Earnings call transcript: Applied Industrial Technologies beats Q4 2025 expectations

Applied Industrial Technologies (AIT) reported its fourth-quarter earnings for 2025, surpassing market expectations with an earnings per share (EPS) of $2.80, compared to the forecasted $2.63. This represents a 6.46% surprise. The company’s revenue also exceeded projections, coming in at $1.22 billion against an anticipated $1.18 billion, marking a 3.39% surprise. Despite these positive results, AIT’s stock experienced a pre-market decline of 3.89%, with shares trading at $265, down from the previous close of $275.72. According to InvestingPro data, AIT maintains excellent financial health with an overall score of 3.29 (rated "GREAT"), supported by strong profitability and momentum metrics.

Key Takeaways

• EPS of $2.80 beat estimates by 6.46%.
• Revenue of $1.22 billion exceeded forecasts by 3.39%.
• Pre-market stock fell by 3.89% despite strong earnings.
• Gross margins surpassed 30% for the first time.
• Strategic acquisitions and innovation drive growth.

Company Performance

Applied Industrial Technologies demonstrated robust performance in Q4 2025, with a 5.5% year-over-year increase in consolidated sales. The company achieved a full-year EPS growth of 4% and expanded gross margins by nearly 50 basis points. AIT’s strategic acquisitions and investments in automation and technology verticals, such as data centers and semiconductor manufacturing, contributed to its growth.

Financial Highlights

• Revenue: $1.22 billion, up from $1.18 billion forecasted.
• Earnings per share: $2.80, above the $2.63 forecast.
• Free cash flow: $465.2 million, a 34% increase year-over-year.
• Gross margins: Expanded to over 30%.

Earnings vs. Forecast

AIT’s Q4 2025 EPS of $2.80 exceeded the forecast of $2.63, resulting in a 6.46% surprise. Revenue also surpassed expectations, with actual figures of $1.22 billion against a forecast of $1.18 billion, marking a 3.39% surprise. This positive performance contrasts with some previous quarters where results were more aligned with forecasts.

Market Reaction

Despite the earnings beat, AIT’s stock fell 3.89% in pre-market trading, priced at $265. This decline may reflect investor concerns over broader market trends or specific company challenges. The stock remains within its 52-week range of $189.18 to $282.98. InvestingPro analysis indicates the stock is trading above its Fair Value, with a P/E ratio of 27.58x relative to near-term earnings growth. For deeper insights into AIT’s valuation and 13 additional ProTips, explore the comprehensive Pro Research Report available on InvestingPro.

Outlook & Guidance

For fiscal 2026, AIT anticipates EPS between $10.00 and $10.75, with total sales expected to rise by 4-7%. The company forecasts organic sales growth of 1-4% and anticipates a pricing contribution of 150-200 basis points. AIT expects stronger performance in the second half of the year, supported by bonus depreciation incentives.

Executive Commentary

Neil Scrimcher, CEO of AIT, stated, "We believe a productive demand environment should develop as policy clarity continues to emerge." He emphasized the company’s ability to navigate various macroeconomic scenarios and its focus on accelerating growth.

Risks and Challenges

• Mixed demand in key markets, with challenges in machinery and primary metals.
• Potential macroeconomic uncertainties impacting future performance.
• Inflationary pressures requiring continued cost discipline.
• Dependence on successful integration of recent acquisitions.
• Competitive pressures in technology and industrial sectors.

Q&A

During the earnings call, analysts inquired about the performance of the Hydrodyne acquisition, which is reportedly exceeding expectations. There were also questions about the cautious outlook amid macro uncertainties and the anticipated ramp-up in pricing throughout the year.

Full transcript - Applied Industrial Technologies (AIT) Q4 2025:

Carly, Conference Operator: Welcome to the Fiscal twenty twenty five Fourth Quarter Earnings Call for Applied Industrial Technologies. My name is Carly, and I will be your conference operator for today’s call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin.

Ryan Cieslak, Director of Investor Relations and Treasury, Applied Industrial Technologies: Okay. Thanks, Carly, and good morning to everyone on the call. This morning, we issued our earnings release and supplemental investor deck detailing our fourth quarter results. Both of these documents are available in the Investor Relations section of applied.com. Before we begin, just a reminder, we’ll discuss our business outlook and make forward looking statements.

All forward looking statements are based on current expectations subject to certain risks and uncertainties, including those detailed in our SEC filings. Actual results may differ materially from those expressed in the forward looking statements. The company undertakes no obligation to update publicly or revise any forward looking statement. In addition, the conference call will use non GAAP financial measures, which are subject to the qualifications referenced in those documents. Our speakers today include Neil Scrimcher, Applied’s President and Chief Executive Officer and Dave Wells, our Chief Financial Officer.

With that, I’ll turn it over to Neil.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I’ll begin today with perspective and highlights on our results, including an update on industry conditions and expectations going forward. Dave will follow with more financial detail on the quarter’s performance and provide additional color on our fiscal twenty twenty six guidance. I’ll then close with some final thoughts.

Before I discuss our fourth quarter results, I want to take a moment to acknowledge our Applied team. I’m extremely proud of what we accomplished in fiscal twenty twenty five within a muted demand backdrop. We achieved new records for sales, EBITDA and EPS. Full year EPS growth of 4% exceeded the high end of our initial guidance. Gross margins expanded nearly 50 basis points and surpassed 30% for the first time in our history.

