Applied Industrial Technologies (NYSE:AIT) reported fiscal 2026 second-quarter results that management said were in line with guidance despite a higher-than-expected LIFO expense and softer-than-normal sales activity in December. Executives pointed to improving order trends, expanding backlogs and sales funnels, and early third-quarter momentum as factors supporting a stronger sales trajectory into calendar 2026.
Quarterly results and sales trends
Consolidated sales rose 8.4% year over year in the quarter, including a 6-point benefit from acquisitions and a 20-basis-point tailwind from foreign currency translation. On an organic basis, sales increased 2.2%.
In early fiscal third quarter, the company said organic sales month-to-date in January were trending up by a mid-single-digit percentage year over year, with continued positive booking momentum in both segments.
Margins pressured by higher LIFO expense, but underlying performance improved
Gross margin was 30.4%, down 19 basis points from 30.6% in the prior-year quarter. CFO Dave Wells said LIFO expense totaled $6.9 million, above the company’s expectations and up from $0.7 million a year earlier, creating a 54-basis-point year-over-year drag on gross margin. Wells said the LIFO increase reflected broader product inflation and supplier price increases, as well as the company’s decision to increase inventory investment based on its outlook and “firming demand” developing across the business.
Excluding LIFO, gross margin was 31%, up 34 basis points year over year, which management attributed to countermeasures including managing supplier price increases, channel execution, margin initiatives, and favorable mix tied to the Hydradyne acquisition and stronger growth in local accounts.
Selling, distribution and administrative expenses increased 11.1% year over year; on an organic constant-currency basis, SD&A rose 1.4% versus 2.2% organic sales growth, as inflation and growth investments were balanced by cost control and productivity initiatives.
Reported EBITDA increased 3.9% year over year, with EBITDA margin of 12.1% compared to 12.6% a year ago. Wells said the EBITDA margin result was within the company’s guidance range of 12% to 12.3% despite LIFO running 15 to 25 basis points worse than expected. Earnings per share were $2.51, up from $2.39, benefiting from a lower tax rate and reduced share count, partially offset by higher net interest and other expense.
Segment performance and order momentum
In the Service Center segment, organic sales increased 2.9% year over year (excluding a 30-basis-point FX benefit). Wells said the increase was primarily driven by price, with volumes relatively unchanged due to a slow December and lower international shipments. U.S. operations grew more than 4%, supported by gains in both national and local accounts and favorable demand across several end markets, along with sales force investments and cross-selling actions. Segment EBITDA rose 2.2% year over year, though EBITDA margin slipped 14 basis points to 13.3%, reflecting LIFO headwinds.
In Engineered Solutions, sales increased 19.1% year over year, driven largely by acquisitions (18.6 points). Organic sales rose 0.5% as pricing and modest volume growth in fluid power mobile and industrial OEM customers offset lower flow control sales. Automation organic sales increased 3%, marking the third straight quarter of positive organic growth. Segment EBITDA rose 4.4%, while segment EBITDA margin fell to 14.3%, with management citing lower flow control sales, unfavorable M&A mix, and a difficult prior-year comparison following record performance in the year-ago period.
Management highlighted accelerating order activity, particularly in Engineered Solutions. Schrimsher said orders in the segment increased over 10% year over year in the quarter, which executives later clarified was on an organic basis. In Q&A, the company broke out organic order growth as:
- Automation: up 20% year over year
- Fluid power: up in the low teens (management cited 13%)
- Flow control: up in the high single digits (management cited 8%)
Management said Engineered Solutions book-to-bill was above 1 in the quarter and has been above 1 in three of the last four quarters.
Cash flow, capital allocation, and acquisitions
Operating cash flow was $99.7 million in the quarter, and free cash flow was $93.4 million, representing 98% conversion relative to net income. The company ended December with approximately $406 million of cash and net leverage of 0.3x EBITDA.
Applied announced an 11% increase in its quarterly dividend, following a 24% increase last year. The company also repurchased more than 346,000 shares for $90 million during the quarter, bringing first-half repurchases to over 550,000 shares for $143 million. In Q&A, management said roughly 700,000 shares remained under the current authorization.
The company also announced the acquisition of Thompson Industrial Supply, which management said is expected to add $20 million in annual sales and enhance Applied’s Service Center footprint in Southern California, including in-house belting and fabrication capabilities.
Schrimsher said the company continues to evaluate M&A opportunities across both segments, with priorities including expanding technical engineered solutions in automation, fluid power, and flow control, as well as selective service center bolt-ons to optimize local coverage and capabilities.
Updated outlook: higher LIFO, slightly higher organic sales expectations
Applied updated its full-year fiscal 2026 guidance, projecting EPS of $10.45 to $10.75 on sales growth of 5.5% to 7% and EBITDA margins of 12.2% to 12.4%. Previously, the company projected EPS of $10.10 to $10.85 on sales growth of 4% to 7% and EBITDA margins of 12.2% to 12.5%.
The updated outlook assumes higher LIFO expense of $24 million to $26 million (up from $14 million to $18 million), and a pricing contribution of 210 to 230 basis points for the year (up from 150 to 200 basis points). The company now expects organic sales to increase 2.5% to 4% for the year, compared with the prior outlook of 1% to 4%.
At the midpoint, management expects about 4% organic sales growth in the second half, with third-quarter organic sales up a low single-digit to mid-single-digit percentage. The company said third-quarter gross margins are expected to decline sequentially into the “low 30% range,” reflecting more normalized execution and slightly higher LIFO expense, while third-quarter EBITDA margin is expected to be 12.2% to 12.4%.
Management reiterated that macro and policy uncertainty could continue to influence customer spending and shipment timing, which may keep monthly growth variable. Executives also noted the company’s interest rate swap matures at the end of January, contributing to higher net interest expense in the second half, partially offset by a slightly lower share count and an assumed full-year tax rate of about 23%.
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.
Featured Articles
- Five stocks we like better than Applied Industrial Technologies
- How a Family Trust May Be Able To Help Preserve Your Wealth
- Do not delete, read immediately
- Refund From 1933: Trump’s Reset May Create Instant Wealth
- NEW LAW: Congress Approves Setup For Digital Dollar?
- The $100 Trillion AI Story No One Is Telling You
