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    AIT
    Earnings call· Jun 2026(Q4 FY26)

    APPLIED INDUSTRIAL TECHNOLOGIES Q4 FY26 earnings call AIT

    Aug 13, 2026 Source

    Executive summary

    Applied Industrial Technologies Q4 FY26 — Record Sales & Earnings Driven by Strong Organic Growth and Automation Demand

    Applied Industrial Technologies concluded Q4 FY26 with record sales and earnings, driven by robust 10% organic growth, particularly in its Engineered Solutions segment. The company leveraged strong demand, especially in automation and fluid power, to expand EBITDA margins and generate significant free cash flow. Management is optimistic about fiscal 2027, setting increased intermediate financial targets for sales and EBITDA margin, supported by an active M&A pipeline and ongoing internal initiatives.

    Highlights

    5

    • Reported record fourth quarter sales and earnings, exceeding expectations.

    • Achieved organic sales growth of 10%, the strongest in over 3 years.

    • Expanded EBITDA margins by over 60 basis points to 13.1%.

    • Engineered Solutions segment delivered 13% organic sales growth, with automation sales increasing over 20%.

    • Free cash generation increased nearly 16% over the prior year to $159.7 million in Q4.

    Concerns

    3

    • Gross margin of 30.4% was down 20 basis points compared to the prior year, impacted by $6.4 million in LIFO expense headwinds.

    • Free cash flow for fiscal 2026 was down modestly year-over-year due to greater working capital requirements.

    • Lingering inflationary pressures and ongoing economic uncertainty tied to geopolitical and trade policy dynamics.

    Guidance & targets

    10
    CategoryTargetConfidence
    Full-year FY27 EPS
    $11.65 to $12.15
    high materiality
    High
    Full-year FY27 Sales growth
    4% to 6.5%
    high materiality
    High
    Full-year FY27 EBITDA margins
    12.5% to 12.8%
    high materiality
    High
    Q1 FY27 Organic sales growth
    6% to 8%
    medium materiality
    High
    Q1 FY27 EBITDA margins
    12.3% to 12.4%
    medium materiality
    High
    Full-year FY27 Sales contribution from pricing
    150 to 200 basis points
    low materiality
    High
    Full-year FY27 LIFO expense
    $24 million to $28 million
    medium materiality
    High
    Full-year FY27 Capital expenditures
    $35 million to $40 million
    medium materiality
    High
    Intermediate Sales objective
    $7 billion
    high materiality
    High
    Intermediate EBITDA margin objective
    14%
    high materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    Service Center
    Improved organic sales driven by stronger volume across U.S. operations, favorable end market demand, internal sales initiatives, and improved volume in international operations. Favorable operating leverage, solid channel execution, and cost control offset inflationary headwinds and LIFO expense.
    EBITDA margin expansion: 91 bpsOrganic sales growth (FY26): nearly 6%EBITDA growth (FY26): 8%Organic sales growth (5-year average): 8%EBITDA growth (5-year average): 13%
    		—7.9% organicaverage daily sales up 5% sequentiallyEBITDA margin 14.5%
    Engineered Solutions
    Driven by double-digit growth in automation and fluid power, solid backlog conversion, improving end market demand, and positive technology vertical contribution (semiconductor, data centers). Muted sales growth in flow control due to difficult prior year comparison and softer MRO activity. Strong incremental margins and cost accountability.
    EBITDA margin expansion: 38 bps (inclusive of 44 bps LIFO headwind)Automation organic sales growth: over 20%Industrial and mobile fluid power sales growth: high single-digit percentTechnology vertical share of segment: over 15%Hydradyne H2 FY26 sales growth: double-digit percentHydradyne H2 FY26 EBITDA margin improvement: over 200 basis points
    		—12.9% organic—EBITDA margin 15.1%

    Operational metrics

    31
    Consolidated sales increase
    10.4%YoY
    Q4 FY26

    Includes modest tailwinds from acquisitions (30 bps) and foreign currency (40 bps).

    Organic sales growth
    9.7%YoY
    Q4 FY26

    Strongest in more than 3 years, notable improvement from 6% growth last quarter.

    Product pricing contribution to sales growth
    250YoY
    Q4 FY26

    Above guidance of 200 basis points.

    Volume growth
    7%YoY
    Q4 FY26

    Volume-driven, reflecting greater technical MRO and capital spending activity.