We also delivered another record year of cash generation that enabled meaningful capital deployment. This included the strategic acquisition of Hydrodyne, our largest M and A transaction in six years. Overall, our performance in fiscal twenty twenty five provides further evidence of our operating resiliency and value creation potential and builds on our compelling track record over the past five years. This includes compounded annual growth for EBITDA and EPS of 1422% respectively as well as gross margins and EBITDA margins expanding one hundred and thirty and three thirty basis points respectively. I’m honored to be a part of our incredible Applied team and the financial performance we continue to deliver.

Our progress in fiscal twenty twenty five ended on an encouraging note with several positive trends developing. Fourth quarter sales and EPS exceeded our expectations. Our team once again executed well against an ongoing muted end market backdrop. Sales exceeded the high end of our fourth quarter guidance by 2.5% and returned to modest positive organic growth. Underlying organic sales trends strengthened across both segments as the quarter progressed.

Average daily sales increased 4% sequentially, which was ahead of normal seasonal patterns for the first time in ten quarters. Upside compared to our expectations was primarily driven by stronger than expected Engineered Solutions segment sales, which grew organically year over year for the first time in seven quarters. The segment’s 2% organic daily sales increase was a notable improvement from mid single digit declines in recent quarters with the underlying drivers encouraging on many fronts. Our ES teams capitalized on recent order strength as well as improving demand and business development efforts across several key growth verticals. This includes double digit organic growth across our technology vertical and mid single digit organic growth across our automation platform during the quarter.

Service center segment trends were also encouraging including exceeding normal seasonal patterns for the second straight quarter and returning to positive organic growth during the month of June. M and A sales contribution was also encouraging with progress continuing to develop at Hydrodyne as well as initial contribution from our early May acquisition of Iris Factory Automation. Taken together, our fourth quarter sales performance highlights solid execution combined with emerging growth tailwinds tied to our industry position and business pipeline. As it relates to underlying end market demand, trends remained relatively mixed during the quarter, though with some positive signs developing. Year over year trends across our top 30 end markets were relatively unchanged from last quarter with 15 generating positive sales growth compared to 16 last quarter.

Declines continued across several top markets including machinery, primary metals, utility and energy, aggregates and chemicals. Consistent with prior quarters, declines were most pronounced across off highway mobile OEM verticals within our fluid power operations. This was offset by solid demand across our technology vertical, which we estimate contributed approximately 100 basis points to our consolidated organic growth rate during the quarter. Sales were also positive across pulp and paper, fabricated metals, food and beverage, and oil and gas verticals. Further capital maintenance spending started to slowly pick up during the quarter within our service center network, while project activity across various process flow markets strengthened later in the quarter.

In addition, orders in our Engineered Solutions segment increased by a high single digit percent year over year during the quarter, adding to the positive inflection we’ve seen in recent quarters. This includes positive growth in industrial and mobile OEM fluid power orders, an encouraging sign following notable headwinds in this area of our business over the past year. During fiscal twenty twenty five, reduced sales from industrial and mobile OEM fluid power customers negatively impacted our consolidated organic year over year sales growth rate by approximately 100 basis points as well as the Engineered Solutions segment organic growth rate by over 400 basis points. Overall, while end market visibility remains limited and mixed, we believe the underlying backdrop improved modestly from last quarter. In addition, based on our core indicators, including order momentum, business funnels and what we’re hearing from our customers, we believe industrial activity and customer spending behavior are starting to pick up to some degree.

It’s also important to highlight the positive impact our own initiatives and ongoing evolution are having. While our overall organic sales trends in fiscal twenty twenty five were muted, average daily sales finished the full year down a modest 2%. This was directionally in line with the midpoint of our initial guidance despite a more challenging end market backdrop that was highly influenced by persistent uncertainty tied to the U. S. Election, interest rates and eventually shifts in trade policy.

The negative impact to many of our legacy manufacturing end markets was evident as reflected in the ISM hitting one of the longest contractionary stretches as well as notable pressure we experienced in OEM and machinery related verticals. This also followed double digit organic compounded sales growth in the prior three year period. Considering this context, we believe our fiscal twenty twenty five performance showcases the more durable and differentiated growth profile we continue to shape across Applied. Of note, our Service Center segment benefited from ongoing sales force productivity initiatives, technology investments and increased cross selling momentum, which helped balance softer MRO customer spending during the year. In addition, growth investments across our flow control and fluid power operations as well as the ongoing expansion of our automation platform have diversified our end market exposure and supported our engineered solutions segment.

In particular, we benefited from encouraging growth tied to data centers, semiconductor manufacturing, new process infrastructure, advanced robotic solutions and calibration services as the year played out. This helped offset acute weakness in our legacy off highway mobile markets and drove a return to positive segment organic growth during the fourth quarter. At the same time, we continue to expand gross margins while maintaining cost discipline in fiscal twenty twenty five, which helped drive modest EBITDA and EPS growth for the year. When excluding the impact from acquisitions, we achieved 10% decremental margins on low single digit organic sales decline. This is inclusive of ongoing growth investment and inflationary pressures throughout the year.

During the fourth quarter gross margins increased sequentially and were in line with our guidance. As previously highlighted, year over year gross margin trends were impacted by a difficult prior year comparison partially reflecting a LIFO layer liquidation benefit last fourth quarter. This fourth quarter also included higher than expected AR provisioning, which held back EBITDA margins to some degree, but is expected to normalize moving forward. Fiscal twenty twenty five was also a year showcasing our cash generation and capital deployment capacity. We generated over $465,000,000 of free cash, up 34% to a new record on both an absolute basis and as a percent of sales.

