Applied Industrial Technologies Q3 Earnings Call Highlights

Key Points

• Applied reported a “solid” Q3 with organic sales up 6% year‑over‑year (the strongest in >2 years), record quarterly EBITDA, EPS of $2.65, and tightened fiscal 2026 guidance to EPS $10.60–$10.75 and sales growth of 7.2%–7.7%.
• Growth was led by the Engineered Solutions segment (more than 9% organic growth), with the technology vertical now >15% of the segment and contributing ~300 basis points to growth; Service Centers also improved (4% organic growth) with cross‑selling adding >100 basis points.
• Capital deployment remained active: the company deployed >$300M YTD across buybacks, M&A and dividends, repurchased ~897,000 shares (~$236M) YTD, received board approval to repurchase up to 3 million additional shares, and finished the quarter with $172M cash and net leverage of 0.3x.

Applied Industrial Technologies NYSE: AIT reported what management called a “solid” fiscal 2026 third quarter, highlighted by the company’s strongest organic sales growth in more than two years and record quarterly EBITDA. President and CEO Neil Schrimsher said organic sales rose 6% year-over-year, improving from 2% growth in the prior quarter and landing at the high end of the company’s guidance.

Sales momentum broadened across end markets and segments

Schrimsher said growth strengthened as the quarter progressed, noting that organic sales in March were up 10% from the prior-year period. He added that average organic daily sales increased 5% sequentially, which he said was above normal seasonal patterns.

Management characterized the improvement as volume-driven, with customer spending “increasingly positive and showing signs of broadening.” Schrimsher said 17 of Applied’s top 30 end markets generated positive year-over-year sales growth, up from 15 in the second quarter. He cited strength in metals, technology, machinery, aggregates, utilities and energy, mining, and construction, offset by declines in chemicals, lumber and wood, transportation, rubber and plastics, and refining.

On the call, Schrimsher also provided additional detail on Service Center account trends. In response to an analyst question, he said local accounts were up 5% year-over-year (versus 3.5% in the second quarter) and national accounts rose 7% (versus 4% in the second quarter).

Engineered Solutions led growth as technology exposure expanded

Schrimsher said both operating segments improved, with particular strength in the Engineered Solutions segment, which posted more than 9% organic growth year-over-year. He said automation and fluid power both increased by a double-digit percent in the quarter, and that organic sales growth across flow control operations also improved.

Management highlighted continued improvement in Engineered Solutions order trends. Schrimsher said segment orders were up by a double-digit percent for the second straight quarter, with backlog and book-to-bill both increasing sequentially.

Schrimsher attributed some of the segment’s momentum to faster-moving automation sales cycles, as customers invest in brownfield applications to improve production agility and address labor constraints. He also pointed to a gradual increase in U.S. process infrastructure project activity, as well as signs of recovery in legacy industrial and mobile OEM fluid power end markets following what he described as a prolonged multi-year downturn.

Technology was another major focus. Schrimsher said the technology vertical now represents more than 15% of the Engineered Solutions segment and contributed over 300 basis points to the segment’s organic growth in the quarter. He described Applied’s solutions exposure in semiconductors—including fluid conveyance, pneumatics, robotic and mechatronic solutions tied primarily to wafer fab equipment manufacturing—along with flow control products used in material processing. In data centers, Schrimsher said Applied is seeing growing opportunities in thermal management applications through engineered assemblies, as well as robotics and machine vision solutions that automate and trace material handling within a facility. He added that Applied’s data center service coverage was enhanced through the Hydradyne acquisition, which is supplying fluid conveyance solutions and assemblies specified in liquid cooling systems.

During Q&A, Schrimsher said flow control delivered “strong mid-single digit growth” (about 6%) in the quarter and benefited from the technology vertical, which he said contributed “really 300 basis points” to flow control. He also cited benefits in primary metals, general industry, energy, and utilities, while noting chemicals remained down year-over-year though trends were improving.

Service Center trends improved; cross-selling contributed to growth

Applied’s Service Center segment also showed stronger trends, according to Schrimsher. He said the segment delivered 4% organic sales growth in the third quarter, strengthening from the prior quarter, and that average daily sales increased about 5% sequentially on an organic basis.

Schrimsher said March organic sales were up more than 6% year-over-year, including nearly 8% in the U.S. He attributed the improvement to strengthening customer spending as higher capacity utilization drove break-fix activity and maintenance needs tied to “critical and aged production equipment.” He added that 13 of the top 15 industry verticals were up year-over-year in the U.S. service center network, compared with 10 in the prior quarter and six in the year-ago quarter.

He said Applied’s “One Applied” value proposition and sales initiatives are helping meet heightened technical MRO requirements. In response to a question about One Applied, Schrimsher described it as leveraging Applied’s service center presence and customer plant-level knowledge alongside Engineered Solutions capabilities in fluid power systems, process flow control, and discrete automation, including collaborative robots, mobile robots, vision systems for inspection, and IoT/connectivity to pull equipment performance data.

