in the future. Transportation faces challenges, particularly in the automotive and truck sectors. We do not expect a recovery in truck OEMs this fiscal year, although we will gain from some aftermarket business. Construction and off-highway construction are performing well, while the agricultural sector remains sluggish. The energy and power generation sectors are robust, although oil and gas are weak on the upstream side; however, midstream operations are benefiting from some capital spending. The HVAC sector is coming off a strong fiscal year '25. While residential demand has decreased, it is more than compensated for by commercial HVAC and refrigeration growth. Regarding international markets, we are increasing our full year organic growth to 2%, up from the previous 1%. This improvement is largely due to strong project shipments in Q2. For EMEA, we are also raising our full year growth estimate to low single digits, up from a flat prior estimate. We see gradual improvements in transportation, mainly within the trucking sector. Strength continues in mining and energy, spanning both oil and gas as well as power generation. Proposed stimulus measures and future defense spending present long-term positives, though we are not seeing their impact this fiscal year. In the Asia Pacific region, we are increasing our full year organic growth to positive mid-single digits compared to the prior positive low single digits. We are observing ongoing strength in electronics and semiconductor demand, with some progress in implant orders and shipments, though it remains mixed. There are signs of improvement in mining within China, but uncertainty stemming from tariffs persists across these markets. This summarizes our observations in these regions.

Very helpful, Jenny. And then Todd, you've continued to generate over 40% incremental margin. I know you've said you're still sort of guiding at 30% to 35%. But as you look forward, how long before after this good performance, do you say to yourself like you can do over 40%. And when you talk about price versus cost, is it better pricing? Is it execution? What's sort of driving this performance?

Andy, thanks for noticing that. I'll tell you, it's not easy. It's a lot of hard work from our team members every day, every week, every month, every quarter. We are really proud to see what they've been able to put up there. We are guiding the second half at 35%. Incrementals are really across the company, that puts the full company to 40% for the full year. We still think that, that's best-in-class when you look at what's going on across the environment. We're really happy to see the industrial businesses pivot to positive organic growth. Those numbers are a little bit muted still. So I think our guide is unchanged when it comes to what we think is best-in-class on incrementals. If you look at these margins, these margins are all-time highs across every business. It is great to see that work, and that's generating these results.

Yes. Strong operational execution.

Yes. It's a line of things. I could even give you a list of the top three because it varies by business, and it depends on what opportunities exist across each and every business.

Just a question on international growth. I think you may have answered it, but I think if you sort of do the math, it just seems that sequentially the growth is going to slow down to 2% the midpoint in the third quarter. And then I think the guide sort of implies it stays there in the fourth quarter. And I think you sort of alluded to large projects. Just thinking that the comp is similar from second quarter to third quarter, even easier in a 2-year stack, we're being conservative, or is there sort of specific dynamics taking place in international in the 3Q or 4Q?

Yes, Andrew, it was really they did benefit in Q2 from the timing of some large project shipments. And that was primarily power generation and commercial HVAC filtration, and that was in EMEA. And that it kind of aligns with some of the choppiness of the orders from the prior year. So those aren't going to repeat in Q3. So we do forecast 2% and that's based on a continued gradual industrial recovery.

Andrew, we basically doubled the guide there. We were one, we're now basically two. You look at that from what we thought would happen at the beginning of the year. We're pretty happy with what's going on there. The orders are also very impressive. But like we've kept saying is there are a number of longer-cycle businesses that just don't necessarily need to ship in the second half of our fiscal year. We'll see those in the outmonths.

I might be nitpicking, but if you analyze the growth by end market, there was a significant increase in off-highway and aerospace and defense. However, the other segment seems to suggest a significant rise in the midpoint just to make the figures align. Could you provide some insight on the growth from plus 10 to about 140? What is included in the other segment if my calculations are correct?

Yes. I don't know if I'm following your math there. Andrew, Jenny went through the logic behind the increases that we've seen by market vertical. Obviously, aerospace continues to be stellar. We have a significant amount of aerospace in the industrial businesses. That was a driver, and we bumped up off-highway a bit.

And one other thing to add, some of what sits in the other, obviously, is electronics, and what you see in there is some data center, which is still less than 1% of our sales, but it's been very strong. It's been some nice growth for us. So that may be part of what you're not seeing in our numbers.

