Applied Industrial Technologies' Q1 2026: Contradictions Emerge on Pricing Contributions, EBITDA Margin Improvements, Tariff Impacts, Order Conversion, and Engineered Solutions Growth

Date of Call: October 28, 2025

Financials Results

• Revenue: Consolidated sales up 9.2% YOY; organic sales up 3.0% (acquisitions contributed ~6.3 pts; FX -10 bps)
• EPS: $2.63 per diluted share, up 11.4% YOY (prior $2.36)
• Gross Margin: 30.1%, up 55 bps YOY (prior 29.6%); included LIFO expense of $2.6M (unfavorable ~5 bps)
• Operating Margin: EBITDA margin 12.2%, up 46 bps YOY (prior 11.7%); above Q1 guidance high end (11.9%–12.1%)

Guidance:

• Raised FY26 EPS to $10.10–$10.85 (prior $10.00–$10.75).
• Maintained sales guidance of ~4%–7% (organic ~1%–4%).
• FY EBITDA margin outlook 12.2%–12.5%; Q2 EBITDA expected 12.0%–12.3% and gross margin modestly up sequentially.
• Guidance assumes 150–200 bps of pricing contribution and $14M–$18M of LIFO expense for the year.
• Q2 organic sales expected low-single-digit growth; Engineered Solutions conversion weighted to back half of year.

Business Commentary:

* Strong Earnings Performance: - Applied Industrial Technologies reported strong earnings performance with EBITDA and EPS growing 13% and 11% respectively over the prior year. - Sales growth was largely in line with expectations, with reported organic sales growth of 3%, the strongest in two years. - The growth was driven by solid gross margin execution, cost control, and internal initiatives, despite a muted and choppy end market backdrop.

• Service Center and Engineered Solutions Segment Performance:
• The Service Center segment reported reported growth of 4.4%, accelerating from previous declines.
• Growth in the Service Center was driven by technical MRO and break-fix activity, with particular strength in primary metals and manufacturing verticals.

• The Engineered Solutions segment saw orders increase nearly 5% organically, with book-to-bill above 1, despite sales slightly lower year-over-year, primarily due to softness in flow control operations.

• Impact of Acquisitions and Strategic Initiatives:

• Hydradyne's acquisition contributed significantly to growth, with its EBITDA up over 20% sequentially and EBITDA margins improving.
• The company's strategy to leverage its service center capabilities and enhance cross-selling opportunities contributed to margin expansion.

• Ongoing sales and operational synergies, along with a growing backlog, are expected to support continued growth and margin improvement.

• Capital Allocation and Financial Outlook:

• The company repurchased approximately 204,000 shares for $53 million during the quarter and retains a strong balance sheet to support capital deployment.
• Guidance remains unchanged, with expected sales growth of 4% to 7% and EBITDA margins of 12.2% to 12.5%, assuming 150 to 200 basis points of contribution from pricing.
• The guidance incorporates expectations of ongoing expense control and leveraging of internal initiatives to drive earnings growth.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We delivered strong earnings performance... EBITDA and EPS growing 13% and 11% respectively...exceeded our expectations." CFO: raised full‑year EPS guide and noted EBITDA margin expansion and strong free cash flow, indicating constructive execution and outlook.

Q&A:

• Question from David Manthey (Robert W. Baird & Co. Incorporated, Research Division): With the holiday timing (Christmas on a Thursday) have you heard about customer holiday shutdowns and how that might affect the December quarter?
  Response: Holiday timing has been considered in Q2 guidance; company expects to be working through the period with some customers active and others pausing, and easier December comps may offset impacts.

• Question from David Manthey (Robert W. Baird & Co. Incorporated, Research Division): Any change in supplier behavior on price-notification periods or surge in surcharges versus orderly price increases?
  Response: No material change—supplier increases have been orderly, team passed through pricing effectively, contributing roughly 200 bps in the quarter.

• Question from Peter Costa (Mizuho Securities USA LLC, Research Division): You previously said Engineered Solutions would outperform Service Center by ~100 bps in FY26—is that still possible or do you expect a more balanced organic mix?
  Response: Yes—assumption remains; Service Centers likely lead in Q2 but Engineered Solutions expected to outperform in the second half supporting the ~100 bps full‑year assumption.

