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Text: As Elaine said, this is Todd Leombruno, Chief Financial Officer speaking.
Reconciliations for all non-GAAP measures are included in today's materials.
Tom will then close with key messages and then Tom, Lee and I will take any questions the group may have.
It's really more than just this quarter, it's really been the whole year and the performance to the pandemic and also the transformation of the company into a top quartile diversified industrial company.
These results are all because of your efforts.
So let's look at the quarter on top of slide three.
Starting with safety, as we always do, we had a 33% reduction in record incidents.
We're still in the stop quartile, the combination of safety, lean, our high-performance team structure in Kaizen, were all driving high engagement and high performance, you see that show up in our results.
Sales grew about 1%.
The organic decline was minus 1%, but in particular, if you take out aerospace and look at the industrial only, industrial segment grew organically almost 4%, so that was significant.
We had 5 all-time quarterly records.
You can net income, EPS, and the segment registered for Parker, North America and international.
EBITDA margin was very strong at 21.6% as reported, 21.8% adjusted a huge increase versus prior 250 basis points, year-to-date cash flow was an all-time record of $1.9 billion and 18 -- a little over 18% of sales.
If you go to the very last row of this page, you see segment operating margin on an adjusted basis, 21.4% and again, a significant improvement versus prior, plus 240 basis points.
So a terrific quarter and really tough conditions.
If you go to the next slide.
I want to talk about the transformation of the company.
The old adage that a picture is worth a thousand words, and so I want to take you to slide five, and this is really the picture that speaks to the transformation of the company.
Let me explain the chart here for a minute.
So you've got in gold Bars, the adjusted EPS.
The blue line is global PMI plotted on a quarterly basis.
If you look at the last six years and look at that dotted green line, and compare that to the blue global PMI line, you see they are much less correlated effect there divergent.
And there's been a step change in performance.
The earnings per share over this time period is more than doubled from $7 to our guidance of $14.80, so approaching $15 and was propelled that over that time period as an EBITDA margin that's grown 600 basis points.
So you might ask how, how that happened?
It's really that blue takeaway at the bottom of the page, it's our people.
That focus the alignment, the engagement that comes when you have people think and act like an owner.
The portfolio, which is a combination of our interconnected technologies and the value they bring and the capital deployment we've done buying some great companies that have added to the strength of the company.
Then our performance, which really sits with the strategy of the company, Win Strategy 2.0, at the kind of the beginning of this journey and then The Win Strategy 3.0 most recently in FY 2020.
So this combination is really transformed the company.
You see that as evidenced in this slide, and we're very proud of it.
But if you go to slide six.
So that's what's kind of in the rearview mirror.
But going forward, we're equally excited about where the company is going to go.
And I call this a convergence of positive inflection point.
So on the left-hand side is kind of those external inflection points.
You're familiar with a lot of these, the macro environment industrial momentum, you see that in our positive orders and positive organic growth industrial we showed in this quarter.
Aerospace is going to recover, question is just what the trajectory will be and the timing?
Vaccines are making progress around the world.
There's going to b e a significant amount of climate investment.
And if you put all that on top of, I didn't write all these down, but low interest rates pent-up CapEx demand and fiscal spending, you have a very attractive environment for industrials for the next several years.
On the right-hand side is really the internal things we've been doing, Win Strategy 3.0, in particular, but that last slide that I just went through, spoke to all those internal actions because that's what's been propelling us.
Remember that last period, last six years, really had very little help from a macro standpoint.
So you look at the three major things I highlight here, performance becoming top quartile strategies to grow faster in the market.
You've seen our margin expansion, great cash flow generation consistently over the cycle.
Portfolio, we've added three great companies, all accretive on growth cash and margins.
And with the rapid debt paydown that we've done, we're positioned to do future capital deployment, which is very exciting.
The technology, I'll get into in the next slide, but the interconnected technologies really is distinctive for us.
And then with a climate investment, we are very well positioned with our suite of clean technologies to take advantage of that.
So I would tell you that my view and the team's view this is about as good an environment as we've seen in a number of years.
Go to slide seven.
You've heard me talk about this page.