    Gross margin
    30.4%down 20 bps YoY
    Q4 FY26

    Excluding LIFO expense, gross margins were up modestly year-over-year.

    LIFO expense
    $6.4 millioncompared to $2.9 million in prior year Q4 and $5.6 million last quarter
    Q4 FY26

    Contributed to gross margin decline.

    SG&A expense increase
    5.1%YoY
    Q4 FY26

    Reflects disciplined spend and efficiency initiatives, offsetting inflationary headwinds and growth investments.

    SG&A expense increase (organic constant currency)
    4.3%YoY
    Q4 FY26

    As a percentage of sales, SG&A improved 94 bps YoY to 18.6%.

    Reported EBITDA increase
    16.1%YoY
    Q4 FY26

    Resulted from stronger organic sales growth, steady gross margin, and solid cost leverage.

    Reported EBITDA margin
    13.1%up 64 bps YoY
    Q4 FY26

    Primarily reflecting more favorable cost leverage on stronger sales growth.

    Reported EPS
    $3.17up 13.2% YoY from $2.80
    Q4 FY26

    Strong earnings performance.

    Free cash flow conversion
    135%
    Q4 FY26

    Relative to net income.

    Cash on hand
    $127 million
    June 30, 2026

    Balance sheet position at quarter end.

    Net leverage
    0.2x
    June 30, 2026

    Strong balance sheet position.

    Available capacity on revolving credit agreement
    $826 million
    Q4 FY26

    Provides significant financial capacity for capital deployment.

    Accordion option on revolving credit agreement
    $800 million
    Q4 FY26

    Additional capacity for capital deployment.

    Shares repurchased
    over 265,000 shares for $81 million
    Q4 FY26

    Part of capital deployment initiatives.

    Total capital deployment
    $425 million
    FY26

    Includes share buybacks, dividends, CapEx, and M&A.

    Shares repurchased
    1.2 million shares for $317 million
    FY26

    More active with share buybacks in FY26.

    Quarterly dividend increase
    11%
    FY26

    Reflects commitment to shareholder returns.

    Net working capital as % of sales
    6-year low
    end of FY26

    Optimized through ongoing initiatives and system investments.

    EBITDA growth
    14%CAGR
    past 5 years

    Historical performance highlighting strategy power.

    EPS growth
    18%CAGR
    past 5 years

    Historical performance highlighting strategy power.

    Gross margin expansion
    120
    past 5 years

    Historical performance highlighting strategy power.

    EBITDA margin expansion
    260
    past 5 years

    Historical performance highlighting strategy power.

    Incremental EBITDA margins
    mid to high-teen
    long-term target

    Targeted for mid-single-digit organic sales growth.

    Incremental EBITDA margins (excluding LIFO expense)
    over 22%
    Q4 FY26

    Demonstrates underlying operating leverage.

    Incremental EBITDA margins (reported)
    over 19%
    Q4 FY26

    Leveraging 10% sales growth into 16% EBITDA growth.

    Sales growth
    9%CAGR
    past 5 years

    Historical performance highlighting strategy power.

    Balance sheet capacity
    nearly $2 billion
    FY27

    Expected to support capital deployment initiatives.

    Interest expense
    $12 million to $13 million
    FY27

    Guidance for fiscal 2027.

    Industry KPIs

    4
    MetricValueDetails
    Daily sales rate5%%
    End market growth mixmetals, technology, utilities and energy, machinery, rubber and plastics and pulp and paper
    Market volume mro market benchmark20end markets
    Contract vs spot large customer mixNational strategic accounts

    Orderbook & backlog

    3
    Engineered Solutions segment order trendsdouble-digit percentQ4 FY26

    year-over-year increase

    Third straight quarter of double-digit increase.

    BacklogupJuly

    year-over-year, sequentially improved

    Usually flat from a seasonality standpoint, indicating strong intake.

    Book-to-billencouragingJuly

    Reflects positive order intake.

    Deals & partnerships

    1
    HydradyneFluid power operations

    Acquired 18 months ago, tremendous progress across synergy workstreams. Second half of fiscal 2026 Hydradyne sales increased by a double-digit percent year-over-year, while their EBITDA margins improved over 200 basis points.

    Risks & headwinds

    5
    Geopolitical backdrop and trade policy uncertaintyFY27

    could impact the cadence and trajectory of end market growth

    Mitigation: Considered in initial fiscal 2027 guidance; prudent approach to market growth rate assumptions.

