Good day, and thank you for standing by. Welcome to the Parker-Hannifin Corporation's fiscal 2022 first quarter earnings release conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone keypad. If you require any further assistance, please press star zero. Thank you. I would now like to hand the conference over to your first speaker today, our Chief Financial Officer, Todd Leombruno. Sir, please go ahead.
Thank you, Rachel, and good morning, everyone, and thanks for joining our FY 2022 Q1 earnings release webcast. As Rachel said, this is Todd Leombruno, our Chief Financial Officer. Joining me today is Tom Williams, our Chairman and Chief Executive Officer, and Lee Banks, our Vice Chairman and President. If I could direct you to slide two, you'll see our disclosure statement addressing our forward-looking statements and non-GAAP financial measures. As usual, we've included all reconciliations for any non-GAAP measures in today's materials. Those reconciliations and our presentation are accessible under the investor section on parker.com and will remain available for one year. The agenda is as usual. Tom is gonna begin with some highlights on the quarter. He's got a few strategic comments he'd like to add.
Then I'll follow up with a very brief financial summary of our quarter and provide some color to the details on the increase in our guidance that we released this morning. Tom will close with a few closing summary comments, and then we'll open up the lines and take your questions. Just one reminder regarding the pending Meggitt acquisition. We are still bound by the requirements of the U.K. Takeover Code in respect to discussing certain transaction details. That's just a reminder for everyone. With that, I'll ask you to move to slide three, and I'll hand it off to Tom.
Thank you, Todd, and good morning, everybody, and welcome to the call. We turned in an outstanding quarter, and it's a great start to FY 2022. My thanks to the global team for delivering such a record quarter against a backdrop of strong demand, inflation, and supply chain disruptions. A couple highlights. Safety performance continued to improve, 17% reduction in recordable incidents on a rolling twelve-month basis. Very strong growth, in particular, organic growth is 16% year-over-year. It was an extensive list of records. We had seven first-quarter records, sales, total company operating margin, net income, and EPS. In each reporting segment, all three of them had all-time operating margin records. EBITDA margin, you can see the reported number was 22.1% adjusted or 210 basis points higher than the prior year.
Then down at the bottom, last row, segment operating margin adjusted was 22.0. Again, a 210 basis points improvement versus the prior year. Just a great quarter. Very proud of the team, and thank you for your hard work. Going to slide four, there's really three things that drive the company: living up to our purpose, being great generators and deployers of cash, and being a top-quartile performer. If you go to slide five, I wanted to spend a minute. You remember our purpose statement, enabling engineering breakthroughs that lead to a better tomorrow. We've been trying to show you examples of our purpose in action, having the company come to life. One of the secular trends that the pandemic is accelerating is digitization.
In Investor Day, we're gonna highlight more via our content as you look at the whole digital supply chain. For example, things like 5G infrastructure, electronics manufacturing, clean rooms, data centers, electronic devices, the shielding and thermal management that we do there, and of course, transportation to get these products around the world. The application that I wanted to cover today is semiconductors, given especially the importance of chip demand around the world. If you go to slide six, there's gonna be a significant amount of investment, as we're all aware of, in the semiconductor space, and that's gonna drive for us double-digit growth over the next several years. We have strong expertise in semiconductor manufacturing. About a quarter of our divisions ship some kind of content into the semiconductor space.
To orient you on this slide, on the left-hand side are the applications that we go into, and the right-hand side are our technologies. For just a second on the applications, those six bullets that you see there really are made up of a combination of what we call fabs and tools. The fabs would be the infrastructure or the transportation part of the process, and the tools are the various tools that are in the factory helping to make the semiconductors. On the left-hand side is a picture of a wafer, and on the center there, that is a picture of an etch tool, a six-chamber etch tool. On the right are our technologies that we bring that create a distinct value for our customers.
First segment is process control, so think of that as precise control of gases and liquids in the process. Fluid and gas handling provides the cooling system for the tools. Electromechanical is helping with the wafer movement, and the engineering materials is doing shielding and sealing. The shielding is helping to protect the wafer from electromagnetic static issues which would destroy the chips. So we are essential to the digital supply chain. This supply chain and the related technologies and markets around digital, if you combine that, will be part of four major secular trends for the company driving long-term growth. That'll be aerospace, ESG, electrification, and digitization.
If you go to slide seven, speaking of the breadth of technologies, these eight motion control technologies, two-thirds, as you heard me talk about in the past, of our revenue come from customers who buy four or more of these technologies. Again, speaks to the interconnectedness of the technologies, the value proposition, the system and subsystem work that we do. Then coincidentally, two-thirds of our portfolio is also helping to enable our customers with their clean technology journey. That two-thirds is gonna continue to evolve to virtually 100% over time. I'll give you a classic example. The seal work that we do today on a combustion engine for transmissions or for piston seals eventually gets replaced for seals for motors and batteries in all electric vehicles.
