Applied Industrial Technologies Q1 Earnings Call Highlights

Key Points

• Strong first quarter: Applied Industrial Technologies reported 7.1% organic sales growth, a 10% increase in EBITDA and 13% EPS growth. Engineered Solutions led performance, with organic sales up 14.1%, EBITDA up 24.7% and orders rising more than 30%.
• Improving demand and financial position: U.S. Service Center sales increased approximately 6%, while consolidated EBITDA margin expanded to 12.4%. The company generated $73.4 million in free cash flow, repurchased about $80 million of shares and ended the quarter with net leverage of roughly 0.3 times EBITDA.
• Guidance remains positive: Fiscal 2027 sales and EBITDA margin targets were maintained, while EPS guidance was modestly raised to $11.70–$12.20. Management expects second-quarter organic sales growth of 6%–8%, supported by October sales growth of approximately 10% month to date.

Applied Industrial Technologies NYSE: AIT reported a strong start to fiscal 2027, with first-quarter earnings and sales growth supported by demand in its Engineered Solutions business, improving U.S. Service Center activity and margin expansion.

President and Chief Executive Officer Neil Schrimsher said first-quarter EBITDA increased 10% from the prior-year period, while earnings per share rose 13%. Organic sales grew 7.1%, in line with the company’s outlook, while consolidated reported sales increased 7.6%.

“Customer activity was directionally positive throughout the quarter,” Schrimsher said, pointing to higher technical maintenance, repair and operations activity, capital spending and benefits from internal sales initiatives. U.S. organic sales rose 8%, while companywide volumes increased 5%.

Engineered Solutions Leads Growth

The Engineered Solutions segment was the company’s largest growth contributor, posting organic sales growth of 14.1% and EBITDA growth of 24.7%. Segment EBITDA margin expanded 129 basis points from a year earlier to 15.1%.

Orders in the segment increased more than 30% year over year, while backlog strengthened and book-to-bill reached its highest level in more than four years, according to Schrimsher. He said order strength was broad-based across automation, fluid power and flow control.

Automation sales rose more than 20% for the second consecutive quarter. The company cited demand for robotics, machine vision and digital technologies as customers seek to address labor constraints, safety and quality requirements, and supply-chain resiliency.

Fluid power sales increased by a high-teens percentage, driven by semiconductor and data-center markets as well as industrial and mobile original-equipment manufacturers. Fluid power backlog ended the quarter at its highest level in four years.

Flow control organic sales increased more than 6%, improving from the prior quarter. The company said it saw stronger demand in metals, utilities and energy, and technology markets, while activity in chemicals and refining began to firm.

During the question-and-answer session, Schrimsher said Engineered Solutions project delivery timelines can range from roughly 90 to 180 days, though some engineering-intensive or phased projects can take longer. He also noted that some blanket orders benefited the quarter.

Service Center Trends Improve Into October

Organic sales in the Service Center segment rose 3.5% year over year, moderating from 8% growth in the prior quarter but reflecting a more difficult comparison. U.S. Service Center organic sales increased approximately 6%, driven by firm break-fix and technical MRO activity and stronger local-account demand.

Canada and Mexico remained softer, partially offsetting U.S. gains. Those countries represent about 12% of Service Center sales. Management said it expects conditions in those regions to improve as the year progresses, based on business pipelines, easier comparisons and internal actions.

Service Center EBITDA rose 1.6%, while the segment’s EBITDA margin declined 35 basis points to 13.6%. Chief Financial Officer Dave Wells said the results were affected by higher LIFO expense and a favorable accounts-receivable provision recovery in the prior-year period. Together, those factors represented a 3.3-percentage-point headwind to year-over-year EBITDA growth and more than a 40-basis-point impact on margin.

Higher employee health-benefit costs also affected the quarter. Wells said the company expects those costs to normalize, while improving sales trends and the absence of the prior-year provisioning comparison should support better year-over-year margin trends in the second quarter.

Margins, Cash Flow and Capital Allocation

Consolidated gross margin was 30.4%, up 25 basis points from a year earlier despite a 23-basis-point year-over-year headwind from higher LIFO expense. Excluding LIFO, gross margin improved by nearly 50 basis points, helped by favorable segment and customer mix, internal margin initiatives and channel execution.

Reported EBITDA margin increased 22 basis points to 12.4%. Wells said selling, distribution and administrative expense as a percentage of sales improved 12 basis points to 19.3%, as the company pursued efficiency initiatives related to technology, shared services and sales productivity.

First-quarter operating cash flow totaled $86.4 million, while free cash flow was $73.4 million. The company ended September with $112 million of cash and net leverage of roughly 0.3 times EBITDA. It repurchased more than 245,000 shares for approximately $80 million during the quarter.

Schrimsher said acquisitions remain a leading capital-allocation priority, with an active pipeline that includes several midsize targets across both operating segments. The company said it has substantial liquidity to fund acquisitions, dividend growth and share repurchases.

Guidance Maintained as EPS Range Rises

Applied maintained its fiscal 2027 sales outlook for growth of 4% to 6.5% and its EBITDA margin forecast of 12.5% to 12.8%. The company continues to expect pricing to contribute 150 to 200 basis points to annual sales growth.

The company modestly raised its EPS guidance to $11.70 to $12.20, from a previous range of $11.65 to $12.15, reflecting the reduced diluted share count following first-quarter buybacks.

For the fiscal second quarter, management expects organic sales growth of 6% to 8%, gross margins to be stable to slightly higher sequentially, and EBITDA margin of 12.3% to 12.5%. October organic sales were up about 10% month to date, Schrimsher said, though the company noted that comparisons become roughly 200 basis points more difficult on average in November and December.

Management said it remains cautious because of geopolitical, interest-rate and trade-policy uncertainty, along with potential seasonal variability in customer production schedules and project timing. Still, Schrimsher said the company remains “positively biased” given current demand, its market position and continued investment in automation, technical MRO and advanced industrial systems.

About Applied Industrial Technologies (NYSE:AIT)

Applied Industrial Technologies, Inc NYSE: AIT is a distributor and value-added service provider of industrial motion, power transmission, fluid power, automation, and control products. Its offerings include bearings, mechanical power-transmission components, motors, gearboxes, hydraulic and pneumatic equipment, industrial hoses, process pumps, safety products, and related maintenance supplies.

The company also provides technical and engineering services designed to help customers improve equipment performance, reliability, and productivity.

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