APPLIED INDUSTRIAL TECHNOLOGIES INC

Applied Industrial Technologies, Inc. operates as a leading distributor and technical solutions provider of industrial motion, power, control, and automation technologies. The Company serves a segment of the industrial market that requires technical expertise and service, as its products and solutions are directly tied to companies' production processes, efficiency initiatives, and most critical operating assets. Growth within the industry is influenced by broader industrial production and capacity utilization, as well as inflation, labor dynamics, capital spending, geopolitical events, factory optimization initiatives, changes in industrial equipment technologies, and supply chain requirements. The broader industrial distribution market is highly fragmented with participants varying in size, product focus, and capabilities. The Company believes its products and solutions are increasingly critical within the industrial supply chain given increased manufacturing activity in the United States, reshoring or localization of supply chains across North America, a greater focus on supply chain resiliency, required maintenance and modernization on aged industrial equipment, technical labor constraints across customers' operations, more sophisticated production equipment and processes, a greater focus on plant floor optimization, and compliance and regulatory requirements.

The Company's principal competitors are specialist and general line distributors of bearings, power transmission products, fluid power components and systems, flow control solutions, industrial rubber products, linear motion components, and automation solutions, and, to a lesser extent, providers of tools, safety products, and other industrial and maintenance supplies. These competitors include local, regional, national, and multinational operations. The Company also competes with original equipment manufacturers and integrators. The Company believes its industry position and value proposition benefits from relative advantages tied to deep technical expertise in providing solutions to critical motion control systems and related service offerings, leading positions in engineered fluid power and flow control solutions, advanced capabilities and an established footprint across advanced automation solutions, broad in-stock product offering, local inventory availability, and repair capabilities, extensive technical knowledge and domain expertise of customers' facility and production equipment, tenured relationships with industrial customers and leading suppliers, scale and proximity of operations relative to customer facilities, local entrepreneurial culture and continuous improvement focus, complementary offerings including indirect consumable supply inventory management, talent acquisition and development of technical sales associates, engineers, and service personnel, business systems and distribution capabilities, and strong financial liquidity and access to capital. The Company believes its cross-selling initiative represents a significant long-term growth opportunity considering an addressable market of approximately $80 billion ¹ and growing.

The Company generates revenue through the distribution and sale of industrial products and technical solutions. Revenue is recognized at a point in time when control of the product transfers to the customer, typically upon shipment from an Applied facility or directly from a supplier. For products that ship directly from suppliers to customers, Applied generally acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue is measured as the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, variable consideration, and any taxes collected from customers. The Company's customers use its products and services for both MRO (maintenance, repair, and operating), OEM (original equipment manufacturing), and new system install applications across a variety of end markets primarily in North America, as well as Australia, New Zealand, and Singapore. Customers range from very large businesses, with which the Company may have multiple-location relationships, to small local businesses. The Company is not significantly dependent on a single customer or group of customers, and no single customer accounts for more than 5% of fiscal 2025 sales ².

The Company reports results of operations in two segments: Service Center and Engineered Solutions. In fiscal 2025, the Service Center segment represented 66% ³ of total sales, while the Engineered Solutions segment represented 34% ⁴ of total sales. The Service Center segment includes MRO-focused distribution operations across North America, Australia, and New Zealand, operating through local service centers and distribution centers with a focus on providing products and services addressing the maintenance and repair of production equipment and motion control infrastructure. Products primarily include industrial bearings, motors, belting, drives, couplings, pumps, linear motion products, hydraulic and pneumatic components, filtration supplies, and hoses, as well as other related supplies for general operational needs. The segment includes operations focused on certain end markets and indirect consumable supplies through vendor managed inventory solutions, as well as regional fabricated rubber shops and service field crews. The Engineered Solutions segment includes operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic fluid power technologies, engineered flow control products and services, and automation technologies. Within the United States, the Company believes it is the largest distributor and solutions provider of fluid power and industrial flow control products, as well as one of the largest distributors and solutions providers of advanced automation technologies. Fluid power products include hydraulic and pneumatic technologies, and operations are supported by a team of certified fluid power specialists, mechanics, technicians, and engineers. Specialty flow control operations provide highly engineered process flow control products, solutions, and services including pumps, valves, fittings, hoses, process instrumentation, actuators, motors, and filtration supplies. Advanced automation operations provide solutions focused on the design, engineering, assembly, integration, and distribution of machine vision, collaborative robots, mobile robots, RFID, industrial networking, motion control, and machine learning technologies.