The takeaway on the bottom here is really our brand promise, helping our customers increase their productivity and their profitability. We do that really in two ways. It's that interconnected tissue, the value proposition that we offer, and we're gonna be a big part of helping our customers on their sustainability journey as we help with our clean technologies. Go to the next slide eight, one of our favorite slides. It's gonna if you wanted to know whether Parker's really different or not, a picture is worth a thousand words. On the left-hand side is the EPS trend, and we've updated that now for our current guidance for FY 2022. You can see that's virtually a 45-degree angle there.
Tremendous amount of year-over-year improvement and 2.5x EPS growth from the $7 that we were doing in FY 2016. On the right-hand side is EBITDA margin. Again, you can see an almost 45-degree angle to that trajectory. While we don't guide on EBITDA margin, our performance in the actual quarter we just completed for EBITDA margin was 22.1%. You can see that that will continue to show the expansion we're doing on margins. The question might be how. The how is really in the header there. It's been our people, their engagement, the ownership that they're taking, the portfolio changes that we made, and then the strategy changes, Win Strategy 2.0, and now most recently, Win Strategy 3.0. If you go to slide nine, just a quick update on the Meggitt transaction.
We had a very strongly favorable shareholder vote. We're working with the U.K. government on both economic and national security reviews that are underway. The antitrust and FDI filings are proceeding as planned, and we still anticipate a Q3 calendar 2022 close. This is, as we described before, a really compelling combination, and it's gonna double the size of our aerospace business. When you couple this with the other acquisitions we've done, CLARCOR, LORD, Exotic, and now Meggitt, our portfolio is now much more long cycle, less cyclical, and faster growing. With that, I'll hand it over to Todd for more details on the quarter.
Okay. Thank you, Tom. I'll ask you to go to slide 11. I know Tom mentioned a number of these numbers, so I'll try to move quick. The quarter was fantastic, right? Seven records. Sales are up almost 17% versus prior year. We finished at $3.8 billion in sales. Organic sales are roughly 16%. It's almost all the total. Currency had a small favorable impact of less than 1%. The growth this quarter was really driven across the board, strong broad-based demand across all our industrial businesses and really a rebound in the commercial aerospace market, so we were happy to see that. As Tom mentioned, we continue to benefit from strong growth from those recent portfolio additions we did in CLARCOR, LORD, and Exotic.
Both segment operating margins and adjusted EBITDA margins expanded by 210 basis points from prior year. We're really proud of that number. That adjusted segment operating margin came in at 22% and really just another strong quarter of margin performance. Really proud of our teams, not only responding to the increased demand, but also executing through a number of various, well-documented supply chain challenges. I wanna give them credit. There was a great effort to maintain cost in the quarter, and you can see that in our results.
Incrementals are 35% year-over-year, which is really impressive, but even more impressive considering you know last year we had $125 million of discretionary savings really based on the actions we took during the pandemic. If you account for that, the difference in incrementals would be 58%. We're very proud of those results. If you look at net income, adjusted net income, and adjusted EPS, both of those numbers increased by 40% versus prior year. Adjusted net income is $557 million. That's a 14.8% return on sales. Adjusted EPS were $4.26. That's a $1.21 increase from prior year, where we finished at $3.05.
If you jump to slide 12, this is really just that breakdown of the $1.21 increase in adjusted EPS. Really the story here is just very strong, solid operating performance across every segment. Adjusted segment operating income increased by $184 million or almost 30%, from prior year. That really is the first leg in this bridge. That's $1.10 or 91% of the increase in earnings per share. All the other items netted to another $0.11 of favorable items, and interest expense, other expense, and tax were all favorable, and that helped us to offset just a slightly higher corporate G&A that was really based off of some of those temporary savings we took action with last year.
If you go to slide 13, just looking at the segments, really the takeaway on this page is every segment generated record margins in the quarter. The other big thing I wanna note is we've always talked about trying to maintain our neutral price cost position. We were able to do that in the quarter across all of the segments. I already mentioned incrementals, but I think it really highlights our efforts on covering inflation costs and really managing through these supply chain inefficiencies. 35% is the MROS, but 58% if you exclude those discretionary savings. Demand continues to be very robust. Orders for the total company are up 26% from prior year. Just still diving into the segments really quickly, Diversified Industrial North America sales were $1.8 billion.
That's up 17% from prior year. Adjusted operating margins did improve by 30 basis points from prior year and finished at 21.3%. Really sound performance in that segment, considering it's pretty clear that the supply chain challenges are more difficult in the North American region. Order rates also very healthy at 32% positive, and it's really just continuing to show a strong rebound off of those prior year comps. If I look at our international businesses in Diversified Industrial International, great quarter here for that team. Even higher organic growth, 21%, organic growth. Their sales came in just under $1.4 billion. Adjusted operating margins, significant expansion, 360 basis points improvement from prior year, and they did reach 22.8%. Very proud of that team.
Volume obviously was a big driver here, but also, we've talked about this before, our focus on international distribution that helped our mix, that continues to expand, and really some disciplined price cost management across that segment, very important drivers for the quarter. Order rates also very strong at 25% plus prior year. If we move to Aerospace Systems, fantastic quarter from that team. Sales were almost $600 million. Organic sales did turn positive for the segment, 3.4%, but it did turn positive. We were very pleased to see that commercial markets are trending up. Notably, commercial aftermarket came in very strong at 33% over prior year. So glad to see some rebound in those markets. Operating margin is a great story here, 400 basis points improvement.
