A note on the period: Parker-Hannifin's fiscal year ends June 30. The quarter covered by this 10-Q — the three months ended March 31, 2026 — is the company's fiscal third quarter of 2026, not a first calendar quarter. All comparisons below follow the company's own fiscal convention.
Net income fell 6.0% to $904 million even though sales rose 10.6% to $5,486 million and pretax income rose 12.5% — and the entire gap is tax. Parker paid a 3.4% effective rate in the year-ago quarter thanks to a foreign valuation allowance release, against 19.2% this time; hold the rate constant and net income would have risen roughly 12% rather than fallen. Underneath the optics, Aerospace Systems delivered a 25.2% operating margin on 15.5% sales growth while the Diversified Industrial segment gave back 52 basis points, and total backlog reached $12.5 billion. The more consequential number, though, sits in the notes: a pending $9.25 billion all-cash acquisition of Filtration Group, announced November 11, 2025, that on the disclosed purchase price would rank as the largest deal in Parker's history — ahead of the £6.3 billion (about $7.2 billion) Meggitt purchase completed September 13, 2022. Parker has already lined up $7.75 billion of committed term loans to pay for it, none of it drawn yet.
1. Consolidated Balance Sheet
1-1. Principal Asset Movements
| Item | Jun 30, 2025 ($M) | Mar 31, 2026 ($M) | Change % |
|---|---|---|---|
| Cash and cash equivalents | 467 | 476 | +1.9% |
| Trade accounts receivable, net | 2,910 | 3,161 | +8.6% |
| Inventories | 2,839 | 3,179 | +12.0% |
| Property, plant and equipment, net | 2,937 | 2,959 | +0.8% |
| Intangible assets, net | 7,374 | 7,425 | +0.7% |
| Goodwill | 10,694 | 11,096 | +3.8% |
| Total assets | 29,494 | 30,679 | +4.0% |
Source: Parker-Hannifin Form 10-Q for the quarter ended March 31, 2026, consolidated balance sheet.
Nearly the entire $1.19 billion increase in total assets is the Curtis Instruments acquisition, closed September 18, 2025 for approximately $1,065 million in total consideration ($1,014 million of cash paid net of cash acquired), which added $477 million of goodwill and $551 million of intangibles. Note that reported goodwill rose only $402 million against Curtis's $477 million contribution — currency translation and measurement-period adjustments absorbed the difference. Strip Curtis out and the balance sheet barely grew.
The item that deserves attention is inventory, up 12.0% against 7.8% nine-month sales growth. On our calculation from the balance sheet and income statement, days supply of inventory on hand moved to 88 days from 82 at June 30 and 85 a year earlier — a six-day build in nine months. Receivables tell a calmer story: days sales outstanding was 53 days, versus 51 at June 30 and 53 a year ago, so the increase there is volume, not collection slippage. Inventory is where working capital discipline loosened, and management cites higher inventory in MD&A as a partial offset within operating cash flow.
Goodwill and intangibles together are $18.5 billion against $30.7 billion of total assets — 60% of the balance sheet — a direct legacy of the Meggitt-era acquisition strategy. The company completed its fiscal 2026 annual goodwill impairment test as of January 1 and found no impairment. Property, plant and equipment was flat at $2,959 million against $4,609 million of accumulated depreciation, meaning the gross asset base is roughly 61% depreciated. Under US GAAP, that historical-cost carrying value cannot be revalued upward, so the productive capacity of Parker's plant is almost certainly understated relative to replacement value.
1-2. Debt Structure — Financial vs. Operating Liabilities
Financial debt was $9,582 million, comprising $2,813 million due within one year and $6,769 million long-term, up 3.2% from $9,285 million at June 30. The mix, however, shifted sharply: short-term obligations rose 57.1% while long-term debt fell 9.7%. Commercial paper explains the $297 million increase in total debt (to $2.1 billion from $1.8 billion); the remaining mix shift reflects long-term debt rolling into current maturities — roughly $0.7 billion of previously long-term obligations moving into the one-year bucket. In August 2025 Parker raised its revolving credit line and commercial paper program to $3.75 billion each, leaving $1.7 billion available after outstanding paper.
Operating liabilities actually shrank — trade accounts payable rose to $2,296 million (+8.0%), tracking sales, but accrued taxes fell to $233 million from $382 million, other current liabilities to $835 million from $933 million and accrued payrolls to $560 million from $587 million. Total current liabilities still rose 15.8% to $6,737 million purely because debt due within one year jumped to $2,813 million from $1,791 million (+$1,022 million), compressing working capital to $871 million from $1,131 million. The current ratio slipped to 1.13 from 1.19. That is tighter than it first appears, but for a company generating $2.6 billion of nine-month operating cash flow against a committed $3.75 billion revolver, it is a funding-mix choice rather than a liquidity constraint.
Maturity and pricing detail: the credit agreement runs to June 2028 with a one-year extension right. Senior debt is rated A- (Fitch), A3 (Moody's) and BBB+ (S&P). The debt-to-debt-plus-equity covenant ratio stood at 0.40 against a 0.65 ceiling — the single most important number in the filing for what comes next, because it defines how much room exists to fund Filtration Group.