Over the past three years, our business has generated 40% compounded annual free cash growth, which has culminated in meaningful capital deployment, including over $560,000,000 deployed in fiscal twenty twenty five. We accelerated capital deployment on M and A, closing four transactions in fiscal twenty twenty five, including the strategic acquisition of Hydrodyne. Sales from acquisitions contributed over 400 basis points of inorganic growth in fiscal twenty twenty five, up 100 basis points from the prior year. At the same time, we were more active with share buybacks repurchasing a total of 656,000 shares for $153,000,000 as well as increasing our quarterly dividend by 24%. We also continue to invest in technology platforms, distribution centers and growth capacity.

Overall, very compelling numbers that highlight the powerful flywheel effect of our operating model and strategy, including our consistency in generating elite levels of cash and shareholder returns long term. As it relates to the evolving tariff backdrop, we continue to work closely with our suppliers as they manage through the dynamic backdrop and the impact on supply chains. As expected, we received a greater level of price increase notifications from our suppliers during the fourth quarter. Our teams are proactively and effectively managing through this. And in short, we remain highly confident in our ability to execute as the tariff backdrop continues to evolve.

As a reminder, we have limited direct exposure to procuring products outside The U. S. We also have a strong track record of effectively managing inflation given our technical industry position, while structural mix tailwinds in various self help gross margin initiatives provide strong countermeasures. The overall price impact to our sales was limited in the fourth quarter, but we expect it to slowly increase moving forward as supplier price increases take effect. Next, I’d like to take a moment to provide some initial thoughts on our outlook as we enter fiscal twenty twenty six.

First, we’re highly focused on accelerating growth. We remain mindful of ongoing trade and interest rate policy uncertainty, which continues to impact broader demand visibility and could remain a gating factor to growth near term. That said, when we consider the underlying fundamentals beneath this on both a secular and structural basis, we believe a productive demand environment should develop as policy clarity continues to emerge. Recent U. S.

Trade agreements with several primary trading partners are a welcome development. In addition, the recent passage of tax reform legislation, including accelerated depreciation incentives and the potential for a more favorable U. S. Interest rate policy could recapitalize U. S.

Business sentiment and capital investment. While it remains early, we’re encouraged to see positive sales momentum continue into early fiscal twenty twenty six with first quarter organic sales to date up by an estimated 4% compared to prior year levels. Secular growth tailwinds also remain on firm footing. Our related exposure is high given our industry position supporting U. S.

Manufacturing and deep technical knowledge of our customers’ facilities. As macro and trade policy dynamics stabilize, we believe our customers’ capital investment decisions will be active given heightened considerations around reshoring. Technical service requirements will increase as break fix MRO activity supports aged manufacturing equipment and as customers expand industrial production infrastructure across North America. Our Service Center segment is favorably positioned to benefit from these positive tailwinds. This could be particularly evident across heavy manufacturing, machinery, mining, metals and aggregates given their break fix intensive nature as well as potential incremental demand from U.

S. Trade and pro growth policies. In addition, we expect additional benefits from technology investments, optimizing sales force productivity and new business sourcing. We’re also focused on increasing our growth with local customers through greater sales of ancillary products such as seals, material handling, fluid conveyance, chemicals, lubricants and safety as well as providing comprehensive service and repair solutions for their production assets. In addition, we’re constructive on the growth opportunities developing across our Engineered Solutions segment considering ongoing positive order momentum and investments made in recent years.

Underlying demand fundamentals are notable across key growth verticals including technology and discrete automation, which combined represent more than 25% of segment sales today. The ongoing build out of data center and semiconductor infrastructure is expanding the addressable market for our fluid conveyance, flow control and robotic solutions. We have a growing business pipeline tied to the emerging transition to electric powered fluid power systems where we expect to play a significant role giving our leading engineering capabilities and supplier relationships. Combined with required flow control infrastructure investments across The U. S, our Engineered Solutions segment is in a strong position to drive above market organic sales growth moving forward.

We also expect acquisitions to remain an important element of our growth potential and we look to build on the M and A momentum we achieved in fiscal twenty twenty five. Our pipeline is developing nicely and we expect to be active in fiscal twenty twenty six as we continue our strategic expansion. The value of our scale, broad technical solution portfolio, engineering capabilities, strategic supplier relationships and balance sheet capacity has never been stronger in our marketplace. Lastly, we’re in a strong position to further expand margins as these growth tailwinds play out. Of note, structural mix tailwinds should strengthen as sales recover across our Engineered Solutions segment and local customer accounts.

We also have ongoing opportunities tied to pricing analytics, optimizing sales processes, utilizing AI and expanding shared services, while synergy benefits from our Hydrodyne acquisition should ramp moving forward. Combined with leveraging recent growth investments and our scaling automation platform, we remain constructive on the EBITDA margin potential developing beyond our current intermediate target of 13%. At this time, I’ll turn the call over to Dave for additional detail on our results and outlook.

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: Thanks, Neil. Just another reminder before I begin, as in prior quarters, we have posted a supplemental presentation to our investor site for your additional reference. We hope that you will find this useful as we recap our most recent quarter performance and initial fiscal twenty twenty six guidance. Turning now to details of our financial performance in the quarter, consolidated sales increased 5.5% over the prior year quarter. Acquisitions contributed 6.5 points of growth which was partially offset by a negative 40 basis point impact from foreign currency translation and a negative 80 basis point impact from the difference in selling days.

