Applied Industrial Technologies Q1 EPS Rises 13% as Engineered Solutions Drives Growth

Applied Industrial Technologies (AIT) reported higher fiscal first-quarter sales and earnings as strong demand in its Engineered Solutions segment supported organic growth and margin expansion. The company maintained its fiscal 2027 sales and EBITDA margin guidance while raising its diluted EPS range to reflect a lower share count following first-quarter buybacks.

For the quarter ended September 30, 2026, sales rose 7.6% year over year to $1.291 billion. Organic sales increased 7.1%, in line with the company’s guidance for growth of 6% to 8%, while acquisitions added 0.3 percentage point and currency contributed 0.2 point.

Net income increased to $110.4 million from $100.8 million a year earlier. Diluted EPS rose 12.7% to $2.97 from $2.63, helped by a lower share count but partly offset by higher interest expense. Results included $5.6 million of pre-tax LIFO expense, equivalent to $0.12 per share, compared with $2.6 million in the prior-year quarter.

Price contributed an estimated 2 percentage points to organic growth, while organic volumes increased approximately 5%, including 6% growth in the U.S. Applied said 18 of its 30 largest industry verticals generated year-over-year growth. Metals, technology, machinery, utilities and energy, mining, and oil and gas were among the strongest markets, while lumber and wood, aggregates, rubber and plastics, and food and beverage declined.

Engineered Solutions leads growth

Engineered Solutions sales increased 14.1% organically to $475.8 million, driven by demand across automation and fluid power, contributions from the technology vertical, and stronger flow control activity. Automation sales rose 24% and flow control sales increased 6% year over year.

Orders in the segment climbed more than 30%, while its book-to-bill ratio exceeded 1 and reached its highest level in more than four years. The segment’s backlog increased 17% sequentially.

Engineered Solutions EBITDA rose 24.7% to $71.8 million. Its EBITDA margin expanded by 129 basis points to 15.1%, including the effect of higher LIFO expense, as volume growth produced operating leverage.

Service Center sales increased 4.2% to $815.3 million, including organic growth of 3.5%, a 0.4-point acquisition contribution and a 0.3-point currency benefit. U.S. organic sales rose approximately 6%, supported by market conditions and internal sales initiatives, while softer demand outside the U.S. partly offset that growth.

Service Center EBITDA increased 1.6% to $110.7 million, but its margin declined 35 basis points to 13.6%. Higher LIFO expense and favorable accounts-receivable provisioning in the prior-year quarter each created a roughly 20-basis-point headwind to the year-over-year margin comparison.

Margins expand despite inflationary pressure

Companywide gross margin increased 25 basis points to 30.4%, despite a 23-basis-point headwind from higher LIFO expense. Excluding that effect, gross margin expanded by nearly 50 basis points, which Applied attributed to channel execution, a favorable business mix and internal initiatives.

Selling, distribution and administrative expense rose 7% to $248.6 million, or 19.3% of sales compared with 19.4% a year earlier. Inflation, higher employee-related expenses and growth investments were balanced by cost controls and productivity measures.

EBITDA, a non-GAAP measure, increased 9.6% to $160.3 million. EBITDA margin rose 22 basis points to 12.4%, at the upper end of the company’s first-quarter guidance, even with a 23-basis-point LIFO headwind.

Operating cash flow was $86.4 million, while non-GAAP free cash flow totaled $73.4 million, or 66.5% of net income. Free cash flow declined from $112 million a year earlier because of growth-related working-capital investment and higher capital expenditure. Applied spent $80 million on share repurchases during the quarter.

The company ended September with a net leverage ratio of 0.27 times trailing EBITDA, $112 million of cash, $806 million of available revolving-credit capacity and $62 million available under its accounts-receivable securitization facility.

Full-year sales and margin guidance unchanged

Applied continues to expect fiscal 2027 sales growth of 4% to 6.5% and an EBITDA margin of 12.5% to 12.8%. It raised diluted EPS guidance to $11.70 to $12.20 from $11.65 to $12.15, citing the lower diluted share-count assumption following first-quarter repurchases. The outlook excludes contributions from future acquisitions or additional share buybacks.

For the fiscal second quarter, management expects organic sales to increase 6% to 8% year over year. Gross margin is projected to remain stable or increase slightly from the first quarter, with EBITDA margin expected between 12.3% and 12.5%. October organic sales were up approximately 10% year over year through the date covered by the presentation.

Management said the near-term demand outlook remained favorable based on customer sentiment and order momentum, but identified geopolitical, trade and inflation uncertainty as continuing risks. The company also faces more difficult year-over-year comparisons in the second half of fiscal 2027.