That segment came in at 22.1%. You know, I just want to note it's really nice to see that level of performance. We are still well below pre-COVID volume levels. There is room to grow here as that volume returns. We're looking forward to see that as well. Order rates turned positive, +16%. That is on a 12-month rolling basis. If you remember last quarter, it was -7%. We did see an inflection to positive orders in the Aerospace segment, and that's really just further proof of a slow but steady recovery in that segment. Really thanks to all of our global team, very great execution and really just continuing to live up to our purpose and perform extremely well.
If I ask you to go to slide 14, this is just, I'll touch on cash flow. Cash flow from operations was $424 million or 11.3% of sales. Free cash flow was $376 million or 10% of sales. Our conversion for the quarter was 83%. I just want everyone to know working capital management continues to be a very strong story here. We continue to tightly manage this, and really we're just responding to the inflection and growth here. That increased level of demand, coupled with really our efforts to provide continuity of supply for our customers, drove working capital as a use of cash in the quarter. It amounted to a 3.6% use of cash in the quarter.
If you just look at that compared to prior year, you know, prior year, we were in the second quarter of a significant downturn. Today, we're in the second quarter of a significant upturn. Last year, working capital was 6.1%, source of cash last year. But just importantly, I want to be clear on this. For the full year, we are forecasting mid-teens cash flow from operations, and our free cash flow will be well over 100%. So you'll see that strong cash flow performance for us as we go throughout the year. On slide 15, just really a quick update on capital deployment. I think everyone saw this, but last week, our board approved a dividend payout of $1.03 per share. That is our 286th consecutive quarterly dividend.
That payout is in line with our announced target of 30%-35% of five-year average of net income. On share repurchases, we did purchase $50 million in the quarter through our 10b5-1 program, but we also deployed an additional $180 million to purchase shares on a discretionary basis. Essentially what that does is that discretionary purchase makes up for the three quarters that we paused the 10b5-1 program from FY 2020 Q4 through FY 2021 Q2. Our goal there is to eliminate dilution in FY 2022. I just want to give a final update on the Meggitt financing. In the quarter, we did secure a $2 billion deferred draw term loan.
That together with a $215 million cash deposit into escrow positioned us to take down our initial bridge facility. That was successful. I want to be clear here, in October, after the quarter end, we also deposited another $2.3 billion into escrow from a combination of proceeds from commercial paper issuance, and also some cash on hand. That really allowed us to further reduce that bridge to GBP 3.2 billion. Lastly, on Meggitt financing, we did complete a deal contingent forward hedge contract in the amount of $6.4 billion, and that really was just to lock in our pound-to-dollar rate as we continue to work through financing on the Meggitt acquisition. Great work by the team there.
If I go to slide 16, just looking at guidance, obviously you saw we increased our guidance this morning. As usual, we're gonna give this to you on an as-reported and an adjusted basis. The sales range now for the year is approximately 6%-9% or just under 8% at the midpoint. The breakdown of that is really all organic. It's 80.4% organic growth. We do expect currency to turn on us in Q3 through Q4, and that will create just a minimal drag, about 0.5 point to top line sales, and obviously that's gonna impact the international segment. There is no impact from acquisitions. We still do not expect Meggitt to close in our fiscal year. We're targeting Q3 of calendar year 2022.
We have no impact from Meggitt acquisition sales or segment operating income. The split on sales is 48% first half, 52% second half. If you move down to segment operating margins, we did increase our adjusted segment operating margin forecast for the full year by 30 basis points from our prior guide, and that full year now gets us to 21.9% at the midpoint. There is a range of 20 basis points on either side of that. Segment operating margin is split 47% first half, 53% in the second half. No change to adjustments at a pre-tax level, so you see all those numbers. Those are exactly the same that we guided last quarter.
In corporate G&A and other expense, we expect that to now be $513 million on an as-reported basis and $461 million on an adjusted basis. Really, the only difference there is some transaction-related costs with the Meggitt acquisition. Just a reminder, we will continue to adjust transaction-related expenses as they are incurred until we get through all of those transactions. No change to the tax rate. We expect that to be 23%, and our EPS guidance on an adjusted basis is now $17.30 at the midpoint. We did narrow the range a little bit, $0.35 on either side of that. The first half, second half split is 46% first half, 54% second half.
Then finally, I'll just say, for Q2, we are expecting adjusted EPS to be $3.74 at the midpoint. That's just a real brief summary of the quarter. With that, I will turn it back over to you, Tom, for opening comments.
Thank you, Todd. I think the first bullet kind of sums up our thoughts. A big thank you to the global team, a highly engaged team delivering outstanding performance. Couple that with this very bright future propelled by the Win Strategy 3.0 and our strategic long cycle acquisitions as part of our capital deployment strategy. With that, Todd has a quick comment that he wants to make on logistics before we start the Q&A.