So Jenny, it's always good to hear insights on the end markets. I have a broader question. With reshoring and the investments that are already happening in the U.S., what is your perspective on the current situation with implant equipment in the U.S.? Also, what specific leading indicators are you considering for the short-cycle inflection?

Yes. So we get a lot of intel from distribution. And we continue to say that this is gradual. But the sentiment is still positive. And I've been saying that for quite some time because the distributors do talk a lot about all of the quoting activity. But I would say in the recent conversations, the CapEx remains selective. And the customers are prioritizing productivity and automation projects versus large-scale capacity expansion. And you see that in pockets, and that's why we consider it gradual because you'll see some in different markets. And I think we're going to continue to see this gradual recovery, and we're going to continue to see better numbers in some of these markets that we've talked about. But I don't know that there's just one catalyst to get this short cycle going. It's really, I think, a matter of taking out some of the noise that really doesn't have anything to do with the business, some of the geopolitical noise, tariffs and maybe possibly interest rates as well.

Yes, that makes sense. And then I guess maybe just for Todd, just a quick question. Like the Aero business has been doing great. Margins were above 30% in the first half the guidance implies a step down in the second half? Just anything we need to be aware of from a mix standpoint, and why they would step down in 2H?

No. We called out high spares and repairs in Q2. Those are great. The business is high. It's hard to predict that going forward. So we've not put that into our forward guide there. But I would tell you, the activity is robust. The team is doing a great job converting serving our customers, and you look at those margins that we're forecasting. It's still showing 60 basis points improvement from prior year, and it's high 29%, mid-29.5% type range. So we feel pretty good about giving you a guide with those numbers.

Congrats on the strong start to the fiscal year, Jenny, Todd, and Jeff. I realize you may not want to discuss pricing, but with the current inflationary pressures, including rising commodity prices and input costs, particularly from natural gas and metals, are you seeing an ability to increase prices? I understand that for some products, particularly those that move through distribution, this might be less challenging, but for those that go through original equipment manufacturers, it may be more difficult. Is there any risk management strategy in place currently? Are we being too cautious, or is there additional insight you can share that would be useful?

Yes. With some of these commodity prices, Scott, we're handling this like we have any other inflation or issues that come about. That pricing muscle is strong. And we've had a long history here of being able to handle these things. But it's ongoing, and I would say that it's nonstop, right? We have to respond to these things and make sure that they don't impact our EPS, and they haven't, and they won't.

Yes, Scott, you are clearly monitoring our margins. You can see that every one of our businesses achieved record margins for the quarter. I want to emphasize that our focus on cost and pricing is a strategy we consistently maintain at Parker. We're actively managing this.

Fair enough. And then just a quick follow-up. The timeline you give to close Filtration Group kind of 6 to 12 months so you could drive a bus for that. But what are the major gating factors just kind of standard antitrust issues that could get pushed or pulled one direction or another, or are there other hurdles?

Yes. No. just the standard regulatory filings and the process that we have to go through.

A lot of questions have been answered, and there's a lot of good detail in the materials. Just curious on the construction side, you guys are like a little more positive than others. Is that just like the data center stuff? Or are there other things you guys are seeing out there?

I would say that's a small part of it, but we're actually seeing an increase in the construction equipment.

Okay. And then just lastly, on the fourth quarter, being a bit below consensus. Is there anything to call out there mechanically as to why the fourth quarter is, I guess, just a little bit weaker than what we would have thought?

No, I don't think there's anything specific that we called out there. When I look at what we have laid out here for the fourth quarter, every single number is an all-time record. The fourth quarter is normally our strongest quarter of the year. We are forecasting the fourth quarter to be the strongest quarter of the year again and in Q3 in making we deliver our commitments for Q3, but there's nothing that has us concerned about Q4.

No, no concern.

Maybe just to focus on some of the end market trends. So looking at Slide 15, just wanted to understand, perhaps when we look at the far right-hand side column of the full year growth rates. When we look at Q4, sort of which of those growth rates as you see it are most different from the full year numbers? Just trying to understand kind of inflections or changes or if it's easier to explain any color on how the first half trended for those respective markets beyond A&D.