The power of this interconnectedness technology brings the value accretion for customers what I want to do today in light of the clean technology discussion is give you four examples of how this suite of technologies helps with a more clean environment, clean technology world.
So the first would be electrification.
And we've got a full portfolio of technologies here, hydraulic, electrohydraulic, pneumatic, electromechanical, no competitors got that breadth of technologies.
And we formed about four years ago, the Motion Technology center, which put the best and brightest of engineers to Motion technologies, things that fly as well as things with wheels underneath them.
So we put the -- the motion and the aerospace teams together.
And this team has come up with a great listing of products around motors, inverters and controllers.
But there's also in addition to the typical motion opportunities, there's other challenges around electrification like light weighting, thermal management, shielding, structural adhesives and noise vibration, all these to accomplish what we have a legacy engineered materials and with the LORD acquisition, we're well positioned to take advantage of those.
Secondary is batteries and fuel cells that utilize most of the technologies see on this page, third would be clean power sources and that kind of falls into two buckets: Renewables, which we do a lot -- we've always have done a lot of wind and solar; Then the hydrogen, we just recently joined the Hydrogen Council, and it's going to be both onboard as well as infrastructure opportunities as you go out for the next many years.
And it's really building in our high-pressure and our cryogenic applications that we have today.
And then we've been a more sustainable company for a long time and really the -- a clean technology example for us that started a lot of things is filtration.
And our filtration business protects and purifies assets and equipment for people for a more sustainable environment.
So we feel very good about this portfolio for climate investment in the future.
Going to slide right.
I just want to remind you of our purpose statement enabling engineering brakes that lead into a better tomorrow it's been very inspirational for our team.
And I think it comes more to light when we give you examples of the purpose in action, which is on slide nine.
And again, kind of following with that clean technology discussion, when I'd highlight electrification, I'm going to highlight in particular, electric vehicles.
On the left-hand side, you see applications that are changed because of an HEV or EV versus a combustion engine.
On the right-hand side, you see the various technologies that Parker has that addresses those applications.
I won't read all those under the Bayou see the major category, safety, related technologies, things that say, weight, thermal management and a variety of things we do critical protection.
The big opportunity for us, so we obviously are in the factories helping to make these vehicles and we'll always do that, but the big opportunity for us is the onboard content around Engineered materials.
Our bill of material for an EV or HEV is 10x what it was in a combustion engine.
And it's one of the key reasons why our LORD business has grown so nicely even despite the pandemic we grew 11% organically in Q3 from LORD.
So we're very happy with the progress so far and our purpose and action around electrification as an example.
I'll just orientate everyone to slide 11, and I'll do a quick review of the financial results for the quarter.
Tom mentioned some of these, so I'll try to move quickly.
Sales for the quarter were $3.746 billion.
That is an increase of 1.2% versus prior year.
We are proud of the fact that the Diversified industrial segment did turn positive organically.
Industrial segment organic growth was 3.7%.
Obviously, that was offset by the Aerospace Systems segment, their organic decline was 19.7%.
So all in, that drove total organic sales to minus 1.0.
Currency was a favorable impact this quarter of 2.2%.
And just a note in respect to acquisitions, this is the first full quarter that we report both LORD and exotic in our organic growth numbers.
So therefore, the acquisition impact was zero.
Moving to segment operating margins, you saw the number, 21.4%, that's an improvement of 240 basis points from prior year.
It's also an improvement of 130 basis points sequentially, strong margin performance there.
And that really was a result of just broad-based execution of the Win strategy.
We continue to manage our cost in a disciplined manner.
The portfolio additions in CLARCOR, LORD and Exotic are all performing soundly.
And you've all been familiar with the restructuring activities that we've done in FY 2020 and in FY 2021.
Those are on track and on planned and generating the savings that we expected.
Adjusted EBITDA margins did expand 250 basis points from prior year, finished the quarter at 21.8%.
And net income is $540 million, which is a 14.4% ROS.
That's increased by 22% from prior year.
Adjusted earnings per share is $4.11 that is $0.72 or 21% increase compared to prior year's results of $3.39.