Netting these factors, sales increased 20 basis points year over year on an organic daily basis compared to a 3.1 decline in the third quarter. As it relates to pricing, we estimate the contribution of product pricing on year over year sales growth was over 100 basis points for the quarter and slightly above the contribution from last quarter. Moving to consolidated gross margin performance, as highlighted on Page seven of the deck, gross margin of 30.6% was down nine basis points compared to the prior year level of 30.7%, but was directly in line with our guidance and up 15 basis points sequentially. During the quarter, we recognized LIFO expense of $2,900,000 which was up slightly from the third quarter. In the prior year fourth quarter, we recognized LIFO expense of only $300,000 which as you may recall was favorably impacted by a layer liquidation benefit.

On a net basis, this resulted in an unfavorable 21 basis point year over year impact on gross margins during the quarter, which was directly in line with our guidance. Excluding the adverse impact of LIFO, gross margins increased over the prior year reflecting positive mix contribution from our recent Hydrodyne acquisition as well as ongoing channel execution and benefits from our margin initiatives. This was partially offset by mix headwinds from lower sales across local accounts as well as tougher comps against prior year fourth quarter mix tied to higher margin solution sales. Price cost trends were relatively neutral in the quarter. As it relates to operating costs, selling, distribution and administrative expenses increased 10.5% compared to prior levels.

On an organic constant currency basis, SD and A expense was up a modest 0.3% year over year. SD and A expense included an unfavorable $4,000,000 or 2% year over year impact from higher AR provisioning. We view the AR provisioning impact as more timing related and expect it to normalize moving forward. Our provisioning requirements can fluctuate quarter to quarter based on various factors. In addition, the fourth quarter of last year included an AR provision benefit tied to recoveries achieved reflecting our ongoing working capital initiatives and collection efforts.

As further context, our DSO trends remain favorable and relatively unchanged from last year and our AR provision as a percentage of sales for fiscal twenty twenty five was at the midpoint of our recent historical range. SG and A expense this quarter also includes an unfavorable 80 basis point impact from higher deferred compensation costs compared to the prior year. As a reminder, changes in deferred compensation costs and SG and A are primarily driven by market values of investments tied to our non qualified deferred compensation plan. There is a corresponding offset to these fluctuations in other income and expense which we report below net interest and income. When normalizing for the AR provision impact and higher deferred compensation costs in the quarter, we estimate SG and A expense on an organic constant currency basis would have declined by over 2% year over year, reflecting benefits from ongoing efficiency gains and solid cost control.

Overall, encouraging sales growth trends and stable underlying gross margin performance were masked by the unfavorable prior year LIFO comparison and higher AR provisioning in the quarter. This resulted in EBITDA margin of 12.5% declining 73 basis points from the prior year level up 13.2%. This was modestly below our fourth quarter guidance of 12.6% to 12.8% primarily reflecting the higher than anticipated AR provision in the quarter which was 20 to 30 basis points unfavorable to our guidance. Normalizing AR provision and excluding the impact of LIFO, EBITDA margins would have been relatively unchanged year over year. In addition, reported EBITDA of $153,000,000 was at the high end of our guidance range reflecting stronger sales trends in the quarter.

Reported earnings per share of $2.8 was up 5.9% from prior year EPS of $2.64 and exceeded the high end of our guidance by nearly 5%. On a year over year basis, EPS benefited from a lower effective tax rate as well as a reduced share count tied to our buyback activity. This was partially offset by higher interest and other expense on a net basis. Turning now to performance by segment. As highlighted on Slides eight and nine of the presentation, sales in our Service Center segment decreased 0.4% year over year on an organic daily basis.

This excludes 30 basis points of contribution from acquisitions, a negative 80 basis points impact from the difference in selling days and a negative 60 basis point impact from foreign currency translation. The organic sales decline was primarily driven by muted MRO spending early in the quarter, particularly across our international operations. That said, the trend improved from last quarter’s organic decline of 1.6%. In addition, on a sequential basis segment sales per day increased 1.5% from the third quarter which was above normal seasonal patterns for the second straight quarter. Sales growth remained positive across our national account base partially reflecting benefits from our internal initiatives including sales force investments and cross selling actions.

Segment trends were also supported by growth across Fluid Power MRO sales and our consumable vending and VMI offerings. Segment EBITDA decreased 8.3% over the prior year, while segment EBITDA margin of 13.6% was down 100 basis points. The year over year decline primarily reflects the unfavorable AR provisioning as previously discussed, which had an approximate 300 basis point negative impact to segment EBITDA growth and a 50 basis point negative impact to segment EBITDA margin in the quarter. In addition, LIFO expense was approximately 100 basis points unfavorable to segment EBITDA growth in the quarter or 15 basis points to EBITDA margin, primarily reflecting the prior year layer liquidation benefit as previously discussed. Lastly, as highlighted earlier, higher deferred compensation costs which are reported in our Service Center segment had an unfavorable 20 basis point year over year impact to segment EBITDA margin.