When considering the off-highway sector, we initially forecasted a slight decline in August, but that outlook improved to neutrality in Q1 and has now transitioned to a positive low single-digit growth. This shows a consistent upward trend that I want to emphasize. Regarding aerospace, we are continuing to see growth in that area. In terms of the broader industrial markets, things have remained stable, with only a few positive indicators that we have highlighted. For the implant and industrial sectors, we are still projecting a slight positive growth. In transportation, we are seeing a modest decline and do not anticipate any changes to this outlook for the remainder of the fiscal year. Similarly, we are maintaining our initial guidance for the energy, HVAC, and refrigeration markets.

Got it. Maybe within A&D, if you could just refresh us perhaps on the end market outlooks for the various pieces for fiscal '26, another company talks about sort of normalization of outsized commercial aero aftermarket growth, but I feel people have been guiding for that for sort of three years running now. So just any thoughts around the market pieces of A&D?

We expect commercial OEM growth to be around 20%, an increase from our previous mid-teens estimate. For commercial aftermarket, we anticipate low double-digit growth, up from high single digits, with Q1 showing 13%. Defense OEM is expected to see mid-single-digit growth, consistent with last quarter, while defense aftermarket is projected at low single-digit growth, a slight decrease from mid-single digits, but still in a good position.

Just wanted to come back to just kind of orders and sales. Obviously, kind of in the industrial businesses, we've got more long cycle, and we've talked about that a lot, including on the call here today. But I'm also just observing that orders have outpaced sales now for 8 quarters, which I've never seen that long of a run. So maybe you could just speak to, is it reasonable to think that those do reconnect at some point in time where there's just that much more long-cycle stuff in the backlog, and obviously, at some point, things will cycle and they'll cross over. But in terms of kind of them coming together during an up cycle, do you think we continue to see kind of a persistent gap there?

Yes. Jeff, it's a good question. I mean, we're clearly a longer-cycle business today than we have been in the past. But it is hard to put a figure on conversion timing as it really is determined by the customer delivery schedule. We, obviously, with higher aerospace and defense in the Aerospace segment as well as in our industrial businesses, we do have a lot of multiyear orders that fall into those buckets. So that definitely has an impact. And what we see from a short-cycle standpoint, as I've mentioned a couple of times, it's a gradual short-cycle recovery, some markets sooner than others. Implant in our distribution business, we think they're going to benefit from both CapEx and OpEx. So again, I pointed out we saw low single-digit positive growth in the quarter. And those long cycle and secular trend businesses HVAC, energy, they're continuing to really be strong. So record backlog, orders are in a good position, but hard to connect the dots there.

Jeff, on the good side, it is giving us better visibility. It is allowing us to level load our operations. It is part of what's driving the consistency in our performance across all of the operating businesses. And again, I think not as much credit as given to the transformation of the portfolio and like I said, we are a different company than we were 2, 3, 5, 10 years ago. So it's still an important metric. We watch it every day, as a matter of fact. And we're really happy that orders have turned positive across every business, and it's a positive outlook for the future.

Yes. And we don't have the industrial backlog. I don't think you could share it, that would be interesting. But yes, Industrial backlog was down in Q1, right? But it looks to me if it was even flat sequentially here in Q2, then we're starting to get to backup in Industrial also inflecting higher. Is that sort of what you see in the business?

Yes. I believe that's exactly what we're seeing here in the...

Industrial backlog has gone up in Q2. Yes, Industrial backlog went up. It remains in the mid-20s, and it grew from Q1 to Q2.

I wanted to circle back to the implant comments and just customer kind of prioritization of spend around productivity and automation over some of the capacity expansion. I think we've been in that kind of environment for some time at this point. Maybe just spend a little bit of time on what that means for their spend, like the wallet that goes to Parker. And when we think about it on the productivity and automation side versus the capacity expansion side. And if we were to see a pivot toward capacity expansion, what that would mean for you?

Well, the good news is, is we participate in both scenarios, right? I mean when there's any type of retooling done or upgrading done or retrofitting done, our distribution channel and sometimes many of our divisions participate in that directly. And then some of the examples we've given in the past is when there is capacity expansion that is actually new factory, new building, we're participating from the time that they start clearing the land. And all the way through the putting the walls up, putting the infrastructure in. So Parker gets a nice share of the wallet in both situations. It is just still a gradual recovery, though, in our distributors, again, positive sentiment, working with a lot of those small and mid-sized OEMs, they're participating in these things. They're ready. They're ready to participate at a higher level. But right now, what we have for them is we see for industrial growth is about 2% to 2.5%.

