Applied Industrial Q4 2025 slides: Return to organic growth with optimistic FY26 outlook

Introduction & Market Context

Applied Industrial Technologies (NYSE:AIT) presented its fiscal fourth quarter 2025 results on August 14, 2025, highlighting a return to positive organic sales growth for the first time in over a year. The industrial distributor, which specializes in motion, power, control, and automation solutions, reported that its organic daily sales increased 0.2% year-over-year, marking a significant improvement from the 3.1% decline seen in the previous quarter.

The company’s performance comes amid what management described as a "mixed" end-market environment with ongoing macro and tariff uncertainties. Despite these challenges, Applied Industrial noted that 15 of its top 30 industry verticals showed year-over-year growth in the quarter, with technology, pulp & paper, fabricated metals, food & beverage, and oil & gas leading the way.

As shown in the following chart tracking organic sales growth trends, the company has reversed a five-quarter streak of negative growth:

Quarterly Performance Highlights

For the fiscal fourth quarter ended June 30, 2025, Applied Industrial reported total sales of $1.22 billion, up 5.5% compared to the same period last year. Net income reached $107.8 million, translating to earnings per share of $2.80, a 5.9% increase year-over-year. However, EBITDA remained relatively flat at $153.0 million, down 0.3% from $153.5 million in the prior year period, with EBITDA margin contracting 73 basis points to 12.5%.

The company’s key financial metrics for the quarter are illustrated in the following charts:

Gross margin for the quarter was 30.6%, down slightly by 9 basis points compared to the prior year. Management noted that this included an unfavorable 21 basis points year-over-year impact from LIFO expense. Meanwhile, selling, distribution, and administrative expenses increased to 19.6% of sales, up from 18.7% in the prior year period.

The detailed margin breakdown shows:

Segment Analysis

Applied Industrial’s performance showed a stark contrast between its two business segments. The Service Center segment, which represents 66% of fiscal 2025 sales, saw revenues decline by 1.5% year-over-year to $779.2 million in the fourth quarter. Organic sales for this segment decreased by 0.4%, which management attributed to muted end-market demand. Segment EBITDA fell 8.3% year-over-year to $106.3 million, primarily reflecting unfavorable accounts receivable provisioning and LIFO expense.

The Service Center segment’s quarterly sales trend is illustrated below:

In contrast, the Engineered Solutions segment, representing 34% of fiscal 2025 sales, delivered strong growth with sales increasing 20.7% year-over-year to $445.5 million. Organic growth for this segment was 1.8%, driven by firming demand across key growth verticals. Segment EBITDA increased 13.5% year-over-year to $65.8 million.

The following chart shows the Engineered Solutions segment’s sales performance:

Management highlighted that the Engineered Solutions segment’s organic performance was led by automation (mid-single digit growth), flow control (low-single digit growth), and parts of fluid power. They also noted solid progress with the Hydradyne acquisition through its first six months of ownership.

Cash Flow and Capital Allocation

Applied Industrial reported strong cash generation in fiscal 2025, with fourth-quarter cash from operations of $147.0 million resulting in free cash flow of $138.2 million, up 24% year-over-year. For the full fiscal year, free cash flow reached a record $465.2 million.

The company’s free cash flow trend and net leverage ratio are shown in the following charts:

The strong cash position supported $562 million in capital deployment during fiscal 2025 (including debt reduction), representing a 124% increase compared to fiscal 2024. The company maintained a strong balance sheet with $388 million in cash on hand and a net leverage ratio of just 0.33x as of June 30, 2025.

Applied Industrial’s capital allocation priorities include organic growth through greenfield expansion, strategic acquisitions to scale the Engineered Solutions segment, debt service, opportunistic share buybacks, and consistent dividend increases. Over the past five years, the company has deployed approximately $1.1 billion in capital across these priorities.

FY26 Outlook and Guidance

Looking ahead to fiscal 2026, Applied Industrial provided an optimistic outlook, projecting total sales growth of 4-7% and organic sales growth of 1-4%. The company expects EBITDA margin to be between 12.2% and 12.5%, with diluted EPS ranging from $10.00 to $10.75.

Management noted that early trends in fiscal 2026 are encouraging, with organic daily sales estimated to be up approximately 4% year-over-year in the first quarter to date. The guidance assumes continued mixed demand conditions but incorporates price contribution to sales growth and benefits from recent acquisitions.

"F4Q25 sales and EPS exceeded expectations due to solid execution and emerging growth tailwinds," management stated in their presentation. They added that margins are "favorably positioned as growth tailwinds resurface" and that the company has "positive momentum entering FY26 considering growth initiatives and potential end-market recovery."

The company’s return to organic growth, combined with its strong cash generation and strategic investments in the higher-growth Engineered Solutions segment, positions Applied Industrial to capitalize on potential market improvements in the coming fiscal year despite ongoing macroeconomic uncertainties.

Full presentation:

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