Parker(PH) - 2025 Q3 - Quarterly Report

PART I ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements for the three and nine months ended March 31, 2025, and 2024, including the Income Statement, Comprehensive Income, Balance Sheet, and Cash Flows, along with detailed notes on revenue, divestitures, debt, and segment performance, reporting net income of $2.61 billion on net sales of $14.61 billion for the nine months ended March 31, 2025 Consolidated Statement of Income For Q3 2025, net sales slightly decreased to $4.96 billion from $5.07 billion year-over-year, while net income attributable to common shareholders significantly increased to $960.9 million from $726.6 million, primarily due to a substantial reduction in income tax expense, with diluted EPS rising to $7.37 from $5.56 Consolidated Statement of Income Highlights (in thousands, except per share) | Metric | Q3 2025 | Q3 2024 | YTD 2025 | YTD 2024 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $4,960,349 | $5,074,356 | $14,606,926 | $14,742,791 | | Income before income taxes | $994,814 | $920,043 | $3,035,857 | $2,608,643 | | Income taxes | $33,628 | $193,309 | $427,494 | $548,780 | | Net income attributable to common shareholders | $960,866 | $726,574 | $2,607,828 | $2,059,252 | | Diluted EPS | $7.37 | $5.56 | $19.97 | $15.82 | Consolidated Balance Sheet As of March 31, 2025, total assets were $28.92 billion, a slight decrease from $29.30 billion at June 30, 2024, primarily driven by a reduction in total liabilities from $17.22 billion to $15.52 billion, largely due to lower notes payable and long-term debt, while total shareholders' equity increased to $13.39 billion from $12.07 billion Balance Sheet Summary (in thousands) | Metric | March 31, 2025 | June 30, 2024 | | :--- | :--- | :--- | | Total current assets | $6,777,140 | $6,798,624 | | Goodwill | $10,461,946 | $10,507,433 | | Total assets | $28,917,808 | $29,297,842 | | Total current liabilities | $5,614,466 | $7,313,309 | | Long-term debt | $7,421,370 | $7,157,034 | | Total liabilities | $15,517,983 | $17,216,949 | | Total shareholders' equity | $13,390,974 | $12,071,972 | Consolidated Statement of Cash Flows For the nine months ended March 31, 2025, net cash provided by operating activities increased to $2.31 billion from $2.15 billion in the prior year, driven by higher net income, while investing activities provided $344.7 million in cash, a significant shift from a $194.3 million use of cash in the prior year, mainly due to $622.7 million in proceeds from the sale of businesses, and financing activities used $2.68 billion, primarily for debt repayment and share repurchases Cash Flow Summary (Nine Months Ended March 31, in thousands) | Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,308,761 | $2,147,077 | | Net cash provided by (used in) investing activities | $344,670 | $(194,301) | | Net cash used in financing activities | $(2,681,045) | $(2,005,528) | | Net decrease in cash and cash equivalents | $(13,292) | $(69,698) | - Proceeds from the sale of businesses were a major source of cash from investing activities, totaling $622.7 million in the first nine months of fiscal 2025, compared to $75.6 million in the prior year[12] - The company used $859.9 million for common share repurchases and $630.2 million for dividend payments in the first nine months of fiscal 2025[12] Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, revenue breakdown, divestitures, debt management, and segment performance, highlighting the divestiture of the CFC business for a $238 million pre-tax gain, the issuance of €700 million in new senior notes, and a significant discrete tax benefit of $180 million from a valuation allowance release, with backlog standing at $11.0 billion as of March 31, 2025 Revenue by Segment (Nine Months Ended March 31, in thousands) | Segment | 2025 | 2024 | | :--- | :--- | :--- | | Diversified Industrial | $10,097,723 | $10,798,644 | | Aerospace Systems | $4,509,203 | $3,944,147 | - In November 2024, the company divested its composites and fuel containment (CFC) business for net proceeds of $555 million, resulting in a pre-tax gain of $238 million[26] - Total backlog was $11.0 billion at March 31, 2025, with approximately 72% expected to be recognized as revenue within the next 12 months[24] - During Q3 2025, the company recorded a $180 million discrete tax benefit due to a valuation allowance release following the simplification of its foreign legal entity structure[59] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses a slight decrease in consolidated net sales for the first nine months of fiscal 2025, driven by lower sales in the Diversified Industrial segment, partially offset by strong growth in the Aerospace Systems segment, while net income and margins improved due to price increases, favorable product mix, cost containment, and a significantly lower effective tax rate, highlighting strong cash flow generation, strategic divestitures, and continued capital return to shareholders through dividends and buybacks Consolidated Results of Operations For Q3 2025, net sales decreased 2.2% to $4.96 billion, impacted by lower Diversified Industrial sales, currency headwinds ($57 million), and divestitures ($105 million), while gross profit margin improved to 36.9% from 35.4% year-over-year due to pricing, mix, and cost controls, and the effective tax rate dropped to 3.4% from 21.0% due to a $180 million discrete tax benefit, boosting net income to 19.4% of sales - Net sales for the first nine months of FY2025 decreased slightly, impacted by currency exchange rates ($-105 million) and divestiture activity ($-180 million)[91] - Gross profit margin increased in Q3 and the first nine months of FY2025, primarily due to price increases, favorable product mix, and cost containment[92] - The Q3 effective tax rate was 3.4%, significantly lower than 21.0% in the prior year, mainly due to a large discrete tax benefit from the release of a foreign valuation allowance[90][96] - A fire at the Saegertown, PA facility in February 2025 is not expected to have a material impact on financial results, with an $8 million deductible recorded in Q3[87][88] Diversified Industrial Segment Diversified Industrial segment