• Question from Peter Costa (Mizuho Securities USA LLC, Research Division): As Engineered Solutions recovers and Hydradyne becomes less dilutive, could consolidated incremental margins see upside in the second half?
  Response: Yes—management sees potential upside to incrementals as Engineered Solutions conversion improves and Hydradyne becomes less dilutive in the back half.

• Question from Sabrina Abrams (BofA Securities, Research Division): Orders have been strong—why are conversions taking longer than usual; are customers delaying shipments and projects?
  Response: Conversions vary by project complexity and sequencing; management expects many conversions to shift into the second half though the overall pipeline and orders are healthy.

• Question from Sabrina Abrams (BofA Securities, Research Division): Pricing seemed stronger in Q1—have you changed the cadence expectation for pricing throughout the year?
  Response: They remain conservative—Q1 delivered ~200 bps pricing (vs guidance 150–200 bps); any further ramp depends on supplier actions and market conditions, so guidance unchanged.

• Question from Kenneth Newman (KeyBanc Capital Markets Inc., Research Division): Any color on Engineered Solutions activity through October and confidence on backlog conversion timing after the September softness?
  Response: Order activity remains good into October; management is encouraged and expects improvement into calendar 2026 with stronger conversion in the second half.

• Question from Kenneth Newman (KeyBanc Capital Markets Inc., Research Division): How are you prioritizing capital allocation (M&A vs. buybacks/dividend) and does rising automation demand affect deal-making?
  Response: M&A remains a top priority with an active pipeline of bolt‑ons and midsized targets; they will balance disciplined acquisitions with dividends and opportunistic buybacks while funding organic automation initiatives.

• Question from Christopher Dankert (Loop Capital Markets LLC, Research Division): With gross margin guided to tick up sequentially, why wouldn't EBITDA margin also improve sequentially—what are the offsets?
  Response: Near‑term offsets include a higher expected LIFO cost versus last year's easy comp, loss of last year's nonroutine supplier rebates and some mix headwinds from acquisitions and segment mix, so EBITDA sequential improvement is limited in Q2 but expected in back half.

• Question from Christopher Dankert (Loop Capital Markets LLC, Research Division): Are Hydradyne synergies on track and any cross‑sell anecdotes?
  Response: Yes—on track to deliver first‑year synergies; Hydradyne EBITDA rose sequentially, cross‑sell and repair/service synergies are progressing alongside systems/process harmonization.

• Question from Patrick Schuchard (Oppenheimer & Co. Inc., Research Division): For automation growth in Engineered Solutions, how much is secular market pickup versus internal initiatives or share gains?
  Response: It's a mix—secular growth in robotics and vision plus internal penetration and cross‑selling; company is expanding customer reach and winning projects across traditional verticals.

• Question from Patrick Schuchard (Oppenheimer & Co. Inc., Research Division): Update on cross‑selling initiatives—what revenue impact are you seeing?
  Response: Still early innings—funnels and project opportunities are growing and execution is underway, with more revenue impact expected over time.

• Question from Patrick Schuchard (Oppenheimer & Co. Inc., Research Division): The Q2 guide implies only low-single-digit organic growth despite stable demand—anything to highlight there?
  Response: No change to view—Q2 guide is consistent with August, reflecting seasonality, holiday timing and a back‑half weighted Engineered Solutions conversion; midpoint remains unchanged.

• Question from Sam Darkatsh (Raymond James & Associates, Inc., Research Division): You noted pulp & paper and oil & gas were favorable—what is allowing you to pick up business in those verticals versus peers?
  Response: Company attributes it to strong positions and value‑add offerings in those verticals and active energy market activity, though no detailed competitor contrast was provided.

• Question from Sam Darkatsh (Raymond James & Associates, Inc., Research Division): The ~2% pricing in the quarter—how did that split between Service Center and Engineered Solutions?
  Response: Pricing was broadly similar across segments, slightly higher in Service Centers but not materially different.

