Executive Summary
Applied Industrial Technologies reported a solid QQ2 2025 performance framed by a muted end-market backdrop and ongoing execution discipline. Consolidated revenue declined 3.4% organically, as management anticipated, driven largely by weaker Fluid Power OEM demand and softer December activity. Despite softer top-line momentum, gross margins expanded meaningfully to 30.6% (up 114 bps YoY; LIFO tailwind of +25 bps), and EBITDA margins rose to 12.6% (+45 bps YoY). The Engineered Solutions segment led margin expansion (EBITDA margin above 16% for the first time, up ~115 bps YoY) and is now a near 40% share of total sales, underscoring the company’s strategic growth vector. The Hydradyne acquisition closed at year-end and is expected to generate roughly $260 million in sales and $30 million of EBITDA in the first year, with EPS accretion of about $0.15 in the first 12 months and $5–$10 million of net synergies over the first three years. Management raised full-year guidance for FY2025 based on these dynamics: EPS guidance raised to $9.65–$10.05, with sales down 3% to up 1% organically and EBITDA margins of 12.2%–12.4%. The plan contemplates a gradual rebound in organic demand in H2 2025, acceleration in Engineered Solutions, and increased cross-selling opportunities across Hydradyne’s footprint. The company maintains a robust balance sheet and strong cash generation, including a 24% dividend increase and ongoing buybacks, supported by pro forma net leverage of about 0.5x post-Hydradyne. Overall, AIT is positioned to benefit from a more favorable growth environment as end markets recover and cross-segment opportunities mature, while continuing to optimize efficiency and capital allocation.
Key Performance Indicators
Key Insights
Revenue: $1,073.0 million for QQ2 2025; YoY change -0.39%, QoQ change -2.36% (per four-quarter data). Gross margin: 30.6% (YoY +114 bps; ex-LIFO tailwind of +25 bps; LIFO tailwind contributed ~+25 bps). Operating income: $120.9 million; margin 11.26% (YoY +~0.6–0.8pp). EBITDA: $134.363 million; EBITDA margin 12.52% (YoY +45 bps). Net income: $93.29 million; net margin 8.69%. EPS: $2.39, diluted $2.39; weighted-average shares ~38.43 million.
Cash flow: Operating cash flow $95.1 million; free ca...
Financial Highlights
Revenue: $1,073.0 million for QQ2 2025; YoY change -0.39%, QoQ change -2.36% (per four-quarter data). Gross margin: 30.6% (YoY +114 bps; ex-LIFO tailwind of +25 bps; LIFO tailwind contributed ~+25 bps). Operating income: $120.9 million; margin 11.26% (YoY +~0.6–0.8pp). EBITDA: $134.363 million; EBITDA margin 12.52% (YoY +45 bps). Net income: $93.29 million; net margin 8.69%. EPS: $2.39, diluted $2.39; weighted-average shares ~38.43 million.
Cash flow: Operating cash flow $95.1 million; free cash flow $89.9 million; FCF conversion 96% of net income. YTD free cash flow approx. $212 million, up 34% YoY with 114% of net income conversion.
Balance sheet: Cash and cash equivalents $303.4 million; total assets $3,044.6 million; total liabilities $1,251.1 million; total stockholders’ equity $1,793.5 million; net debt $268.9 million; pro forma net leverage ~0.5x post Hydradyne.
Liquidity/ratios: Current ratio 3.76; quick 2.55; days sales outstanding 58.4; days inventory outstanding 62.6; days payable outstanding 29.1; cash conversion cycle 91.9 days; ROA 3.06%; ROE 5.20%; ROCE 4.62%; P/E 24.66; P/B 5.13; P/S 8.58. EBITDA margins are trending toward the mid-12% range with Engineered Solutions delivering above-16% EBITDA margins.
Guidance: FY2025 EPS guidance raised to $9.65–$10.05; sales growth 1%–3%; EBITDA margin 12.2%–12.4%. Organic sales decline expected to be 3%–1% for the year, with Hydradyne contributing 600–700 bps to H2 sales growth; third-quarter gross margins ~30% and EBITDA margins 12%–12.2%.
Commentary highlights: January organic sales down mid-single digits; ISM new orders showed expansion in late 2024; engine solutions and automation segments show improving demand; cross-selling with Hydradyne anticipated to unlock margin and mix benefits. The company targets long-term growth via M&A and internal margin initiatives, with a strategic emphasis on cross-segment opportunities and service capabilities.