Yeah, just one comment before we start the Q&A portion of the call. We'd like to respond to as many analysts as we can today on the call. If you could ask one question, a follow-up if necessary, and then jump back in the queue, it would be appreciated. With that, Rachel, I'll turn it back over to you, and we can start the Q&A session.
Thank you. As a reminder, to ask a question, you will need to press star and then the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mig Dobre from Baird. Please proceed with your question.
Good morning, Mig.
Yeah, good morning, everyone, and congrats on a very strong quarter. Tom, I guess where I was thinking we'd start, you highlighted four big trends that benefit your business, right? Aerospace, ESG, electrification, digitization. I guess the first one, aerospace, is perhaps the clearest to observe. I'm curious, the other three, can you give us some context in terms of how all of this plays into your business? How is it driving incremental growth? And more importantly, are all these items driven by sort of new product introduction from Parker? Or is this sort of using the existing solutions that you have in new ways that are helping your customer achieve these goals?
Thank you, Mig. I appreciate you picked up on that comment during my opening comments. Yeah, what I would characterize these are secular trends that, you know, feel longer than a normal business cycle. ESG is gonna take decades to unfold, electrification really being kind of a subset of that, and digitization continues to just transform how we interface with each other and how we interface with the supply chain. These are things that I view as being bigger, longer than a typical business cycle. For us, it's gonna be a combination of infrastructure, so the infrastructure that goes around the world to put these in place, things that are also on board equipment.
Both of these are bill of material plus type of additions for us, and then also the fact that this, they should be faster growing environments as a result of it. We are doing innovation in this space, but a lot of our portfolio today, which is what I mentioned on that one slide, two-thirds of it today is already clean technology related. Yes, we're adding some motors and motor controllers and software in addition to our current portfolio, but our current portfolio was already designed to be very energy source agnostic and be able to respond to these changing dynamics. We'll try to give a little more context to this in Investor Day, but we just started before the call to try to, the last couple days, quantify digital and the thread that it cuts through the company, and it's surprisingly large.
We'll give you more context on that with some actual numbers when we get to Investor Day. You know, it has an opportunity. You think of the company as being very diverse and probably knowing markets outside of Aerospace being bigger than 5% or 6%. Digital is a thread that cuts through so many. It's gonna be probably, you know, second to Aerospace, the biggest thread that cuts through the company. ESG is, you know, unfolding for the next 20, 30 years as the world tries to get to carbon neutrality. That's what I like. You've got a prior environment, you know. I'm thinking on Lee's and my watch, seven years, two industrial recessions in a pandemic. I think we're facing a much more constructive environment going forward.
Understood. My follow-up is on international, which frankly performed quite a bit better than I guessed. Two questions here. One is on the margin side, in terms of incrementals and maybe some things that might have been unique that helped the quarter. I don't know if there's anything to call out. On the order front, I'm curious as to how you're seeing the various regions develop, China in particular. I know that geography punches maybe above its weight from a profitability and margin standpoint. What are you seeing there? And what's the impact on a go-forward basis in terms of mix? Thank you.
Maybe I'll start with that mix versus Tom again on the orders. You know, they were strong throughout the quarter. To help people, it's easier to look at it from a dollar value basis. The dollar value was fairly consistent with what we saw in the prior quarter. We had nice consistency. The numbers in the 26% improvement went down from where we were in the mid-50s just because the prior period was improving. We saw all regions strong internationally. All three of the international regions were pretty much the same. You know, we reported international as 25, but all three regions underneath there were pretty much ± 25, you know, give or take some change.
On the margin side, I would say there was nothing in particular that is different other than what we've been doing all along, which was Win Strategy 2.0 and 3.0, and a rapid resizing of the company post-pandemic, and then being very careful as we moved into a higher demand of feathering costs in a very judicious type of fashion, in a much more lean and agile fashion we've had ever before because our cost structure is so much better. I do think international has less supply chain disruptions than North America for sure, and you see that reflected in camera OS.
Thank you.
Appreciate it, Mig.
Thank you. Your next question comes from the line of Jeff Sprague from Vertical Research. Your line is open.
Hey, thank you. Good morning, everyone.
Good morning, Jeff.
Hey, good morning. Tom, I was wondering if you could address a little bit, what's going on with your OE customers. The nature of my question is, you know, I thought it would be apparent maybe in the quarter that there would be some more pressures there. I'm sure there were some sales slippage and the like, but it doesn't jump off the page in the numbers, so to speak. Maybe just a, you know, a little color on what's going on with the OEs, the shape of their inventory, and just your visibility into the remainder of the year.
Yeah, Jeff. It's Tom. I'm gonna touch on customers and then a little bit about us, because what you're referring to is really supply chain issues, and those will be the two fronts that it touches, obviously. You know, with our customers, I would say the supply chain has been much more acute and a bigger issue versus our own supply chain. What we've seen with orders from customers is a much more longer period duration, staggered release dates, you know, trying to make sure they have a spot in line, so to speak. We've had pushouts on delivery acceptance, so you may have a date that it's due, and due to other challenges they have as far as supply chain with other suppliers, they may not necessarily want that delivery, which we fully understand.