Schrimsher said cross-selling contributed more than 100 basis points to Service Center organic growth in the quarter, which he said was higher than levels in the first half of fiscal 2026.

Margins held steady amid LIFO headwinds; guidance tightened higher

CFO David Wells said consolidated sales increased 7.3% year-over-year, with acquisitions and foreign currency adding 50 and 80 basis points, respectively, resulting in 6% organic growth. Wells estimated pricing contributed about 250 basis points to year-over-year sales growth, implying volumes grew about 3.5%.

Gross margin was 30.4%, relatively unchanged from the prior year, but Wells noted higher LIFO expense of $5.6 million versus $2.2 million a year ago, which he said reduced gross margin by 27 basis points year-over-year. Selling, distribution and administrative expense rose 7.5% year-over-year; on an organic constant currency basis, SD&A was up 6%. SD&A as a percentage of sales was 19.4%, relatively unchanged year-over-year but improving about 40 basis points sequentially.

Reported EBITDA increased 6.2% year-over-year, with LIFO pressuring the growth rate by 2.3 percentage points, according to Wells. EBITDA margin was 12.3%, down 13 basis points, and Wells said LIFO negatively impacted EBITDA margin by 27 basis points. Applied posted earnings per share of $2.65, up from $2.57, with Wells noting EPS was affected by a higher tax rate and net interest expense, partially offset by a lower diluted share count. He also said results included $1.7 million, or about $0.05 per share, of non-routine discrete tax expense related to prior-year tax provision adjustments.

By segment, Wells said Service Center sales increased 4.2% year-over-year on an organic daily basis, while segment EBITDA rose 2.7% and segment EBITDA margin declined 42 basis points to 14.2%, reflecting LIFO headwinds and higher employee-related costs. Engineered Solutions sales increased 10.2% (9.3% organically), segment EBITDA rose 11.9% (about 14% excluding LIFO), and segment EBITDA margin improved 21 basis points to 14%, inclusive of a 50 basis point LIFO headwind.

Applied generated $100.1 million in operating cash flow and $95.4 million in free cash flow, which Wells said represented conversion of about 96% relative to net income. The company ended March with about $172 million in cash and net leverage of 0.3x EBITDA.

For the outlook, Wells said the company tightened full-year fiscal 2026 guidance “toward the high end” of the prior range. Applied now expects:

• EPS of $10.60 to $10.75 (previously $10.45 to $10.75)
• Sales growth of 7.2% to 7.7% (previously 5.5% to 7.0%)
• Organic sales growth of 3.8% to 4.2% (previously 2.5% to 4.0%)
• EBITDA margin of 12.3% to 12.4% (previously 12.2% to 12.4%)

For the fiscal fourth quarter, Wells guided to EPS of $2.85 to $2.96, organic sales growth of 4% to 5.5%, and EBITDA margins of 12.6% to 12.8%. He said the outlook reflects tougher comparisons in May and June and assumes some continued variability in end markets given geopolitical developments and trade policy uncertainty.

Capital deployment: buybacks, M&A focus, and new repurchase authorization

Schrimsher said Applied deployed more than $300 million year-to-date across share repurchases, M&A, and dividend growth. Wells said the company repurchased more than 346,000 shares for $93 million in the third quarter, bringing the year-to-date total to more than 897,000 shares for $236 million.

Schrimsher said M&A remains a top priority, with a focus on mid-size and smaller tuck-in acquisitions across both segments. He said he expects the next 12 to 18 months to be a more active period for Applied, citing ongoing work and engagement at various stages of the acquisition process. He also noted that since 2018, the company has closed 18 acquisitions representing more than $1 billion in acquired sales.

In addition, Schrimsher said the board approved a new authorization to repurchase up to three million shares.

Looking ahead, Schrimsher said early fourth-quarter trends were positive, with organic sales up a high single-digit percentage year-over-year month-to-date in April, while reiterating caution given macro uncertainty. He said conditions appeared increasingly consistent with “an early end market recovery beginning to take shape” following what he described as two years of deferred maintenance and capital spending.

About Applied Industrial Technologies NYSE: AIT

Applied Industrial Technologies, listed on the New York Stock Exchange under the symbol AIT, is a leading distributor of industrial products and services. The company offers a comprehensive range of bearings, power transmission components, fluid power products, industrial rubber products, and automation solutions. Through its network of distribution centers and branch locations, Applied Industrial Technologies serves diverse end markets including manufacturing, oil and gas, mining, food and beverage, and wastewater treatment.

Founded in 1923 and headquartered in Cleveland, Ohio, Applied Industrial Technologies has grown through a combination of organic expansion and strategic acquisitions.

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