    More difficult comparisonsH2 FY27

    most notably in the second half of the year

    Mitigation: Considered in initial fiscal 2027 guidance; assumes more modest growth rates in H2.

    Lingering inflationary pressuresFY27

    ongoing

    Mitigation: Guidance assumes ongoing inflationary pressures and growth investments.

    Higher LIFO expenseFY27

    higher in fiscal 2027 versus 2026

    Mitigation: Expected to be more modest increase in FY27 following notable increase in FY26, combined with more balanced supplier price increases.

    Greater working capital investmentFY27

    potentially trend lower year-over-year for free cash generation

    Mitigation: To support growth opportunities; free cash generation expected to remain strong but potentially lower YoY.

    What to watch in Q1 FY27

    5

    Organic Sales Growth (Q1 FY27)

    Q1 FY27
    CurrentQ4 FY26 organic sales growth of 10%; QTD August trending at 7%.
    Target6% to 8%

    Why it matters

    Verifies the company's ability to maintain strong organic growth momentum in the face of evolving market conditions and initial FY27 guidance.

    In addition, based on quarter-to-date sales trends through mid-August and our near-term outlook, we currently project fiscal first quarter organic sales to increase by 6% to 8% versus the prior year quarter.

    Q&A highlights

    8

    Inquiry about the significant increase in CapEx (almost 50% higher than average) and its drivers.

    The CapEx increase is for organic investments, including expanding the footprint in the automation business and further technology investments. It's not a single large project but a collection of opportunities focused on efficiency and organic growth.

    “No big heavy single hitters there, but just some organic investment continue to focus on both efficiencies and organic growth opportunities in the business. So stepping up as part of our capital deployment, that CapEx a bit to see some of those opportunities that we see in front of us.”

    asked by Christopher Glynn · answered by David Wells

    2 min read6 chapters

    Detailed Narrative

    01

    Strong Q4 Performance & FY26 Highlights

    Applied reported record Q4 sales and earnings, with 10% organic sales growth and 16% EBITDA growth. Fiscal 2026 demonstrated the company's operating durability and growth potential, exceeding commitments and creating value for stakeholders. The team's execution drove another year of strong results, validating the power of collective efforts and differentiated industry position.

    02

    Underlying Demand Improvement

    Underlying demand improved across both segments during Q4, with trends strengthening through June. 20 of the top 30 end markets generated positive sales growth, up from 17 last quarter. Strongest growth was seen in metals, technology, utilities, energy, machinery, rubber and plastics, and pulp and paper, partially offset by declines in chemicals, lumber and wood, and transportation.

    03

    Engineered Solutions Segment Strength

    The Engineered Solutions segment delivered 13% organic sales growth, its strongest in over 4 years. This was driven by automation (up over 20%) and high single-digit growth in industrial and mobile fluid power. The technology vertical, representing over 15% of the segment, saw favorable growth in semiconductor and data centers, with Hydradyne contributing double-digit sales growth and over 200 basis points of EBITDA margin improvement in H2 FY26.

    04

    Service Center Segment Resilience

    The Service Center segment achieved 8% organic sales growth, accelerating from 4% last quarter, with average daily sales up 5% sequentially. Growth was strongest across national strategic accounts and small/midsized local accounts, indicating a recovery in the industrial sector. The segment grew organically year-over-year every quarter in FY26, highlighting a stronger and more durable growth profile.

    05

    Capital Deployment & M&A Strategy

    Applied deployed approximately $425 million in capital in FY26, including $317 million for share buybacks (1.2 million shares) and an 11% increase in its quarterly dividend. With nearly $2 billion in balance sheet capacity, M&A remains a top priority. The company expects M&A contribution to be more meaningful to sales growth in FY27 and beyond, actively evaluating targets across both segments to enhance scale and competitive position.

    06

    Intermediate Financial Targets & Growth Catalysts

    The company increased its intermediate sales objective to $7 billion (from $5.5 billion) and EBITDA margin objective to 14% (from 13%), aiming to achieve these over the next 5 years. Key catalysts include rising technical support, industrial system upgrades, automation adoption (including physical AI), and critical infrastructure build-out across legacy and emerging customer verticals, leveraging its strong industry position and technical knowledge.

    AI-generated summary of the company’s earnings call. Not investment advice.