Got it. And then just on your own CapEx plans. You've raised the guide a little bit last quarter, maintained it this quarter. It's up about $100 million year-over-year. So some nice growth there. Maybe just elaborate on that and whether there's anything on the capacity expansion side? Is any of that targeted around as you're starting to highlight off-highway a little bit and then some of the activity you're seeing there. Just to understand where that higher spend is going?

Yes. We are definitely investing in our businesses. We have investment around automation and productivity. And we do have capacity expansion on both sides of the business. So it's important to us to be able to keep up the level of service and world-class manufacturing. And as our team uses Kaizen tools to improve the processes that we have. We're always looking to make those processes better. So a lot of investment in our factories.

So I want to follow up on some of the earlier conversation around cycle trends. You guys have as broad exposure as anybody, both on an end market, but also a geographic basis. So just kind of maybe simply, when you look across all this exposure, is there anything that you think will be worse a year from now where you're seeing signs that there is pointing to next 12-month deterioration?

I don't see anything now. I'm not hearing anything or I don't see any indicators that would cause us to think the forecast we have out there now for these market verticals is going to get worse. I don't see anything.

Yes, Chris, we called out backlog in total. Backlog is a record. Orders have been positive for some time now. Historically, that has been a positive sign for future growth for Parker-Hannifin.

I was just wondering if there was anything that wasn't like stable to improving. And then I guess maybe just following up on that. It seems like a good chunk of the North America order pickup was in some of the long-cycle businesses. But did the shorter cycle businesses also see a positive rate of change on orders? And any color on the specific end markets? I would imagine construction and some of them we're seeing momentum.

Yes. Yes, we definitely saw some positive orders in implants and off-highway and energy. So definitely, it wasn't all aerospace and defense, but there were some multiyear aerospace and defense orders that hit our industrial businesses that really caused that jump from 3% to 7%. But positive orders and implant off-highway and energy.

Hi, Katie, this is Todd. I think we have time for maybe one more question before we wrap it up at 12:00.

Wanted to follow up on Filtration Group. I imagine the teams are already getting a running start on some of the integration and preplanning. Any early observations on confidence around cost synergies? And then as you've been mapping the combination, any early view on the sales synergy side?

Thanks for the question, Brett. We're, as I said, we're just really excited about the filtration group. So we are very confident in our ability to deliver that $220 million in synergies by the end of year 3. And part of our diligence process was several plant visits, and that's what gives us that confidence. We are working with the team. We don’t own them yet. So we're building relationships. We're getting that integration playbook going. We have the integration team assembled here on the Parker side and will shortly with the filtration group side, but we really feel very confident about the synergies. We didn't model any revenue synergies, but we feel that there's opportunities to utilize the customer relationships that we both have to deliver value to customers. So we think that that is going to give us some upside. And then we'll look at the distribution networks and see what makes sense and learn and be focused on our organic growth with this acquisition, just like we have in the last.

That's great. And then just a quick follow-up. So just close the loop on tariffs, so calendar '25 in the books. Can you update us on what the annualized tariff expense that you absorbed? And as you progress through the mitigation measures, is it fair to think that as you get into the second half of calendar '26 that you do have the potential to drive better than normal incrementals as you're lapping some of that expense pain?

Brett, this is Todd. The tariffs obviously have been pretty volatile. I don't want to make any predictions on what's going to happen with tariffs, or what has happened with tariff. I would just tell you, rest assured that we haven't covered. You have not heard us call out any negative impact from tariffs. You look at these margins, these margins are all-time records. We're really positive now that the majority of the company has returned to positive organic growth. And we're going to manage whatever happens as it happens and just be as clear and transparent with our customers as we possibly can be. So that's the way we're running it.

That's right.

All right, Katie, I think this wraps up our time here. This concludes our FY '26 Q2 earnings release webcast. We do appreciate everyone's time and attention. We thank you for joining us today. If there are any needs for follow-ups, our team will be available as usual, Jeff Miller and others will be available for any kind of follow-up that's needed. Thank you, everyone, and have a wonderful day.