Applied Industrial Technologies targets 4% to 7% sales growth in fiscal 2026 while expanding M&A activity

Earnings Call Insights: Applied Industrial Technologies (AIT) Q4 2025

MANAGEMENT VIEW

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Neil A. Schrimsher, President and CEO, highlighted that "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." Schrimsher also pointed to the strategic acquisition of Hydradyne—the company's largest M&A transaction in six years—and noted, "sales exceeded the high end of our fourth quarter guidance by 2.5% and returned to modest positive organic growth."

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Schrimsher emphasized the Engineered Solutions segment's return to organic year-over-year growth for the first time in seven quarters, driven by "double-digit organic growth across our technology vertical and mid-single-digit organic growth across our automation platform during the quarter."

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He reported, "we generated over $465 million of free cash, up 34% to a new record," and referenced continued share buybacks and a dividend increase of 24%.

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David K. Wells, CFO, stated, "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."

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Wells further remarked, "reported earnings per share of $2.80 was up 5.9% from prior year EPS of $2.64 and exceeded the high end of our guidance by nearly 5%."

OUTLOOK

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Wells provided fiscal 2026 guidance: "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%."

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He noted, "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."

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For the first quarter of fiscal 2026, Wells said, "we currently project fiscal first quarter organic daily sales to increase by a low single-digit percent over the prior year quarter. Our guidance also assumes fiscal first quarter EBITDA margins between 11.9% to 12.1%."

FINANCIAL RESULTS

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Fourth quarter consolidated sales grew 5.5% year-over-year, with organic daily sales increasing 20 basis points.

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Gross margin for the quarter was 30.6%, down 9 basis points year-over-year but up 15 basis points sequentially.

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EBITDA margin was 12.5%, with reported EBITDA at $153 million.

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Free cash flow for the fourth quarter totaled $138.2 million and $465.2 million for the full year.

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The Service Center segment saw sales decrease 0.4% year-over-year on an organic daily basis, while the Engineered Solutions segment's sales rose 20.7% over the prior year quarter, with organic daily growth of 1.8%.

Q&A

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Christopher D. Glynn, Oppenheimer: Asked about Hydradyne's sequential performance and integration costs. David K. Wells responded that "integration costs quarter-over-quarter really didn't play heavily into that improvement" and highlighted quicker realization of synergy benefits.

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Glynn inquired about break-fix MRO trends. Schrimsher replied, "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."

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Glynn questioned the outlook's prudence. Schrimsher explained, "it's taken our view of, hey, kind of the right prudent approach given some of the macro, and we believe some of those firm up as we move through these summer months."

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David John Manthey, Baird: Sought clarification on pricing contribution. Schrimsher stated, "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 150 to 200 basis points."

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Sabrina Lee Abrams, BofA Securities: Asked about Hydradyne's EBITDA contribution. Wells confirmed, "In Q4, Hydradyne contributed just over $7 million of EBITDA."

SENTIMENT ANALYSIS

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Analysts pressed for details on integration costs, pricing, and the sustainability of margin trends, showing a neutral to slightly positive tone, with ongoing curiosity about guidance prudence and growth drivers.

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Management maintained a confident and constructive stance in prepared remarks and Q&A, using language such as "we remain highly confident in our ability to execute" and "we're pleased on both, including the interaction with the teams and the cross-selling opportunities."

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Compared to the previous quarter, both analysts and management were more optimistic, with management emphasizing positive momentum and analysts focusing on details behind the guidance and recent acquisitions.

QUARTER-OVER-QUARTER COMPARISON

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Guidance shifted from a focus on cautious stability to an outlook targeting 4% to 7% total sales growth for fiscal 2026, compared to the previous quarter's more restrained projections.

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Strategic focus evolved with increased emphasis on M&A activity, particularly Hydradyne and IRIS Factory Automation, and accelerating growth initiatives.

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Analysts in both quarters remained focused on M&A integration, pricing, and margin sustainability, but the current call featured more questions about breakout growth verticals and the impact of recent legislation.

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Key metrics such as organic sales growth turned modestly positive, and management tone was slightly more bullish regarding macro recovery and structural growth drivers.

RISKS AND CONCERNS

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Management cited ongoing uncertainty around trade policy, tariffs, and interest rates as factors impacting demand visibility.

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Wells addressed higher AR provisioning as a temporary issue, expected to normalize.

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The company continues to monitor inflation and supply chain impacts, with proactive supplier engagement to manage price increases.

FINAL TAKEAWAY

Applied Industrial Technologies closed fiscal 2025 with record achievements in sales, EBITDA, and EPS, supported by strategic acquisitions and robust cash generation. Management is taking a prudent yet optimistic approach into fiscal 2026, targeting 4% to 7% sales growth and ongoing margin expansion while remaining active in M&A and capital deployment. Although macro uncertainty persists, the company points to positive order momentum, a strengthening growth pipeline, and disciplined execution as foundations for continued shareholder value creation in the year ahead.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/ait/earnings/transcripts]

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* Applied Industrial Technologies, Inc. (AIT) Q4 2025 Earnings Call Transcript [https://seekingalpha.com/article/4813735-applied-industrial-technologies-inc-ait-q4-2025-earnings-call-transcript]
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