On a full year basis, our Service Center segment delivered solid margin and cost control performance with operating expense per day down 1% on an organic basis and EBITDA margins up modestly against the low single digit sales decline. Within our Engineered Solutions segment, sales increased 20.7% over the prior year quarter with acquisitions contributing a positive 19.7 points of this increase. On an organic daily basis, accounting for the difference in selling days, segment sales increased 1.8% over the prior year. The prior year over year increase was primarily driven by solid growth across our Fluid Power Pneumatic and Conveyance solutions supporting the technology vertical as well as growth in our Flow Control business. In addition, organic sales in our automation operations increased by mid single digit percent over the prior year quarter.

While partially aided by easier prior year comparisons, the segment’s underlying sales performance improved noticeably with two year stack trends improving across all primary business units reflecting strong execution on recent order strength and firmer demand. The benefit from improved automation growth performance was partially offset by ongoing weakness across mobile, fluid power OEM markets, though the year over year decline eased from last quarter. Segment EBITDA increased 13.5% over the prior year reflecting impact from our Hydrodyne acquisition as well as solid cost management. Segment EBITDA margin of 14.8% was down roughly 90 basis points from prior year levels, though influenced by several dynamics. First, the prior year fourth quarter segment EBITDA margin of nearly 16% was record high and benefited from unusually strong mix tailwinds from higher engineered solutions sales.

As a reminder, Hydrodyne currently flows through at a lower EBITDA margin relative to the segment’s average. This represented a 60 basis point year over year headwind in the quarter while LIFO was unfavorable by 30 basis points over the prior year. I will note that the Hydrodyne EBITDA margin mix impact improved from last quarter with further positive direction expected moving forward as we continue to work through our integration and synergy plans. Of note, Hydrodyne’s EBITDA contribution in the quarter was up over 30% sequentially from the third quarter compared to a 12% sequential increase in sales contribution. On a full year basis, our Engineered Solutions segment delivered solid underlying margin and cost control performance in fiscal twenty twenty five.

Excluding the impact from acquisitions, segment operating expense per day was down 5% and segment EBITDA margins increased approximately 40 basis points against a 4% organic decline in average daily sales. Moving to our cash flow performance, cash generated from operating activities during the fourth quarter was $147,000,000 while free cash flow totaled $138,200,000 or 128% of net income. For the full year, we generated free cash of $465,200,000 or 118% of net income. This was up 34% reflecting more modest working capital investment compared to the prior year as well as ongoing progress with internal initiatives and our enhanced margin profile. From a balance sheet perspective, we ended June with approximately $388,000,000 of cash on hand and net leverage at 0.3 times EBITDA, which is above the prior year level of 0.2 times and down slightly from last quarter.

In summary, our balance sheet is in a solid position to support our capital deployment initiatives moving forward. Turning now to our outlook, which is detailed on Page 12 of the presentation, we are establishing full year fiscal twenty twenty six guidance including EPS in the range of $10 to $10.75 based on assumptions for total sales increasing 4% to 7% including 1% to 4% growth on an organic basis as well as EBITDA margins up 12.2% to 12.5%. Our outlook takes into consideration sales trends through mid August as well as ongoing economic uncertainty. At the midpoint of guidance, we assume ongoing tariff and interest rate uncertainty continues to impact end market demand through the first half of the year followed by more favorable underlying end market demand trends in the second half of the year. Guidance also assumes 150 to 200 basis points of year over year sales contribution from pricing as well as ongoing inflationary headwinds and growth investments.

We expect inorganic growth from completed acquisitions to contribute approximately 300 basis points to sales growth in fiscal twenty twenty six, including approximately 600 basis points in the first half, primarily reflecting two quarters of contribution from Hydrodyne, which closed at the December 2025. Guidance does not assume contribution from future acquisitions or share buybacks. In addition, based on quarter to date sales trends through mid August and prior year comparisons for the remainder of the quarter as well as ongoing trade policy uncertainty, we currently project fiscal first quarter organic daily sales to increase by low single digit percent over the prior year quarter. Our guidance also assumes fiscal first quarter EBITDA margins between 11.9% to 12.1%. From a margin and cost perspective, guidance assumes ongoing inflationary pressures and growth investments as well as $14,000,000 to $18,000,000 of LIFO expense.

We expect stronger relative year over year EBITDA margin trends in the second half of the year reflecting greater expense leveraging, Hydrodyne synergy progress and easier comparisons. Lastly, we expect free cash generation to remain strong in fiscal twenty twenty six, but to potentially trend lower year over year reflecting greater working capital investment tied to potentially stronger demand and growth opportunities. In addition, we expect ongoing organic investments supporting our strategy and technology investments with capital expenditures targeted in the 30,000,000 to $35,000,000 range for fiscal twenty twenty six. With that, I will now turn the call back over to Neil for some final comments.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: So to wrap up, fiscal twenty twenty five was another meaningful year for Applied. We executed well in a slower demand environment while positioning the company for long term success through several acquisitions and internal growth investments. The year culminated in significant capital deployment, enhancing our long term earnings power, while continuing to drive strong shareholder returns. Our market cap today exceeds $10,000,000,000 and we’ve delivered total shareholder returns that have more than doubled primary market benchmarks over the past three five years, a strong testament to the power of the Applied team and our differentiated strategy. Moving into fiscal twenty twenty six, we’re encouraged by recent sales momentum, which could accelerate given the underpinnings of various secular tailwinds and deferred customer spending the past eighteen months.