The Company's Service Center segment sales were $3,014.3 million ⁵ in fiscal 2025, a decrease of $42.2 million ⁶ or 1.4% ⁷ compared to the prior year. Acquisitions within this segment increased sales by $11.7 million ⁸ or 0.4% ⁹, and unfavorable foreign currency translation reduced sales by $23.7 million ¹⁰ or 0.8% ¹¹. Excluding the impact of businesses acquired and foreign currency translation, sales decreased $30.2 million ¹² or 1.0% ¹³ during the year. The Engineered Solutions segment sales were $1,549.1 million ¹⁴ in fiscal 2025, an increase of $126.2 million ¹⁵ or 8.9% ¹⁶. Acquisitions within this segment increased sales $181.3 million ¹⁷ or 12.7% ¹⁸. Excluding the impact of businesses acquired, sales decreased $55.1 million ¹⁹ or 3.8% ²⁰. The gross profit margin for the Engineered Solutions segment is higher than the Service Center segment, and the Engineered Solutions segment today contributes over 40% ²¹ of the Company's consolidated EBITDA.

On December 31, 2024, the Company acquired all of the membership interests of Hydradyne, LLC, a Dallas, Texas based provider of fluid power solutions, for a purchase price of $282,136 ²², which was funded using available cash. On May 1, 2025, the Company acquired substantially all of the net assets of IRIS Factory Automation, an Aurora, Illinois provider of automation products, for a purchase price of $14,000 ²³. On August 1, 2024, the Company acquired substantially all of the net assets of Total Machine Solutions, a Fairfield, New Jersey based provider of electrical and mechanical power transmission products, for a purchase price of $6,025 ²⁴. On August 1, 2024, the Company acquired 100% of the outstanding shares of Stanley Proctor, a Twinsburg, Ohio based provider of hydraulic and pneumatic components, for a purchase price of $3,924 ²⁵. In fiscal 2025, the Company repurchased 655,791 ²⁶ shares of common stock at an average price per share of $231.20 ²⁷, using $152.8 million ²⁸ of cash. On April 29, 2025, the Board of Directors authorized the repurchase of up to 1.5 million ²⁹ shares of common stock, replacing the prior authorization. The Company paid aggregate dividends of $1.66 ³⁰ per share in fiscal 2025. The Company had total debt obligations outstanding of $572.3 million ³¹ at June 30, 2025.

Consolidated sales for fiscal 2025 were $4.6 billion ³², an increase of $84.0 million ³³ or 1.9% ³⁴ compared to the prior year, with acquisitions contributing to sales growth by $193.0 million ³⁵ or 4.3% ³⁶ and unfavorable foreign currency translation of $23.7 million ³⁷ reducing sales by 0.5% ³⁸. Gross profit margin increased to 30.3% ³⁹ for fiscal 2025 from 29.8% ⁴⁰ for fiscal 2024. Operating margin decreased to 10.9% ⁴¹ in fiscal 2025 from 11.1% ⁴² in fiscal 2024. Net income for fiscal 2025 was $392,988 ⁴³, compared to $385,762 ⁴⁴ in fiscal 2024. Diluted earnings per share was $10.12 ⁴⁵ in fiscal 2025 versus $9.83 ⁴⁶ in fiscal 2024. Cash provided by operating activities was $492,385 ⁴⁷ in fiscal 2025, compared to $371,393 ⁴⁸ in fiscal 2024.

The Company expects capital expenditures for fiscal 2026 to be in the $30.0 million to $35.0 million range ⁴⁹, primarily consisting of capital associated with focused investments for growth and information technology equipment maintenance.