They don't wanna sit on all this inventory. There's been temporary idling of plants, and this isn't really tied to the OEs, but you've got the rolling energy shutdowns that we've had and been experiencing in China, which will continue, I think, pretty much all the way to the Olympics. You know, we've done pretty well through all that. If I had to use round numbers, it's probably a $50-$75 million impact as far as the OE customers, you know, feeling supply chain things that feathered into us. I think overall demand with them continues to be strong. It's more just sliding to the right and then trying to manage a more complex supply chain.
Their inventory, they've always been just in time, and they're being very careful to not accept other inventory that they don't need, that they can't put together with holes that they might have in their bill of material.
Great. No, thanks for that. That's very interesting. On price cost, it is quite an achievement to not only get to dollar neutrality, but margin rate neutrality. I wonder if you could just give us a ballpark number of the actual realized price on a year-over-year basis that you're running at, your nominal price.
Jeff, it's Lee. I can't give you an actual number, but I'll tell you the margin neutrality is a lot of hard work by everybody in the company, and I think it shouldn't be a surprise. You know, we've had two processes embedded in our Win Strategy for going on 20 years, and that's around pricing and it's around supply chain. Those processes give us very accurate indices around our selling price index and our purchase price index.
What it does is it aligns the whole company, and it gives us a way to roll things up about what we need to do going forward. You know, what you're seeing are the benefits of those processes really embedded in the company and institutionalized.
Great. Thanks. I'll leave it there. Take care.
Okay, thanks.
Thank you. The next question comes from the line of Scott Davis from Melius Research. Please proceed with your question.
Hi, good morning, guys.
Good morning, Scott. Hope you're well.
Well, great results from you guys make our lives a little easier, so thanks for that. On now that we've had a little bit of time, not post-COVID yet, but a little bit of time, can we take stock of Lord and Exotic, kind of where they are at versus the deal models on, I imagine perhaps, maybe, not quite on the top line at your deal model, but perhaps better on the margin line. I'm just guessing. Some color there would be helpful.
Yes, Scott, it's Tom. We could not be happier with both of these transactions. LORD has proven to be more resilient and faster growing than Legacy Parker, and that's what we had hoped for. Its margins are beating what we had expected and the cash flow that we reviewed with the board. You know, it's performing in the upper 20s EBITDA, so it's accretive on growth, it's accretive on margins, accretive on cash flow, and it's exposed to longer cycle businesses. Then Exotic has performed remarkably well. Remember when we bought Exotic, nobody would have anticipated the 737 MAX being grounded for as long as it was. Even with the strength of their portfolio and that team, we put up mid-20s EBITDA.
It's a little light on the top line, mainly because of two things, the MAX grounding and the pandemic, but its margins have held up very consistent to what we had approved for the board. We know we're at the beginning of a long cycle improvement there with Exotic. The aerospace traffic is gonna come back and the MAX ramp up is coming back. You know, we've gotten through the worst of it, and it's gonna be quite an exciting transaction for us.
Yeah. Sounds good, Tom.
Scott, hey, I would offer to say, you know, CLARCOR, it's been obviously a few years, but that business is also exceeding our expectations from the model standpoint. A lot of hard work across the team, and that is, you know, flowing through in all those numbers that we just talked about. They're a big piece of that as well, so didn't want to lose sight of that.
Yeah. That was a great deal. Moving on to I love your slide six, the semiconductor example. Can you go to market as one Parker, when you're looking at content into a semi fab?
We do, Scott. We have account managers that cover certain accounts, and they're representing and looking at the entire business, and that's how we've formed. You know, we're organized operationally around technologies, but our commercial teams are organized around channels to market, either global OEMs, national OEMs, or distribution. It's that account management team that brings power Parker to the customers. If we go through our channel partners, it's our distributors that are bringing the power of Parker and bringing that comprehensive offering together.
Okay. Encouraging. Good luck the rest of the year, guys. Thank you.
Thanks, Scott.
Thank you. The next question comes from the line of Ann Duignan from JPMorgan. Please proceed with your question.
Hi. Good morning. Ann Duignan here after 20 years.
Yeah. Good morning.
Maybe first on your guidance for fiscal Q2, you're guiding to $3.74 at the midpoint, and consensus is at $3.86. Can you talk about where you think the biggest disconnect is between our sell-side models and what you're guiding to? Where should we be most focused and where do we need to review?
Yeah, it's Tom. I would say it's probably the top line. So what we try to do with Q2, and you saw that we raised the organic guide for the full year from 7%- 8.5%. That was primarily by raising the second half. Our second half in a prior guide was 4.5%, and the new guide is 6%. We left Q2 basically the same. That's really based on what we saw in Q1, and in particular in October, around just supply chain challenges, more around what I was talking about with Jeff around our customer demand and kind of the uncertainties or difficulty in predicting delivery dates and timeliness on that. You just look at the raw dollars. The dollars flow very much proportionately from Q1 to Q2.