That said, we’re taking a prudent approach to our initial outlook pending greater clarity on trade policy, interest rates and broader macro conditions. Our track record shows we can manage through various macro and trade scenarios as they develop and have company specific growth and margin tailwinds that could strengthen into fiscal twenty twenty six. In addition, we expect to remain active in M and A, share buybacks and dividend growth. And lastly, our technical industry position, manufacturing domain expertise and aligned strategy provide a compelling long term growth and margin expansion opportunity as various secular and structural tailwinds continue to develop across The U. S.

Industrial economy. We believe this backdrop combined with our compounding cash generation algorithm and balance sheet capacity support double digit compounded earnings and dividend growth long term. We look forward to building on our performance in fiscal twenty twenty six and beyond as our evolution continues to unfold. With that, we’ll open up the lines for your questions.

Carly, Conference Operator: Thank you. We will now begin the question and answer session. Your first question comes from the line of Christopher Glynn with Oppenheimer.

Christopher Glynn, Analyst, Oppenheimer: Thanks. Good morning. Had a couple. Just first on Hydrodyne, talked about 12% sequential sales growth and 30% EBITDA. I don’t know if that reflected integration costs that you incurred in the third quarter that diminished in the fourth or just wanted to dimensionalize that a little bit?

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: I think it’s a combination. It’s relatively similar integration costs, I think about Q3 versus Q4, Chris. So what it really points to is the kind of leverage that we saw on the SG and A falling through to EBITDA, the stronger margin performance is obviously a contributing factor there as well as very pleased with the progress we’ve made to date in terms of quicker realization of synergy benefits. So we’re actually ahead of where we anticipated at this point in terms of synergy realization and continue to work that angle. So really all those factors combined, I’d say the integration costs quarter over quarter were really didn’t play heavily into that improvement.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: I would say as we thought about synergies going in, you know, we’ve said, you know, roughly 80% from cost and margin and as well as 20% sales opportunity. And to Dave’s point, we’re we’re pleased on both, including the interaction with the teams and the cross selling opportunities, especially in service and repair opportunities throughout that Southeast geography, as well as things that we can do in in key growth verticals around data centers and the technology segment. So pleased about the performance center start and look forward to continuing that momentum.

Christopher Glynn, Analyst, Oppenheimer: Great. And then just on the market for kind of break fix MRO and idea of any kind of pent up coming through. It sounds like you might be starting to see some of that with the national accounts, but not so much with the locals. So another thing just asking to dimensionalize a bit.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Yeah. So as we as we look at, break down the sales, they we’re we’re pleased in the last month on, local accounts being positive as well as SA in the month of July. So I think that’s a good indicator that things could be firming and build from here.

Christopher Glynn, Analyst, Oppenheimer: Okay. Great. And then just the midpoint of the year doesn’t have any acceleration versus the first quarter at all, but you do have easy comps. I know there’s

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: a little shift when you

Christopher Glynn, Analyst, Oppenheimer: get to the fourth quarter. And then the ADS halfway through the quarter really outpacing the outlook. You referenced comps. I don’t know if there’s a major kind of hockey stick in the September comp a little bit. But is there just a couple layers of prophylactic caution in there with potential month to month volatility around behaviors?

Is that how we should think about the guide?

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Yes. There is a ramp in the prior September. And I just think overall, Chris, it’s taken our our view of, hey, kind of the right prudent approach given some of the some of the macro, and we believe some of those firm up as we move through these these summer months. But, that’s what comes into our approach to have a be prudent in the guide and the outlook and specific detail we provide around the first quarter.

Christopher Glynn, Analyst, Oppenheimer: Makes a lot of sense. Thanks, Neil.

Carly, Conference Operator: Your next question comes from David Manthey with Baird.

Ryan Cieslak, Director of Investor Relations and Treasury, Applied Industrial Technologies: Thank you. Good morning,

David Manthey, Analyst, Baird: everyone. My first question is related to pricing. I think you said 100 basis points in the quarter and an expectation that that would slowly increase ahead. I’m hoping, if you didn’t, I didn’t hear it, but could you scale that more narrowly for us and talk about sort of what benefit from price is baked into the first quarter guidance and the overall 2026?

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Yes. I would say, Dave, for the first quarter, I would say to be similar. And we talked about a little over 100 basis points in the quarter. So in the first quarter, similar, but with the expectations that it ramps as we move through the year, in the perhaps a 150 to 200 basis points as we look at, at all of fiscal twenty six. And if the demand environment is strong and there’s additional, supplier inflation and increases of that, perhaps it’ll be higher than that number for ’26.

David Manthey, Analyst, Baird: Okay. Got it. And second, ES trends looking really good. You mentioned technology and automation. First question and then I’ve got one after that.

But could you give us examples of when you say technology as a vertical, could you talk about what you mean by that as an area you’re seeing growth today?

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Yeah. So that would include the data center. It would include semiconductor manufacturing in the side. So I think those would be, you know, the most significant components of that tech vertical. And we’re broadening our participation.

And so we’ve historically had a strong presence with Fluid Power. But today, we’re doing more with Fluid Conveyance, and also our automation business participates in that vertical well.

David Manthey, Analyst, Baird: Okay. And then on automation, which you said grew mid single digits, there too, I guess you sort of touched on that as saying that data center and technology are getting more applications in those verticals. But as it relates to ES overall, Are you seeing a benefit? Are people talking about this bonus depreciation is helping mainly on flow control side, which seems like a higher ticket maybe? I mean any color you can give us on that would be helpful in terms of you mentioned some of the growth tailwinds, and I’m

Ryan Cieslak, Director of Investor Relations and Treasury, Applied Industrial Technologies: just wondering if that’s one of them that you’re hearing about or or not.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: And so as we think about where the the businesses participate even in automation doing well in in some other segments, you know, be it food and beverage, life science, and pharma. I would say, yes. We have a full pipeline of projects with customers. They have great return profiles. We’ve talked about in prior quarters perhaps the approval process of those had elongated while still strong returns and our view of customers are in a very good cash position.