Income Statement
| Metric |
Value |
YoY Change |
QoQ Change |
| Revenue |
1.07B |
-0.39% |
-2.36% |
| Gross Profit |
328.05M |
3.46% |
0.91% |
| Operating Income |
120.87M |
5.48% |
6.80% |
| Net Income |
93.29M |
2.26% |
1.33% |
| EPS |
2.43 |
3.40% |
1.25% |
Key Financial Ratios
operatingProfitMargin
11.3%
operatingCashFlowPerShare
$2.48
freeCashFlowPerShare
$2.34
dividendPayoutRatio
15.3%
Management Commentary
Theme: Strategy and M&A
- Hydradyne acquisition closes, expanding footprint in the Southern U.S. and complementing the Engineered Solutions/Fluid Power portfolio. Neil Schrimsher notes Hydradyne is a strong strategic fit with anticipated annual sales of $260 million and EBITDA of $30 million in the first year, expanding cross-selling opportunities and service capabilities. Quote: 'Hydradyne strengthens our number one fluid power position... 30% of sales tied to repair, engineering and design, system fabrication, hose assemblies and other value-added solutions.' Impact: accelerates geographic reach and adds technical capabilities to support high-growth end markets.
Theme: Segments and Margin Momentum
- Engineered Solutions margin expansion remains a key driver: EBITDA margins exceeded 16% for the first time, with a five-year cumulative EBITDA margin expansion of ~450 bps. Quote: 'The segment's margin expansion highlights the strong market position and value proposition... expected to enhance our mixed tailwind and overall margin expansion potential.' Impact: shifts profitability mix toward higher-margin engineered offerings.
Theme: Market Conditions and Demand Trends
- Demand remained soft in QQ2, with January trending down mid-single digits. Management cites offsetting positives from ISM new orders (expansionary) and improving service center bookings. Quote: 'We do not view January sales as indicative of how the third quarter and the balance of the year could play out... signs of improvement in various industrial macro data points.' Impact: near-term volatility, but signs of stabilization and potential rebound as end markets reaccelerate.
Theme: Capital Allocation and Shareholder Returns
- Capital deployment remains aggressive; 24% dividend increase and $380 million YTD in investments, including Hydradyne. Quote: 'Year-to-date, we've deployed over $380 million in capital focused on enhancing our growth position and shareholder returns.' Impact: suggests a balanced approach to growth and shareholder value creation.
Theme: Outlook and Guidance
- FY2025 guidance lifted to reflect Hydradyne contribution; expects accretion to ramp into fiscal 2026 as synergies materialize and end markets improve. Quote: 'We are raising full year fiscal 2025 guidance... EPS in the range of $9.65 to $10.05.' Impact: provides a constructive path forward with visible milestones for the Hydradyne integration.
Hydradyne's annual sales are anticipated at $260 million with EBITDA of $30 million in the first year, strengthening our fluid power leadership and expanding cross-selling opportunities.
— Neil Schrimsher
Engineered Solutions EBITDA margins have expanded 450 basis points over the last five years and are now exceeding 16% for the first time, underscoring the strategic value of this growth engine.
— Neil Schrimsher
Forward Guidance
Management raised FY2025 guidance based on a combination of stronger QQ2 performance and anticipated Hydradyne contributions. Key targets include: - EPS: $9.65 to $10.05 for FY2025; - Organic sales: down 3% to up 1%; - EBITDA margin: 12.2% to 12.4%. The mid-point implies organic sales decline in the second half of the year at a low single-digit rate, with a gradual recovery into Q4 as Engineered Solutions and Hydradyne cross-sell opportunities gain traction. Hydradyne is expected to contribute roughly 6–7 percentage points of year-over-year sales growth in H2 (600–700 bps), partially offset by currency headwinds. Synergies are targeted at $5–$10 million in net synergies within the first three years (70–80% cost-related, 20–30% sales-related) with D&A incremental ~$3 million per quarter in H2 2025. The company maintains ample balance sheet capacity (pro forma net leverage ~0.5x) and continued buyback/dividend flexibility. Outlook risks include macro policy uncertainty, potential tariff changes, and evolving end-market demand. Monitor: trajectory of Engineered Solutions growth, the cadence of Hydradyne integration, commodity/price inflation, and the pace of service-center break-fix activity as production ramps post-election.