Normally in Q2, we would have less workdays, which was what we have. In North America, typically, if you look at us over the last 20 years, our Q2 is typically 4% lighter than Q1, and international is typically 1% lighter. We lowered North America a hair more, it's -5% from a dollar standpoint versus Q1, mainly because that extra 100 basis points of some supply chain uncertainties. Part of what we're looking at is, you know, those temporary idling that customers have been doing. In particular, you know, while we haven't had any customers announce it yet, you've got the holidays, and it would be very easy for them just to extend a day or a half day or those type of things.
We're just trying to be pragmatic as to what Q2 would look like given the natural progression from Q1 to Q2, putting on a little bit of supply chain risk. I think the difference would be on the top line because the incrementals for Q2, if you look at it on an apples to apples, again, taking out the discretionary basis that we had in prior Q2, it's another upper 50s%, just like Q1. If you look at the operational excellence, upper 50s% incrementals is pretty hard to beat. Really the only difference you could have is top line assumptions. That, giving you the context of how we came up with our Q2.
Very helpful. I guess if I'd had time to back into all your first half, back half, I would have figured that out. I appreciate you taking the time to give us that color. Just as a follow-up then, if I look at your sales in Diversified Industrial North America, up 19% versus orders up 32%, which suggests that your lead times are extending. A, can you just confirm that? B, is that what gives you confidence in the back half revenues, or is there still some uncertainty?
I mean, you're not known for having long lead times, so to have confidence in the back half and make no change to your revenue outlook for half two, is some of that back half contingent on all of these supply chains getting better through the course of Q2 and off to the races thereafter? Or is there still some lack of visibility for back half for you guys? I leave it there. Thanks.
Yeah. Ann, this is Tom again. Yes, we don't always have complete visibility, but our backlog is increasing sequentially. North America went up 14%, and International went up 6%, so that's part of it. We're also just recognizing that, you know, the second half, we don't see necessarily significant improvement from supply chain. We think you'll get a little bit, but most of those supply chain improvements will be more so into our FY 2023. We have not been impacted a lot of that, but I think the difference you're seeing between orders and organic growth is what I was referring to earlier, is customers putting in orders and having it be over multi-quarters release dates. Whereas in the past, they would give us orders that were much shorter cycle.
These are longer cycle by industrial standards with release dates over multiple quarters.
Okay. That's helpful color. I appreciate that. Thank you. I'll get back in queue.
Thanks, Ann.
Thank you. Your next question comes from the line of David Raso from Evercore. Please proceed with your question.
Hi. Thank you. You know, I've obviously been covering the company for some years, and the international margins have really been impressive now running ahead of North America. You know, part of it lately maybe has been the supply chain issues are a little more acute in North America. Can you help us better understand how we should think about that notable improvement in international margins, be it geographic, be it obviously building out more Parker Stores, whatever it may be, bigger distribution there? Just trying to understand, when we think about, you say, the upcoming March meeting, and we think about margin improvement from here, it just was a major issue years ago about can international get close or equal North America? You know, now it's been many quarters in a row it's running ahead.
I'm just curious about the, you know, the drivers and how to think about that going forward. Thank you.
Yeah, David, it's Tom. We could not be happier, obviously, because this has been something the company's been working on for a long time on international margins. I would say it started a while, even before the changes to the Win Strategy, at least at my watch. It started with our team working very hard to change the cost structure in all of international, in particular in EMEA. Just recognizing that in all those different countries and different infrastructures, there was an opportunity to try to simplify that. That's been going on for multiple years, having a more agile lower cost structure.
A concerted effort to grow international distribution from where we started at 35%, you know, a 35-65 split, now up to 40, and we'll give you the latest when we get to Investor Day, but it's north of 40 now. So you're getting some mix help there. Asia's always historically been a very strong performer. We really kind of set that region up, if you think about over the last 30 years, we set that region up the latest. We took all the best practices we had from everywhere around the world, and we set that region up from a cost structure standpoint.
What's helped us a lot the last couple years is the Europe team and Latin America, Latin America being small for us, but both of those teams have made a marked improvement. When we think going forward to your other part of your question, David, we see no reason why they can't continue. You know, we'll give you new targets when we get to March. You see right now our full year guide, you know, basically North America and international origins converging. We'd always hoped that they'd be basically the same. Going forward, we don't see any reason why they can't be. They both have equal opportunity to grow to higher levels, and we'll give you that vision in March.
A quick follow-up. The back half of the year, fiscally speaking, your revenue's only up 4%, and I have to believe pricing's running probably at least that.
The idea of volume being essentially flat or down in the back half of the year, is that simply a conservatism around the supply chain? Or just trying to understand why volumes wouldn't be able to grow in the back half?
This is just for clarification, David. The back half organic is 6%. You have about a 1% currency headwind, so it probably nets to around 5%. There is some, you know, we're being what I mentioned earlier, pragmatic about the uncertainties on supply chain, more so on our customers. Then we're not immune. We have some of our own challenges, but I think our team has done a pretty good job weathering it. Probably the best evidence of our ability to weather supply chain is just our ability, the MROs. Because if you're struggling with your supply chain issues, it'll ultimately show up in your marginal return on sales. That's how I'd characterize the second half.