I think the opportunity for accelerated depreciation on those will be a further stimulus of those projects being acted and converted. So as we look out over ’26, that could be a positive development for our pipeline.

David Manthey, Analyst, Baird: Great. All right. Thanks, Neil.

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: Thank you.

Carly, Conference Operator: Your next question comes from Ken Newman with KeyBanc Capital Markets.

Ken Newman, Analyst, KeyBanc Capital Markets: Hey, good morning, guys.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Good morning.

Ken Newman, Analyst, KeyBanc Capital Markets: Good morning. So maybe the first one, Neil, just wanted to go back to the low end of the full year organic sales growth guide. I think it kind of implies that volumes at the low end are kind of assuming down 50 basis points year over year organic on what’s a pretty easy comp throughout the entire year. I guess the question is, if you’re assuming 1% or 2% of price contribution outside of maybe the timing of comps in this first quarter that you talked about, is there anything else structural that’s kind of assumed within that low end of the guide or anything that we should kind of be aware of?

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: I think again, Ken, as we think about the full range of the guide, including the low end, we just want to be prudent in the approach given still some of the uncertainty that would be out. If we think about more the midpoint, that’s going to assume some headwinds continue on the macro and the tariff environment and some of that uncertainty in the first half and then with those headwinds abating somewhat into the second half. And so that’s been more of the approach and the consideration going in.

Ken Newman, Analyst, KeyBanc Capital Markets: Okay. And then for my follow-up, maybe just help us fine tune the comments about normalizing LIFO and AR provisioning through the year by segment. Obviously, ES EBIT margins kind of took a bigger hit sequentially year over year. I think part of that was the AR provisioning and Hydrodyne mix. How should we think about segment margins implied at the midpoint of the 1Q guide and how that trends through the rest of the year?

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: Yes. Just a little bit of clarification. In terms of our Q4, the majority of that AR provisioning was more skewed to The U. S. Service centers or service centers as opposed to the engineered solutions.

Again, that’s a formal process, you know, kind of based on several variables in terms of credit ratings, you know, age balances. Don’t see anything, you know, problematic there as we we we had a couple customers that were just, you know, kind of, you know, delayed on some payments. The If you look back, I look and kind of benchmark our as I said our DSO has maintained stability. Our provisioning as a percent of sales for the year was at really the midpoint of right where we’ve been in the last five year average. So we’ve made some good progress in terms of the initiatives yielding some kind of improvements in terms of past dues and just this timing issue.

Unfortunately, have had or fortunately, I should say maybe. The lot that came back in like the first two weeks or so of July. So let’s see, we see that normalize in terms of the EBITDA margins we talked about in the service centers. They are also impacted this past quarter by that’s where the deferred comp mark to market adjustment hits and then gets offset in other income and expense. That also distorts things.

I would expect the margins to normalize as we talk about kind of as we think about 26%, the LIFO will read through proportionately. And then we’ll continue to see the mix up benefit from Hydrodyne and improvement in the drag that it is right now on the Engineered Solutions segment EBITDA margins as we continue to realize those synergy benefits which as we discussed are coming quicker than we’d anticipated. So like the, like the progress there.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Yeah. Ken, I’d just add, you know, if we think about the quarter over quarter comparison, I mean, we reflect back last fourth quarter in the engineered solutions, I mean, it was really strong, you know, 16% record high. You know, we benefited from strong mix of solutions going across. So I think that demonstrates the strong potential, you know, to Dave’s point on, Hydrodyne, we’re pleased with the progress, but he touched on or talked about the 60 basis point headwind in EBITDA margins there. So if we think about the potential around engineered solutions on the full year, you know, we we were very cost accountable and, you know, OpEx and expense, you know, down 55% into to that side, but with EBITDA margins up on lower organic daily sales of 4% in that side.

So as we see an inflection coming in growth in that opportunity, we feel like, hey, we’re well positioned.

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: And of course, that Q4 noise has really distorted some underlying stronger performance between AR provisioning, which I see getting back obviously as we move into 2026, the deferred comp noise. And like I said, that was just if you look back at last year, the quarter performance on gross margins across the business, Q4 was the only one that even started in the 30s, right? Everything else was started with less than a 3%. So at 30.7% comp in the prior year quarter, that was very challenging comp. And even with the LIFO that we rolled through this quarter versus the favorability last year, within nine basis points of that I think was a pretty good story.

Christopher Glynn, Analyst, Oppenheimer: Understood. Thanks.

Carly, Conference Operator: Your next question comes from Sabrina Abrams with Bank of America.

Sabrina Abrams, Analyst, Bank of America: Hey. Good morning, everyone.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Good morning.

Sabrina Abrams, Analyst, Bank of America: Guys have given some helpful color on Hydrodyne, but maybe I guess what I’m just gonna ask, could you disclose, I guess, Hydrodyne contribution in dollars to EBITDA in the quarter? And maybe any color from either an EBITDA or EPS standpoint, what’s in fiscal twenty six guide?