• Question from Sam Darkatsh (Raymond James & Associates, Inc., Research Division): Were particular product categories (e.g., bearings) outsized in pricing versus others?
  Response: No material outliers—pricing was broad‑based across core products (many with steel content); nothing materially overweight like bearings.

Contradiction Point 1

Pricing Contribution Expectations

It involves changes in financial forecasts, specifically regarding pricing contribution expectations, which are critical indicators for investors.

Has the quarterly performance changed expectations for the pricing cadence? - Sabrina Abrams (BofA Securities)

2026Q1: We're early in the year. Pricing came in at 200 basis points. Market activity and additional supplier increases will dictate further pricing contributions. - Neil Schrimsher(CEO)

What is the expected pricing benefit for fiscal 2026, and can you scale it? - David John Manthey (Robert W. Baird & Co. Incorporated)

2025Q4: Pricing contribution is expected to ramp through fiscal 2026, starting at over 100 basis points in the first quarter, increasing to 150-200 basis points. - Neil Schrimsher(CEO)

Contradiction Point 2

EBITDA Margin Improvement Expectations

It involves changes in financial forecasts and expectations for EBITDA margin improvements, which are critical indicators for investors.

Why isn't EBITDA margin improving sequentially despite gross margin gains? - Christopher Dankert (Loop Capital Markets)

2026Q1: Increases in LIFO expense and mix headwinds from acquisitions affect EBITDA margin. Expect greater sequential leverage in the second half with mix benefits and lower LIFO expense. - Neil Schrimsher(CEO)

Will Blackwell's Q4 revenue be additive, and what is the expected gross margin exit rate? - Stacy Rasgon (Bernstein Research)

2025Q4: We expect EBITDA margin to leverage sequentially into the second half of the year with the firming of the top line and the benefit of synergies from the Hydradyne acquisition. - David Wells(CFO)

Contradiction Point 3

Tariff Impacts and Price Inflation

It involves expectations regarding the impacts of tariffs on pricing and demand, which could significantly affect financial performance and strategic planning.

Have expectations for pricing cadence changed with quarterly performance? - Sabrina Abrams (BofA Securities)

2026Q1: We are early in the year. Pricing came in at 200 basis points. Market activity and additional supplier increases will dictate further pricing contributions. - Neil Schrimsher(CEO)

When setting guidance, how do you balance tariff-driven price increases against demand destruction? - David Manthey (Baird)

2025Q3: We are factoring in expected price inflation impacts. We expect similar price contributions as in Q3. Tariff impacts will become clearer later, but we are prepared to adjust based on supplier and customer feedback. - Neil Schrimsher(CEO)

Contradiction Point 4

Order Conversion in Fluid Power and Flow Control Segments

It pertains to the conversion of backlog in key segments, which directly impacts revenue realization and operational performance.

Why has the conversion of backlog in fluid power and flow control segments taken longer than expected? - Sabrina Abrams (BofA Securities)

2026Q1: Some projects have complex timelines, but we're encouraged by continued orders. Conversion may occur more in calendar 2026, with ongoing activity in data centers, life sciences, and pharmaceuticals. - Neil Schrimsher(CEO)

Can you provide specific growth figures for fluid power, flow control, and automation in Engineered Solutions? - Christopher Glynn (Oppenheimer)

2025Q3: Orders indicate a potentially positive trend in fiscal 2026. - Neil Schrimsher(CEO)

Contradiction Point 5

Engineered Solutions Growth Expectations

It involves differing expectations for the performance of the Engineered Solutions segment, which is a strategic focus area for the company.

Is Engineered Solutions still expected to outperform Service Center by 100 basis points in fiscal 2026? - Peter Costa (Mizuho Securities)

2026Q1: In the second quarter, Service Centers might lead, but Engineered Solutions could outperform in the second half due to project conversions. - Neil Schrimsher(CEO)

Can you provide specific growth data for fluid power, flow control, and automation in Engineered Solutions? - Christopher Glynn (Oppenheimer)

2025Q3: We believe Engineered Solutions will outperform Service Center by 100 basis points in fiscal 2026. - Neil Schrimsher(CEO)