And as Tom said, it's just really outstanding performance.
And I'd also too like to commend our global team members for generating these results.
If you slide to slide 12, this is really a bridge of that $0.72 increase in adjusted earnings per share versus prior year.
And the story here across the board is just strong execution from all of our businesses.
This produced robust incrementals in our Diversified Industrial segment and really commendable decrementals in the Aerospace Systems segment.
Adjusted segment operating income did increase by $98 million or 14% versus prior year, that equates to $0.58 of earnings per share and really is the primary driver of the increase in our adjusted earnings per share number.
Interest expense was favorable to prior by $0.12 as we posted yet another quarter of sizable repayment of our serviceable debt, and that is really benefiting from our strong cash flow generation.
Other expense, income tax and shares netted to a $0.02 favorable impact compared to prior year.
Moving to slide 13.
This is just an update on our discretionary and permanent cost out actions.
And this is just a reminder these represent both savings recognized in the current fiscal year from our discretionary actions in response to the pandemic and our permanent realignment actions that were taken at the end of FY 2020 and throughout FY 2021.
Discretionary statements came in exactly as we guided, at $25 million for Q3, and now total $215 million year-to-date.
There is no change to our discretionary savings forecast for Q4.
That remains $10 million.
And we continue to forecast the total year to be $225 million in full year savings.
Just to note, with the increased demand levels that we're seeing from our positive order entry, our teams have really pivoted to growth and really now these discretionary actions that we knew would diminish across the calendar year have now really been based in reduced travel expenses.
If you move to permanent savings, we realized $65 million in Q3.
Our total year-to-date is $190 million.
The full year forecast, again, here remains, as previously communicated, at $250 million.
One item to note, we did guide that the cost of the FY 2021 restructuring would come in around $60 million.
It's now expected to be $10 million less or $50 million but there is no change to the expected savings that we are forecasting.
Total incremental impact for the year for both permanent and discretionary savings is $260 million.
And just one other thing to note, this will probably be the last quarter that we detail these items as we anniversary the pandemic-induced volume declines and really focus our attention on growth.
So the takeaway is savings are on track, no changes other than the expense will be a little bit less.
If you go to slide 14, this is just highlighting some items from our segment performance for the third quarter.
In our diversified North America business, sales were $1.76 billion.
That is an improvement in organic sales sequentially from Q2.
It still is down 1.2% from prior year, but if you look at the adjusted operating margins, we did increase those operating margins by 190 basis points versus prior year and reached 21.9% for the quarter.
We were able to increase these margins despite that sales decline due to our disciplined cost management, those portfolio improvements we've talked about and really, margins in this segment are at a record level.
If you slide over to order rates, another positive here, they improved significantly from plus one last quarter, and they're now ending the quarter at plus 11.
Looking at the diversified industrial international sales, robust organic growth here of 11.1%.
Total sales came in at $1.39 billion, and another great story here, adjusted operating margins expanded substantially and reached 21.6%, an improvement of 400 basis points versus prior year.
Clearly, the double-digit organic growth, coupled with the cost containment and the effort from our global team really generated this level of record margin performance as well.
And again, another plus here is order rates accelerated in this segment and are now plus 14% for the quarter.
If you look at aerospace systems, they continue to really perform soundly in the current environment sales were $599 million for the quarter.
Organic sales showed a slight sequential improvement from Q2, but are still down basically 20% from prior year.
Commercial end markets are still under pressure.
However, there is strength in our military end markets.
What's nice here is operating margins were 19.4%, 30 basis points better than prior year, despite that 20% decline in volume.
And if you look at our fiscal year, that performance of 19.4% is the highest they've done all year, so we're really proud about that.
Decremental margins are also impressive here in this segment.
This quarter, they're 18% decremental margins.
Order rates appeared to have bottomed and finished at minus 19% for this quarter.
And just a reminder, that is on a rolling 12-month basis.
So overall, we're pleased about a number of things this quarter.
That diversified industrial segment, organic growth of 3.7% as a positive.
Total segment margins improved 240 basis points from prior year and at record levels.
