AIT

• Overall Quarterly & Full-Year Performance

  • The company delivered record fourth quarter 2026 sales and earnings that exceeded management expectations, with 10% organic sales growth (the strongest in more than three years, up from 6% last quarter). Reported consolidated EBITDA grew 16% year-over-year, while EPS grew 13%, even with ongoing LIFO expense headwinds. EBITDA margin expanded 64 bps to 13.1%.
  • Full fiscal 2026 free cash flow totaled $461 million, down modestly year-over-year due to higher working capital requirements to support second half growth. Net working capital as a percentage of sales ended fiscal 2026 at a six-year low, driven by successful working capital optimization initiatives.
  • In fiscal 2026, the company deployed ~$425 million for capital deployment, including $317 million in share repurchases (1.2 million shares), an 11% dividend increase, CapEx, and M&A. Total capital deployment over the past two years is just under $1 billion, with ~$2 billion of remaining balance sheet capacity for fiscal 2027.

• Demand & End Market Trends

  • Underlying demand strengthened through the quarter, with June organic sales growing over 10% year-over-year despite tough comparisons. 20 of the company's top 30 end markets generated positive sales growth, up from 17 last quarter. Strength was concentrated in metals, technology, utilities, energy, machinery, rubber and plastics, and pulp and paper, with declines limited to chemicals, lumber, and transportation.
  • For the Engineered Solutions segment: orders grew double-digit year-over-year for the third straight quarter. The recently acquired Hydrodyne business delivered double-digit sales growth in the second half of fiscal 2026, with EBITDA margins improving over 200 bps, as synergy targets are met ahead of schedule. The technology vertical (including semiconductors and data centers) now makes up over 15% of the segment.
  • For the Service Center segment: organic growth accelerated to 8% from 4% last quarter, with 27 of 30 top U.S. end markets growing year-over-year. Growth was strong across both national strategic accounts and high single-digit growth for small and mid-sized local accounts. The segment delivered organic sales growth every quarter of fiscal 2026, with a 5-year average annual organic growth of 8% and average annual EBITDA growth of 13%.

• Updated Intermediate Financial Targets

  • Management raised long-term (five-year) intermediate targets: increased sales to $7 billion from the prior $5.5 billion target, and increased the target EBITDA margin to 14% from the prior 13% target. The targets reflect the company's successful strategic transformation and exposure to high-growth secular trends.

• Full fiscal 2027 guidance: 4% to 6.5% total sales growth, EBITDA margin of 12.5% to 12.8%, and EPS of $11.65 to $12.15. Guidance does not include any contribution from future unannounced acquisitions or share buybacks.
• First quarter fiscal 2027 guidance: organic sales growth of 6% to 8% year-over-year, with EBITDA margin projected between 12.3% and 12.4%. As of mid-August, organic sales are tracking 7% year-over-year, in line with guidance.
• Guidance assumes stronger organic growth in the first half of fiscal 2027, with more modest growth in the second half due to tougher year-over-year comparisons and uncertainty around geopolitical and trade policy developments. Pricing is expected to contribute 150 to 200 bps to year-over-year sales growth.
• Capital expenditure guidance for full fiscal 2027 is $35 million to $40 million, up from historical average levels to support organic growth investments and technology improvements.
• Free cash flow is expected to remain strong but decline year-over-year, due to higher working capital investment to support growth opportunities. LIFO expense is expected to increase modestly year-over-year in 2027, after a larger increase in fiscal 2026.

1. Service Center Segment: Organic sales grew 7.9% year-over-year, with 50 bps of additional contribution from acquisitions and 60 bps from foreign currency translation. Segment EBITDA increased 16.3% year-over-year, reaching an EBITDA margin of 14.5%, which expanded 91 basis points from the prior year. This segment contributed approximately 47% of total company organic sales growth for the quarter. For full fiscal 2026, segment sales grew nearly 6% organically, and EBITDA grew 8% inclusive of higher LIFO expense.

2. Engineered Solution Segment: Organic sales grew 12.9% year-over-year, driven by double-digit growth in automation (over 20% organic growth, the strongest in over four years) and high single-digit growth in fluid power, partially offset by muted growth in flow control. Segment EBITDA increased 15.8% year-over-year (19% excluding LIFO expense), reaching an EBITDA margin of 15.1%, which expanded 38 basis points from the prior year (inclusive of a 44 bps LIFO headwind). This segment contributed approximately 53% of total company organic sales growth for the quarter.

• Evolving geopolitical conditions and trade policy uncertainty create uncertainty around the timing and trajectory of future in-market demand growth, with limited visibility into how these factors will develop through fiscal 2027.
• Inflationary cost pressures remain an ongoing headwind for operating margins, alongside higher incentives and growth investments that increase operating costs.
• Higher LIFO expense continues to create downward pressure on reported gross margins and EBITDA margins, representing the key near-term wildcard for quarterly margin performance.
• The company faces more difficult year-over-year sales comparisons in the second half of fiscal 2027 following strong 2026 performance, which will moderate reported growth rates.

Q: Analyst Christopher Glynn asked why CapEx guidance for fiscal 2027 is ~50% higher than historical average levels, and whether there are specific large projects driving the increase. / A: CFO Dave Wells explained there are no single large capital projects driving the increase. The higher spend reflects a range of smaller organic investments, including expansion of the company's automation footprint, ongoing technology platform improvements, and investments to support operational efficiency and growth across the business, as part of the company's disciplined capital deployment strategy.

Q: Ken Newman of KeyBank asked about exposure to the recent FCC ban on foreign robotics imports, and whether the ban could create pricing or share gain opportunities for Applied. / A: CEO Neil Schrimsher stated that Applied's current exposure to products covered by the ban is very low. The business continues to operate normally with strong incoming order growth, and the ban has not impacted near-term performance or cross-selling opportunity to date.

Q: Andrew Obin of Bank of America asked for monthly sales trends during the fourth quarter of 2026 and an update on early trends in August for fiscal 2027. / A: CFO Dave Wells reported organic growth of 10% in April, 8% in May, and 10% in June 2026, ending the quarter on strong footing. As of mid-August, first quarter fiscal 2027 organic growth is tracking ~7% year-over-year, which is in line with the 6% to 8% guidance range. CEO Neil Schrimsher added that July order momentum was strong, with engineered solutions orders up mid-20% year-over-year, and backlog improved sequentially against typical seasonal trends.

Q: David Manthe of Baird asked about demand trends in chemicals and refining process industries, and the outlook for turnaround maintenance activity that was deferred in 2026. / A: CEO Neil Schrimsher noted chemicals was still a low single-digit declining end market in the fourth quarter, but July order growth for flow control has improved, and deferred turnaround and maintenance work in chemicals and refining is expected to contribute progressively through fiscal 2027, including the first half.