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: In Q4, Hydrodyne contributed just over $7,000,000 of EBITDA, just to help frame it up. If we all in factor in some lost interest income from financing that deal with cash on hand, about zero three dollars contribution. We had said at the time of announcing the deal, we would expect the $0.15 accretive EPS in the first twelve months. So we’re right on track there when you think about still some integration costs at play. We have not framed up necessarily, you know, kind of that impact on on ’26.

But here again, like the traction in terms of running ahead on expectations on the cost synergies as well as the, you know, kind of the the the traction that we are seeing on cross selling. So, know, I would expect it to certainly, you know, meet those first twelve months expectations as a, you know, kind of frame it up as a least a guide for you, if not potentially beat that that initial expectation we set for the first twelve months.

Sabrina Abrams, Analyst, Bank of America: Thank you. That’s super helpful. Second point, I guess, second question for me. Maybe if you could give a little color. I know there were some comment on LIFO in ’26, but maybe if you could just give some color on what is, like, the amount of LIFO expense embedded in guide in either dollars or bits.

And anything else to sort of call out as we other than, like, I guess, like, organic incrementals as we look at the fiscal twenty six margin guide?

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: Sure. We we paid LIFO at 14 to So that would kind of work across the guidance range. Obviously, that’s a function of tied to obviously the inflationary increases that we see that impact indices as well as inventory levels. So it goes part and parcel with some of the work around the kind of what’s happening in terms of pricing and inflationary impact.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: And then Sabrina, I’d say on incrementals, at the midpoint, which would be 2.5% growth. We talked about low teens incrementals, you know, that includes M and A mix coming in lower in the side, some ongoing growth investments that we’ll make in into the business. And to Dave’s point, that range of of LIFO that we laid out. More at the higher end, we’d expect mid teen incrementals of EBITDA margin on that. So, you know, we think about the outlook.

Again, we just want to be prudent in the approach. But if we consider the business incremental ex M and A and ex LIFO at the midpoint of our guidance, that’s a high teen incremental which I think talks to our views, outlook as we think about year ahead and ongoing business capabilities.

Sabrina Abrams, Analyst, Bank of America: Thank you so much, guys. I’ll pass it on.

Carly, Conference Operator: Your next question comes from Chris Dankert with Loop Capital Markets.

Chris Dankert, Analyst, Loop Capital Markets: Hey, good morning guys. Thanks for fitting me in here. I guess just to hold on ES for a second here, fourth quarter as you mentioned in the remarks, up well ahead of typical seasonality in the fourth quarter. Just wanted to ask, do you feel like there was anything pulled forward or anything one time in nature that came in the fourth quarter? Is that a fairly clean kind of growth figure you think?

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Chris, would say, hey, no big pull forward. Nice job recognizing some of that order conversion that we had in doing it. I I think as this is kinda normal as we move through to close the the fourth quarter, Sequentially, backlog would be down a little bit. Book to bill slightly below one into the side, but this year is higher than the prior year in that. And then as we look forward at the start of the year, we’re encouraged by the order rates around engineered solutions.

So we feel like we’ve got a very good pipeline to work on and execute across Fluid Power, Flow Control and our automation businesses.

Chris Dankert, Analyst, Loop Capital Markets: Got it. Super, super helpful there. I guess just a follow-up. You’d mentioned some softness in the international markets. Is that principally the Mexico market?

Is it the domestic headwinds we’ve heard about there? Or is it something else going on? And I guess does that impact kind of what you’re seeing at Grupo Copar? Any color there would be great.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: Yeah, Chris. I’d say more related maybe in in Canada. And I think there’s just a settling out of some tariff impact and what it means for flows of products, but also in country Canadian business industry of that. We feel like the business is doing a very nice job. We’re well diversified into that segment, but I’d say a little more in Canada than the other geographies.

Those headwinds did less as we moved across the quarter, which was encouraging.

Chris Dankert, Analyst, Loop Capital Markets: Glad to hear that. Well, thanks again guys and best of luck into 2026 here.

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: Thanks, Chris.

Carly, Conference Operator: Your next question comes from Ken Newman with KeyBanc Capital Markets.

Ken Newman, Analyst, KeyBanc Capital Markets: Hey, thanks for squeezing me in. I just had one quick follow-up, more higher level. Neil and Dave, just curious, what’s the thought on potentially kind of maybe adding back some of this intangible amort to the earnings power? It seems like, obviously, Hydrodynamic is pretty solid for our EBITDA despite some of the negative mix in this part of the cycle. But I wonder how much you’re maybe getting negatively comped just because some of your peers do add that back And your thoughts on potentially kind of normalizing that to make the earnings power apples to apples?

Dave Wells, Chief Financial Officer, Applied Industrial Technologies: I’d say, I think we’re pretty transparent in terms of the way we break it out. And I’d prefer to kind of maintain the approach of being consistent there and just continue to break it out. So you’ve got that visibility. I mean to your point a headline read would maybe skew things. But let’s say our focus is on continuing to improve it and make it not a talking point right.

I think we’re hard at work at that with the synergy realization we’ve seen and driving that cross selling. Understood. Thanks.

Carly, Conference Operator: At this time, I’m showing we have no further questions. I’ll now turn the call back over to Mr. Skrimsher for any closing remarks.

Neil Scrimcher, President and Chief Executive Officer, Applied Industrial Technologies: I just want to thank everyone for being with us today. We look forward to talking with you throughout the quarter. Thank you.

Carly, Conference Operator: Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for You may now disconnect.

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