sales fell 7.6% in Q3 2025 to $3.39 billion, with organic sales declining 3.2% excluding divestitures and currency impacts, as North American businesses saw a 3.5% organic decline due to weaker demand in industrial, off-highway, and transportation markets, and international organic sales fell 2.8%, yet the segment's operating margin improved to 23.0% from 21.8% year-over-year, driven by favorable mix, pricing, and cost controls Diversified Industrial Segment Sales Change (Q3 2025 vs Q3 2024) | Metric | North America | International | Total Segment | | :--- | :--- | :--- | :--- | | As reported | (9.0)% | (5.3)% | (7.6)% | | Divestitures | (4.7)% | - | (2.9)% | | Currency | (0.8)% | (2.5)% | (1.5)% | | Organic (Non-GAAP) | (3.5)% | (2.8)% | (3.2)% | - Segment operating margin increased to 23.0% in Q3 2025 from 21.8% in Q3 2024, benefiting from favorable product mix, price increases, and cost containment[101][108] - Backlog decreased from $4.36 billion in the prior year to $3.75 billion, with 95% of the decrease attributed to the CFC business divestiture[101][111] Aerospace Systems Segment The Aerospace Systems segment delivered strong performance in Q3 2025, with sales increasing 11.6% to $1.57 billion from $1.41 billion year-over-year, driven by higher volumes in both commercial and defense aftermarket, as well as the OEM market, while operating margin expanded significantly to 23.7% from 20.5% in the prior-year quarter, attributed to higher sales volume, favorable aftermarket mix, and cost control initiatives, and backlog grew to $7.29 billion from $6.47 billion a year ago Aerospace Systems Segment Performance (in millions) | Metric | Q3 2025 | Q3 2024 | YTD 2025 | YTD 2024 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,572 | $1,409 | $4,509 | $3,944 | | Operating income | $373 | $289 | $1,034 | $779 | | Operating margin | 23.7% | 20.5% | 22.9% | 19.7% | - Sales growth was primarily driven by higher volume in the commercial and defense aftermarket, with contributions from the OEM market as well[115] - Backlog increased to $7.29 billion as of March 31, 2025, up from $6.47 billion in the prior year and $6.7 billion at June 30, 2024, mainly due to strong orders in defense and commercial OEM[114][118] Liquidity and Capital Resources The company maintained a strong liquidity position, with operating cash flow increasing to $2.31 billion for the first nine months of fiscal 2025, with key uses of cash including $750 million for share repurchases and significant debt repayments, including the remaining $490 million of a term loan, and the company issued €700 million in new notes to refinance maturing debt, remaining in compliance with all debt covenants as of March 31, 2025, with a debt-to-debt-shareholders' equity ratio of 0.41 to 1.0, well below the 0.65 to 1.0 limit - Operating cash flow for the first nine months of FY2025 was $2.31 billion, an increase of $162 million from the prior year, due to higher earnings and strong working capital management[123] - The company repurchased 1.2 million common shares for $750 million in the first nine months of FY2025[125] - Significant debt activity included repaying the remaining $490 million Term Loan Facility, repaying $500 million of medium-term notes, and issuing €700 million of new Senior Notes to refinance maturing debt[125][133][134] - The company declared a quarterly dividend of $1.80 per share, marking the 69th consecutive fiscal year of increased annual dividends[127] - The company maintains investment-grade credit ratings of A (Fitch), A3 (Moody's), and BBB+ (S&P)[136] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risks from foreign currency fluctuations and interest rate changes, managing foreign currency risk through derivative instruments like forward contracts and cross-currency swaps, as well as net investment hedges, and mitigating interest rate risk from variable-rate debt, primarily commercial paper, by aiming for a 60/40 fixed-to-variable debt mix - The company uses derivative instruments (forward contracts, cross-currency swaps) and non-derivative instruments (foreign currency debt) to hedge foreign currency transaction and translation risks[144] - A hypothetical 100 basis point (1%) increase in near-term interest rates would increase annual interest expense on variable-rate debt by approximately $18 million[146] ITEM 4. CONTROLS AND PROCEDURES Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2025, with no material changes to the company's internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[147] - No changes in internal control over financial reporting occurred during the third quarter of fiscal 2025 that materially affected, or are reasonably likely to materially affect, internal controls[148] PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. The company discloses its involvement in various environmental matters from time to time and will report any such matters that are reasonably expected to result in monetary sanctions of $1.0 million or more - The company reports environmental legal matters when monetary sanctions are expected to exceed $1.0 million[150] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. During the third quarter of fiscal 2025, the company repurchased a total of 1,044,147 of its common shares under its publicly announced share repurchase program, with approximately 6.1 million shares remaining authorized for future repurchase as of March 31, 2025 Issuer Purchases of Equity Securities (Q3 2025) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | January 2025 | 25,700 | $654.80 | | February 2025 | 22,600 | $683.98 | | March 2025 | 995,847 | $620.29 | | Total | 1,044,147 | N/A | - As of March 31, 2025, 6,104,602 shares may yet be purchased under the existing share repurchase program, which has no expiration date[151] ITEM 5. Other Information The company reports that none of its directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter ended March 31, 2025 - No director or officer adopted, modified, or terminated a Rule 10b5-1 trading plan during the quarter ended March 31, 2025[152] ITEM 6. Exhibits. This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO as required by the Sarbanes-Oxley Act, and the Inline XBRL data files