1-3. Financing the Filtration Group Deal
The filing answers that question directly, and the answer belongs alongside the covenant. On December 10, 2025, Parker entered a 364-Day Term Loan Agreement and a Three-Year Term Loan Agreement providing senior unsecured delayed-draw term loan facilities of $5.25 billion and $2.50 billion respectively — $7.75 billion in total (the "Filtration Group Credit Facilities"), earmarked to fund a portion of the Filtration Group consideration. Borrowings would price at SOFR plus a margin, and Parker pays commitment fees on the undrawn portion until the deal closes or the commitments terminate. As of March 31, 2026, none of it had been drawn.
That matters for reading the 0.40 covenant ratio correctly: the ratio is clean today precisely because the acquisition debt is committed but not yet on the balance sheet. Layering $7.75 billion of term loans onto $9,582 million of existing debt would roughly double financial debt and push the ratio materially toward — though on the filing's own equity base still below — the 0.65 ceiling. The transaction remains subject to customary closing conditions including regulatory approvals, and is expected to close within 12 months of the November 11, 2025 announcement date. Investors should treat the current balance sheet as a pre-deal snapshot, not a steady state.
1-4. Capital Structure
Total equity rose 6.8% to $14,617 million. Retained earnings did the work, climbing $1,874 million to $23,649 million, while treasury shares deepened to $(8,975) million from $(7,495) million and accumulated other comprehensive loss widened to $(980) million from $(883) million, a period in which the nine-month foreign currency translation loss was $108 million.
Additional paid-in capital jumped to $824 million from $194 million, which looks alarming until the note explains it: $578 million of that increase is a reclassification between treasury shares and additional paid-in capital to correct the historical accounting for shares withheld for taxes on equity compensation. Management concluded the out-of-period adjustment was not material to the current or any prior period. It has no effect on total equity, cash or earnings — but it is a correction of historical accounting, and investors tracking internal control quality should log it.
The quality of this capital base is high: paid-in capital of $915 million (common stock plus APIC) against $23,649 million of retained earnings means essentially all of Parker's equity is self-generated rather than issued.
2. Consolidated Income Statement
2-1. Core Performance
| Item | Q3 FY25 ($M) | Q3 FY26 ($M) | Change % |
|---|---|---|---|
| Net sales | 4,960 | 5,486 | +10.6% |
| Gross profit | 1,830 | 2,017 | +10.2% |
| Gross margin (%) | 36.9 | 36.8 | −0.1pp |
| Segment operating income | 1,152 | 1,282 | +11.3% |
| Income before interest and other | 1,108 | 1,229 | +10.9% |
| Income before income taxes | 995 | 1,119 | +12.5% |
| Effective tax rate (%) | 3.4 | 19.2 | +15.8pp |
| Net income | 962 | 904 | −6.0% |
| Net margin (%) | 19.4 | 16.5 | −2.9pp |
| Diluted EPS ($) | 7.37 | 7.06 | −4.2% |
Source: Parker-Hannifin Form 10-Q for the quarter ended March 31, 2026, consolidated statement of income.
The reported decline in net income is an artifact. Applying the current 19.2% rate to the year-ago pretax figure of $995 million gives $804 million, against $904 million this quarter — a 12.5% increase. The prior-year rate was depressed by the release of a foreign valuation allowance; the company guides to approximately 21% for full-year fiscal 2026. Anyone comparing headline EPS across these two quarters is comparing tax accidents.
Diluted EPS fell 4.2% while net income attributable to common shareholders fell 5.9% (to $904 million from $961 million; the $962 million total above is before $1 million of noncontrolling interest). The 1.7-point difference is buybacks: diluted weighted-average shares declined to 128.0 million from 130.3 million, roughly 1.8% (per the EPS note). Repurchases cushioned the tax hit but did not offset it.
Operating leverage was unusually muted this quarter. Sales rose 10.6% and income before interest and other rose 10.9% — a drop-through ratio of just 1.03x, versus 1.78x across the nine months. Business realignment and acquisition integration charges explain much of the difference: $29 million in the Diversified Industrial segment this quarter against $13 million a year ago, with Aerospace immaterial versus $3 million. Normalizing for those charges lifts the quarterly increase to roughly 11.9%. Management expects about $15 million of further realignment charges in the Diversified Industrial segment in the remainder of fiscal 2026, and estimates the workforce actions taken in the first nine months will increase operating income by approximately one percent in fiscal 2027 while not materially affecting fiscal 2026 — a fiscal 2027 benefit, not a fiscal 2026 one.
For the nine months the distortion runs the other way and is larger. Pretax income rose only 6.2%, but that comparison carries $262 million of prior-year gains on disposal of assets and divestitures, as reported in the income statement. Excluding those, pretax income rose 15.9% — closer to the 13.8% growth in income before interest and other, which is the cleanest read on the underlying business.