The Company is favorably positioned to benefit from various secular tailwinds developing across the North American industrial market, including localizing and reshoring supply chains to North America, required infrastructure investments, greater equipment maintenance and system modernization on aged industrial assets, and the build-out and maintenance of systems used for decarbonization. Sustainability initiatives and dynamic energy costs are driving a focus on optimizing equipment efficiency through greater technical maintenance and component upgrades, while the Company's expertise and access to fluid conveyance and robotic solutions are providing new growth opportunities in areas such as datacenter infrastructure and semiconductor manufacturing. The Company expects to play a significant role in helping its OEM customers transition to electric-powered machinery given its leading engineering capabilities and supplier relationships. The ongoing build out of datacenter and semiconductor infrastructure is expanding the addressable market for fluid conveyance products and solutions, while demand for flow control solutions is benefiting from customers' decarbonization and energy transition efforts.

The Company sees significant potential to further scale its automation operations in coming years given its internal initiatives, M&A pipeline, a growing addressable market, cross-selling opportunities, and a developing long-term aftermarket. The Company expects various secular tailwinds to positively influence demand including structural labor constraints, a heightened focus on safety and quality, and North American reshoring activity. The Company believes these dynamics will accelerate the adoption of collaborative and mobile robots, machine vision, and Internet of Things solutions. The Company also sees sustainable mix tailwinds driving margin expansion as it continues to grow its higher-margin Engineered Solutions segment, which today contributes over 40% ⁵⁰ of consolidated EBITDA. The Company sees an ongoing opportunity to optimize its margin profile and cash generation in coming years. The Company expects acquisitions to remain an important element of its growth potential moving forward given high industry fragmentation, greater operational and technical requirements, and supplier authorizations within the markets served. Over the near to intermediate-term, acquisition priorities are primarily focused on current offerings including the ongoing expansion of the Engineered Solutions segment, as well as opportunistic acquisitions across the Service Center segment that further enhance organic growth profile, margin improvement, and value-added service capabilities.

The Company has a number of initiatives focused on driving operational improvements throughout the organization. Systems investments in recent years including common enterprise resource planning platforms are supporting opportunities in leveraging shared services, refining the sales management process, and standardizing pricing and sourcing functions, while the Company continues to optimize its shop and distribution network and analytics. The Company believes its expanded solutions portfolio, scale, and technical expertise is enhancing its cross-selling opportunity and share gain potential as customers continue to consolidate their spend with more capable distributors. Considering the embedded customer base across the legacy service center network, and an addressable market of approximately $80 billion ⁵¹ and growing, the Company believes its cross-selling initiative represents a significant long-term growth opportunity, including accelerating its ability to expand with strategic accounts and penetrate faster growing market verticals such as food & beverage, semiconductor, datacenters, life sciences, pharmaceutical, power generation, and alternative energy.

The Company expects capital expenditures for fiscal 2026 to be in the $30.0 million to $35.0 million range ⁵², primarily consisting of capital associated with focused investments for growth and information technology equipment maintenance. At June 30, 2025, the Company had remaining authorization to purchase an additional 1,300,000 ⁵³ shares under the share repurchase program authorized on April 29, 2025. Subsequent to June 30, 2025, the Company repurchased 128,401 ⁵⁴ shares of common stock at an average price per share of $258.36 ⁵⁵. In fiscal 2025, the Company repurchased 655,791 ⁵⁶ shares of common stock at an average price per share of $231.20 ⁵⁷. The Company paid aggregate dividends of $1.66 ⁵⁸ per share in fiscal 2025 and $1.44 ⁵⁹ per share in fiscal 2024.

The Company's business depends heavily on the operating levels of its customers and the factors that affect them, including general economic conditions. When customers or prospective customers reduce production levels because of lower demand, increased supply, higher costs, supply chain or labor market disruptions, changes in interest rates, tight credit conditions, unfavorable currency exchange rates, governmental regulations or adverse trade policies, foreign competition, other competitive disadvantage, offshoring of production, geopolitical instability, or other reasons, their need for the Company's products and services diminishes. Selling prices and terms of sale come under pressure, adversely affecting the profitability and the durability of customer relationships, and credit losses may increase. Volatile economic and credit conditions also make it more difficult for the Company, as well as its customers and suppliers, to forecast and plan future business activities. Supply chain disruptions could adversely affect the Company's results of operations and financial condition. The Company's supply chain, including transportation availability, staffing, and cost, could be disrupted by natural or human-induced events or conditions, such as power or telecommunications outage, security incident, terrorist attack, war, other geopolitical events, public health crisis, earthquake, extreme weather events, fire, flood, other natural disasters, transportation disruption, labor actions, including strikes, raw materials shortages, financial problems or insolvency, trade regulations or actions, inadequate manufacturing capacity or utilization to meet demand, or other reasons beyond the Company's control.

