Applied Industrial Technologies Q4 Earnings Call Highlights

Key Points

• Record fourth-quarter performance: Applied Industrial Technologies reported 10.4% sales growth, 9.7% organic growth, a 16.1% increase in EBITDA and 13.2% EPS growth to $3.17. Free cash flow reached $159.7 million, while operating leverage helped expand EBITDA margins despite higher LIFO costs.
• Engineered Solutions led segment growth: Organic sales increased 12.9%, supported by more than 20% growth in automation and stronger demand for robotics, machine vision, digital technologies and technology-related applications. Service Center sales also rose 7.9%, with EBITDA up 16.3%.
• Fiscal 2027 outlook remains positive: Management expects sales growth of 4% to 6.5%, EPS of $11.65 to $12.15 and EBITDA margins of 12.5% to 12.8%, while citing potential upside from flow-control recovery and acquisitions. The company also raised its five-year targets to $7 billion in sales and a 14% EBITDA margin.

Applied Industrial Technologies NYSE: AIT reported record fourth-quarter sales and earnings that exceeded its expectations, supported by improving industrial demand, stronger volumes and operating leverage. The company said organic sales rose 9.7% year over year, its strongest growth rate in more than three years, while reported sales increased 10.4%.

President and Chief Executive Officer Neil Schrimsher said demand strengthened through the end of the quarter, with organic sales up more than 10% in June despite tougher comparisons. He attributed the increase primarily to greater technical maintenance, repair and operations activity, capital spending, internal sales initiatives and the company’s market position.

“The quarter was underscored by organic sales growth of 10%, which was the strongest in more than three years,” Schrimsher said. He added that 20 of the company’s top 30 end markets posted year-over-year sales growth, compared with 17 in the prior quarter.

Growth was strongest in metals, technology, utilities and energy, machinery, rubber and plastics, and pulp and paper. Chemicals, lumber and wood, and transportation remained areas of decline.

Margins and Cash Flow

Reported EBITDA increased 16.1% from the prior-year quarter, and EBITDA margin expanded 64 basis points to 13.1%. Earnings per share rose 13.2% to $3.17 from $2.80 a year earlier.

Chief Financial Officer David Wells said the results included higher LIFO inventory-accounting expense. Fourth-quarter LIFO expense was $6.4 million, compared with $2.9 million a year earlier, creating a 26-basis-point year-over-year headwind to both gross margin and EBITDA margin. Excluding LIFO expense, gross margin increased modestly, according to Wells.

Gross margin was 30.4%, down 20 basis points year over year, while selling, distribution and administrative expense improved by 94 basis points as a percentage of sales to 18.6%. Wells said disciplined spending, technology investments, shared-services initiatives and sales productivity tools helped offset inflation, higher incentive costs and growth investments.

Fourth-quarter free cash flow totaled $159.7 million, up nearly 16% year over year and representing roughly 135% conversion relative to net income. For fiscal 2026, free cash flow was $461 million, down modestly from the prior year as the company increased working-capital investment to support growth. Net working capital as a percentage of sales ended the year at a six-year low, Schrimsher said.

Segment Performance

The Engineered Solutions segment led growth, with organic sales rising 12.9%. Automation sales increased more than 20%, marking the business’s strongest organic growth in more than four years, as demand increased for robotics, machine vision and digital technologies. The segment also posted high-single-digit growth in industrial and mobile fluid power operations.

Schrimsher said technology-related business, including semiconductor and data-center activity, contributed to segment performance. The technology vertical represents more than 15% of Engineered Solutions sales and includes automation, fluid power and flow-control offerings.

Engineered Solutions EBITDA increased 15.8%, while segment EBITDA margin expanded 38 basis points to 15.1%, despite a 44-basis-point LIFO headwind. Flow-control sales were comparatively muted due to a difficult prior-year comparison and softer maintenance activity in process markets.

The Service Center segment delivered 7.9% organic sales growth and 16.3% EBITDA growth. Segment EBITDA margin increased 91 basis points to 14.5%. The company cited stronger U.S. service-center volumes, growth among national strategic accounts and high-single-digit growth from small and midsize local accounts. Twenty-seven of the company’s top 30 industry verticals in its U.S. service-center network grew year over year during the quarter.

Management said Hydradyne, acquired 18 months earlier, continued to contribute to fluid-power performance. Hydradyne sales increased by a double-digit percentage in the second half of fiscal 2026, while its EBITDA margin improved by more than 200 basis points.

Fiscal 2027 Outlook and Targets

Applied issued fiscal 2027 guidance for earnings per share of $11.65 to $12.15, sales growth of 4% to 6.5%, and EBITDA margins of 12.5% to 12.8%. The outlook assumes pricing will contribute 150 to 200 basis points to sales growth and excludes contributions from future acquisitions and share repurchases.

For the fiscal first quarter, the company projected organic sales growth of 6% to 8% and EBITDA margin of 12.3% to 12.4%. Organic sales were tracking at roughly 7% through mid-August, Wells said. Management expects stronger growth in the first half of the fiscal year and more modest growth in the second half, reflecting tougher comparisons and uncertainty surrounding geopolitical developments and trade policy.

Schrimsher said the company expects potential improvement in higher-margin flow-control sales as deferred maintenance, project work and turnarounds in chemicals and refining resume. July orders in flow control were encouraging, management said, while Engineered Solutions orders were up in the mid-20% range during the month.

The company expects fiscal 2027 free cash flow to remain strong but potentially decline year over year because of additional working-capital investment and capital expenditures of $35 million to $40 million. Applied ended June with $127 million in cash, net leverage of 0.2 times EBITDA and nearly $2 billion of stated balance-sheet capacity, including revolving-credit availability and an accordion option.

Applied deployed about $425 million during fiscal 2026 on buybacks, dividends, capital expenditures and acquisitions. It repurchased 1.2 million shares for $317 million during the year, including more than 265,000 shares for $81 million in the fourth quarter, and raised its quarterly dividend by 11%.

Management also raised its intermediate financial objectives, targeting $7 billion in sales, up from its prior $5.5 billion target, and a 14% EBITDA margin, up from 13%. Schrimsher said the company believes the targets can be achieved over the next five years, depending on macroeconomic conditions, merger-and-acquisition activity and other factors.

Mergers and acquisitions remain a priority, with management evaluating opportunities across both segments. While no acquisition contribution is included in fiscal 2027 guidance, Schrimsher said the company sees a productive environment for potential bolt-on and larger transactions in automation, fluid power, flow control and service-center operations.

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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