2-2. Segment Performance — Where the Margin Came From
| Segment (Q3) | Sales FY25 ($M) | Sales FY26 ($M) | Sales % | Op. income FY25 ($M) | Op. income FY26 ($M) | Op. margin FY25 | Op. margin FY26 |
|---|---|---|---|---|---|---|---|
| Diversified Industrial | 3,389 | 3,672 | +8.4% | 779 | 825 | 23.0% | 22.5% |
| Aerospace Systems | 1,571 | 1,814 | +15.5% | 373 | 457 | 23.7% | 25.2% |
| Total | 4,960 | 5,486 | +10.6% | 1,152 | 1,282 | — | — |
Source: Parker-Hannifin Form 10-Q for the quarter ended March 31, 2026, segment disclosures.
The two segments moved in opposite directions. Aerospace expanded margin 145 basis points on higher volume, aftermarket profitability and cost containment, growing operating income 22.5% to $457 million — and it did so with no acquisition contribution at all, since Curtis sits entirely in Diversified Industrial. Currency added roughly $20 million (total company FX benefit of $125 million less the $105 million booked in Diversified Industrial), so organic growth was still about 14%. Across nine months the Aerospace margin gain is even starker: 25.4% against 22.9%, with operating income up 26.8% to $1,311 million. Aerospace backlog reached $8,413 million at March 31, 2026, from $7,292 million a year earlier and $7.4 billion at June 30, 2025; Diversified Industrial backlog was $4,065 million against $3,748 million — together the $12.5 billion cited above.
Diversified Industrial lost 52 basis points on unfavorable product mix, higher realignment charges, higher amortization of acquired intangibles and increased material costs, only partly offset by favorable pricing. One point that reads like a typo but is not: the nine-month Diversified Industrial margin improved, to 23.0% in FY26 from 22.5% in FY25 — the same two figures as the quarterly comparison, in the opposite order. The quarter was a single-period deterioration against a nine-month period that got better, not a trend break.
Corporate general and administrative expense rose 20.5% to $53 million, or 1.0% of sales versus 0.9%. The filing does not break out the cause at the corporate line; company-wide SG&A growth is attributed to stock-based compensation, acquisition-related expenses, R&D and intangible amortization.
3. Consolidated Cash Flow Statement
| Item (Nine months) | FY2025 ($M) | FY2026 ($M) | Change |
|---|---|---|---|
| Operating activities | 2,309 | 2,628 | +$319M |
| Investing activities | 345 | (1,239) | −$1,584M |
| Financing activities | (2,681) | (1,370) | +$1,311M |
| Capital expenditures | (304) | (286) | −$18M |
| Free cash flow | 2,005 | 2,342 | +16.8% |
| Ending cash | 409 | 476 | +$67M |
Source: Parker-Hannifin Form 10-Q for the quarter ended March 31, 2026, consolidated statement of cash flows. Free cash flow is operating cash flow less capital expenditures (a non-GAAP measure, our calculation).
Free cash flow of $2,342 million on $15,744 million of sales is a 14.9% free cash flow margin — exceptional for a manufacturer. Earnings quality improved materially: operating cash flow covered 1.03x of nine-month net income of $2,557 million this year, versus 0.89x against $2,609 million last year. Last year's sub-1.0x reading was not a red flag, however — it reflected the $253 million non-cash "gain on sale of businesses" that the cash flow statement backs out of net income. (That $253 million and the $262 million cited in the income statement discussion are different line items: the former is the cash-flow statement's gain on sale of businesses, the latter the income statement's broader gains on disposal of assets and divestitures.) This year's 1.03x is the cleaner number.
Capital expenditures ran at 1.8% of sales, below the company's own 2.0–2.5% fiscal 2026 target and its 2.0% long-term target. This is maintenance-level spending, not growth investment; Parker is buying growth rather than building it, which is consistent with the acquisition pipeline but worth watching if underinvestment persists.
The investing swing of $1.6 billion is largely explained by two items: $1,014 million of cash paid for Curtis this year, against $623 million of proceeds from sales of businesses last year (MD&A describes these as $621 million of net proceeds from the composites and fuel containment and non-core filtration divestitures). Financing was funded differently too — $323 million of net commercial paper borrowings this year versus $203 million of net repayments last year, with no comparable term-loan or note refinancing in either period. The modest gap between the $323 million cash-flow figure and the roughly $300 million change in the commercial paper balance is the usual timing and discount difference between cash-flow and balance-sheet presentation.
That last line is the one to carry forward. Parker is currently funding itself with short-dated commercial paper while sitting on $7.75 billion of undrawn, committed term loans for a deal that has not closed. The nine-month cash flow statement therefore describes a company in a holding pattern: strong cash generation, minimal capital investment, buybacks continuing, and the balance sheet deliberately kept clean ahead of the largest acquisition it has ever attempted. The fiscal fourth quarter and the Filtration Group closing — expected by November 2026 — are where that changes.
This article is journalism based on Parker-Hannifin's SEC filings and is not investment advice.