All right. Thank you very much.
Thanks for the questions, David.
Thank you. The next question comes from the line of Nathan Jones from Stifel. Please proceed with your question.
Good morning, everyone.
Good morning, Nathan.
Parker has, you know, over the years, continued to move towards and has always maintained a kind of local for local sourcing and manufacturing structure. Has that given you guys, you know, better supply chain here that's allowed you to pick up any market share versus, you know, competitors who might have longer supply chains? Do you think that market share gain will be sticky or transient once supply chains normalize?
Yeah, Nathan, it's Lee. Just maybe I'll touch the first part. You're right. Our strategy always has been to build and source local, which has been incredibly helpful. I think the other thing that's kind of benefited us through these disruptions, we've worked hard on dual sourcing strategy where appropriate, which has given us some flexibility. You know, one of the things that kind of has weaved itself into this are our simple by design efforts on some key areas where it's been easier for us to do material substitutions than we've done in the past. All that together is really. I'm not saying we're immune, but has made us to be able to work through these supply chain disruptions. I would say the market share that we pick up is very sticky, you know.
One, you're talking about a lot of engineered products, so I mean, when people take the effort to engineer the product in, it's not something that you quickly change. Two, the reality is if we're taking on new business, we're looking for commitments on both, you know, from both of us to be committed to the volume going forward, and to that standpoint, I think it's sticky going forward.
Thanks. My follow-up, Tom, was to one of your comments where you talked about, customers giving you, I guess, orders over multiple quarters rather than maybe orders over just one quarter. Does that have a meaningful impact on the order rates, in the quarter you've just reported, first quarter of 2022? Should we expect that to have maybe a little bit of a negative impact on the order rates as we go forward with that increased visibility that customers are giving you at the moment, or is it not a significant amount?
You know, Nathan, it's Tom. It's hard to quantify. If you take the orders and try to somehow dissect and separate all the ones that are multi-quarters, it would be hazardous and just a guess. I don't think it's material. It's just different as far as in the past, at least in industrial and normal business conditions, you know, say normal supply chains and normal order entry patterns, you know, you had a fairly consistent input/output, you know, quarter to quarter, maybe a little bit going into the next quarter. This is clearly more over multi quarters. Actually it's good. It's customers trying to plan for longer, trying to make sure they got their ducks in a row and in a way that helps us from a planning standpoint.
When things do stabilize, if they continue that way, I think that's a good thing for scheduling them, our factories and scheduling our supply chain.
Great. Thanks for taking my questions.
Thanks, Nathan. Take care.
Thank you. The next question comes from the line of Nigel Coe from Wolfe Research. Please proceed with your question.
Thanks. Good morning. Thanks for the question. Aerospace. I wonder if we could maybe unpack the OEM performance a little bit and maybe focus a little bit more on military, because that's been an area where we've seen, you know, especially in the aftermarket, some noise from some of your competitors in defense. I'm just curious how you see military over the next fiscal year compared to your prior expectations.
Yeah, Nigel, it's Tom. On military OEMs, that's one we mentioned in the last call. We do see that being slightly soft, kind of mid-single-digit% decline. That's primarily because of the repositioning that our customers thankfully did to try to strengthen the supply chain and protect the supply chain during the pandemic. They didn't want people to go under, so they kind of pulled forward demand into last fiscal year, leaving this fiscal year lighter as you're adjusting inventory. That should come back into FY 2023 and beyond. I would see that being a low- to mid-single-digit%, probably more towards a low single-digit%, growth on the military OEM side. On military MRO, we had some softness in the quarter. We're still forecasting, you know, mid-single-digit% positive for the full year.
The only weakness that we're really experiencing for the full year would be the military OEM based on the supply chain things I mentioned.
Okay, that's great. Thanks, Tom. Then you raised your margin by a point at the midpoint for Aerospace. I think the revenue number stayed unchanged. Just curious, what's changed since you gave guidance back in August?
Well, the aerospace team is doing a fantastic job. There's a couple factors, Nigel. It's Tom again. First of all, a nice commercial MRO uptick. Todd mentioned that commercial MRO up 33% for the quarter and order entry on a 312 was over 70%. You're starting to see that replenishment of commercial aftermarket, which is of the four elements, the highest margin that we would have. Within that kind of favorable mix, the spare to repair mix was favorable. At the beginning, which is typical when customers are trying to maintain assets and minimize cost, they'll do more repair work. Once that's kind of exhausted, they have to put back in spares. We've seen an uptick in spare activity.
The Aerospace team has done a great job. If you go back to the beginning of the pandemic, we moved very aggressively at the beginning to resize the business for the long cycle. What's really remarkable here is we're gonna put up these margins we're putting up to guide at 20.9% will be higher than our previous all-time high pre-COVID. This business is at 80% volume of COVID, and it's putting up margins that are higher than the best we've ever done pre-COVID. This is a fantastic job. To your point, Nigel, if you were to go compare that Aerospace performance against other Aerospace peers, I think we would do quite well with that.
Well, that raises the question of whether you can get to mid-twenties longer term, but I think we'll leave that one for March. Thanks, Tom. Go ahead, Kelvyn.