The Company's operations outside the United States increase its exposure to global economic and political conditions and currency exchange volatility. Foreign operations contributed 12% ⁶⁰ of sales in 2025. This presence outside the United States increases risks associated with exposure to more volatile economic conditions, political instability, cultural and legal differences in conducting business, economic and trade policy actions. In addition, the Company's foreign operations' results are reported in local currency and then translated into U.S. dollars at applicable exchange rates, which opens the Company up to risks associated with potential currency exchange fluctuations. Fluctuations in exchange rates, devaluations, and limitations on the conversion of foreign currencies into U.S. dollars may result in decreased revenues or profits. The Company's ability to pass along increases in its costs in a timely manner to its customers depends on execution, market conditions, and contractual limitations. Failing to pass along price increases timely in an inflationary environment, or not maintaining sales volume while increasing prices, could significantly reduce profitability.

The Company's business depends heavily on the operating levels of its customers and general economic conditions; when customers reduce production levels due to lower demand, supply chain disruptions, changes in interest rates, or other factors, demand for the Company's products diminishes and selling prices come under pressure. The Company extends unsecured trade credit to a broad range of customers, and if customers become financially distressed, they may not be able to make scheduled payments, which could materially and adversely affect financial condition. Supply chain disruptions, including transportation availability, staffing, and cost, could be caused by natural or human-induced events and may result in increased costs which the Company may be unable to pass along to customers. The Company's information systems are vulnerable to the growing threat of damage or intrusion from computer viruses or other cyber-attacks, including ransomware and business e-mail compromise, and a serious, prolonged disruption or security breach could materially impair fundamental business processes and increase expenses. As of June 30, 2025, the Company had total debt obligations outstanding of $572.3 million ⁶¹, and its debt commitments may require dedicating a substantial portion of cash flows to debt service, limiting the availability of cash flow for other purposes, and the inability to comply with debt covenants could result in an event of default.

Management's discussion emphasizes that the Company is a leading distributor and technical solutions provider of industrial motion, power, control, and automation technologies, with a comprehensive network of approximately 6,800 ⁶² employee associates and approximately 600 ⁶³ facilities. Management highlights that fiscal 2025 consolidated sales were $4.6 billion ⁶⁴, an increase of $84.0 million ⁶⁵ or 1.9% ⁶⁶ compared to the prior year, with acquisitions contributing to sales growth by $193.0 million ⁶⁷ or 4.3% ⁶⁸ and unfavorable foreign currency translation of $23.7 million ⁶⁹ reducing sales by 0.5% ⁷⁰. Gross profit margin increased to 30.3% ⁷¹ for fiscal 2025 from 29.8% ⁷² for fiscal 2024. Operating margin decreased to 10.9% ⁷³ in fiscal 2025 from 11.1% ⁷⁴ in fiscal 2024. Diluted earnings per share was $10.12 ⁷⁵ in fiscal 2025 versus $9.83 ⁷⁶ in fiscal 2024. Management's strategic priorities emphasized for the period ahead include exposure to industrial mega trends such as localizing and reshoring supply chains to North America, required infrastructure investments, greater equipment maintenance and system modernization on aged industrial assets, and the build-out and maintenance of systems used for decarbonization; leading fluid power and flow control position with expectations to play a significant role in helping OEM customers transition to electric-powered machinery; automation expansion potential with significant potential to further scale automation operations in coming years; cross-selling opportunity with an addressable market of approximately $80 billion ⁷⁷ and growing; margin expansion focus with sustainable mix tailwinds driving margin expansion as the Company continues to grow its higher-margin Engineered Solutions segment; and industry consolidation and acquisition opportunities with expectations that acquisitions will remain an important element of growth potential.