Orders have turned positive and are plus 6% and our teams really continue to leverage the Win Strategy to drive significant improvements in our business and increased productivity and generate strong cash flow.
So with that, I'll ask you to go to slide 15.
This is just some details on our cash flow.
Year-to-date cash flow from operations is now $1.9 billion.
That's 18.1% of sales.
That's up 45% from prior year, and it is a year-to-date record.
Improved net income margin, as we've talked about before, is really a key driver in this.
It's created a step change in our cash flow generation, but I'd also like to commend our team members' intense focus on our working capital metrics.
Each of our working capital metrics is improving and showing positive results, and I'm really proud about that.
Moving to free cash flow at 16.8% of sales.
That's an increase of 630 basis points over prior year, and our free cash flow conversion is now 141%, which compares to 1.22% in the prior year, so great cash flow generation there.
Moving to slide 16, I just want to mention some things we've done on our capital deployment.
We did pay down $426 million of debt this quarter.
That brings our total debt reduction to a little over $3.2 billion in the last 17 months since the LORD acquisition closed.
This reduced our gross debt-to-EBITDA to 2.4%, it was 3.8% in the prior year, and net debt-to-EBITDA is now 2.2%, and that's down from 3.5% in the prior year.
Last week, you saw our Board of Directors approved a quarterly dividend increase of $0.15 or 17%.
This raises our quarterly dividend from $0.88 to $1.03 per share and extends our record of increasing the annual dividends paid per share to 65 consecutive years.
Have positioned us to increase our full year outlook for sales to a year-over-year increase of 4.5% at the midpoint and the breakdown of that sales change is this.
Organic sales are now expected to be flat year-over-year.
Acquisitions will add 3%, and the full year currency impact is expected to be 1.5%.
We've calculated the impact of currency to spot rates as of the quarter ended March 31 and we held those rates constant to estimate the Q4 21 impact.
Moving to segment operating margins.
Our guidance for the full year is raised to 20.8% and that would equate to an increase of 190 basis points versus prior year.
And just some additional color, some things to note.
Corporate G&A, interest and other is expected to be $381 million on an as-reported basis and $479 million on an adjusted basis.
The main difference between those two numbers is that $101 million pre-tax or $76 million after-tax gain on real estate that we recognized and adjusted in the other income line in Q2.
That's the main item.
If you look at our tax rates down just a little bit.
We're now expecting the full year tax rate to be 22.5% and moving to earnings per share on a full year basis.
Our as-reported earnings per share guidance range has increased from $12.96 to $13.26, that's $13.11 at the midpoint.
And on an adjusted basis, we're increasing the range from $14.65 to $14.95, and that's $14.80 at the midpoint.
For Q4, adjusted earnings per share is projected to be $4.18 per share, that excludes $0.54 or $93 million of acquisition-related amortization expense, the finishing of our business realignment expenses and integration cost to achieve.
If you look at slide 18, this is just a bridge of our increase -- our adjust earnings per share guidance, these results that we just reviewed you can see the outperformance that we had in Q3.
That increases our previous guide by $0.57.
The order strength that we just reviewed and really the exceptional operation and execution by our teams have allowed us to increase Q4 guide by an additional $0.33, and that is exclusively based on increased segment operating income.
This raises our full year earnings per share guide by about 6.5% from prior guide.
So we've got a highly engaged team.
You see that is what's driving our results, the ownership culture that we're building.
Record performance in difficult times, these numbers are historical all-time highs for us and not the best of times.
The convergence of positive inflection points, we feel it points to a very bright future.
And the cash generation and deployment is evidenced by the rapid debt pay down, the acquisition performance.
And our dividend increase, which I would just highlight the first time, we've ever been over at $1.03 on a quarterly dividend, which we're very proud of.
So the Win Strategy 3.0 and our purpose statement is well positioned, in addition to those inflection points for a very strong future.

user
q3 adjusted earnings per share $4.11.
sees fy earnings per share $12.96 to $13.26.
q3 sales $3.75 billion versus $3.7 billion.
sees fy adjusted earnings per share $14.65 to $14.95.
sees 2021 organic sales flat compared with prior year.

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