Thanks, Nigel. Take care.
Thank you. The next question comes from the line of Stephen Volkmann from Jefferies. Please proceed with your question.
Good morning, Steve.
Hi, good morning, guys. Thanks for fitting me in here. You mentioned, Tom, I think that some of your OE customers were sort of delaying some of their deliveries, certainly understandable. What are you seeing in the distribution side? Are inventories also really low there? And would they rather be building them a little if they could?
Absolutely. Steve, it's Tom. Dave, I can let Lee chime in if he has anything extra. Our distributors are finding the same challenges. When you talk to them, they would love to be building inventory. This would be a strategic use of cash for them if they could, but they're having a hard time, you know, really all of their suppliers getting up to where they'd like them to be. They're pretty much running hand to mouth. That's when I think about the longer term opportunities for us on growth here. You've got, you know, the pent-up demand and then kind of the reflex off the COVID bottom. There'll be an inventory replenishment back to normal levels for distribution, which will help us. If you go out longer than that, you've got CapEx reinvestment.
Two things there, underinvestment, and I think this whole localization has a giant burner underneath it now because of this lack of product availability, is gonna drive customers and suppliers to add capacity and to create dual capacities, which is infrastructure opportunities for us, ESG, and then just the capital deployment. I think there's a long-term secular growth trajectory. To get to your more near-term question, yes, the distributors are in desperate need of more material, and we're doing everything we can to get it to them.
Okay, great. Maybe just my quick follow-up. You know, you guys obviously did much better this quarter than I think most of us expected, and I think maybe than you even expected. Yet, for most of our companies, things actually deteriorated through the quarter. I guess I'm just curious, you know, really what changed for you from three months ago, that allowed you to kinda come in with such a strong result?
I think three months ago, you know, we're doing an annual guide, so we're careful of the annual guide, again, as Tom, as to getting too far over our skis. We try to factor in an element of uncertainties with supply chain because we were experiencing them already when we did the August guide. I think we weathered the supply chain issues better than we'd had anticipated, allow us to generate higher organic growth. Then the operating margins are, I think, indicative of really multiple years of effort. It's a combination of Win 2.0, Win 3.0, the capital deployment, buying companies that are accretive on margins and cash and growth. It's not an overnight sensation. It's really, you know, you go to that one slide that shows the EBITDA trend.
It's been building on it, and the pace of that improvement, on top of, some very quick, cost actions that we did in the pandemic. Thankfully, not a lot of those costs have come back. We've been able to run the business differently in a more digital fashion, which has clearly helped us on some of those variable costs.
Great. Thank you, guys.
Thanks, Steve. Rachel, I think we have time for at least one more question. Could you take who's next in line?
Sure. The next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.
Hey, good morning, guys.
Good morning, Jeff.
appreciate you fitting me in. I know you can't say much on the Meggitt deal, but you know, I guess I just wanna understand from your perspective, if the review process or the gating factors around getting the deal closed or the timing has changed in any way.
Jeff, it's Tom. No, not at all. We're on schedule. We had always kind of anticipated, you know, third quarter of next calendar year. The reviews we're doing with the government on economic and national security will conclude well before that. Then really the pacing item will be just the antitrust and FDI filings, which are proceeding as planned, but you just can't, you know, predict. Every country has a different process and timing, and it's difficult to predict that outcome. That's our best guess. Everything is on schedule.
Okay, great. Tom, I like the slide on the clean tech as well, you know, the two-thirds of the product enabling clean tech. I'm just wondering if you have a sense of what you think your revenue mix is today to clean tech or ESG markets and what you think that might look like, you know, three-five years out.
Jeff, it's Tom again. It's basically that two-thirds number. That's how we came up with it. Two-thirds our revenue today would be supporting clean tech. I would argue everything we do supports sustainability. If you take, say, an engine and mobile filtration that we'd be doing for heavy-duty trucks is helping that fuel run more efficiently and better emissions. We just try to be very conservative in that number, recognizing that, hey, that was still a fossil fuel-related technology. It is going to morph into 100% of the portfolio because everything. If you take construction equipment or forestry equipment, as it moves to more electric, all you're really doing is changing the power source.
You're going from, say, a reciprocating engine, diesel engine, to a hydrogen engine or a fuel cell or a battery or some combination thereof. All of our technologies are still needed to facilitate the work functions and the propulsion functions. If anything, like I had mentioned before, our bill of material gets bigger because there's much more heat, and you've got to manage all of our engineering materials, technologies. We do have, I think, a bigger bill of material that we'll have with our motion technologies. We add more motor content and more software, et cetera. So we're very excited. You know, I came back to those secular trends for us, aerospace, ESG, electrification and digitization. I think you're gonna see a different Parker if you look at it for the next five years.
Okay, thanks so much.
Thanks for the question, Jeff. All right. I think that concludes our FY 2022 Q1 earnings webcast. Thank you to everyone for joining us today. As usual, Robin and Jeff are gonna be here for follow-ups if anyone needs any. I wish everyone has a great remainder of the day. Thanks again.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.