AIT Q2 2026: Engineered Solutions Orders Jump 10%, Signaling Backlog-Driven Growth Ahead
Engineered Solutions orders surged over 10% organically, providing a clear demand signal for Applied Industrial Technologies (AIT) as it navigates a mixed industrial landscape. While December’s seasonal softness and elevated LIFO expense weighed on reported margins, management’s execution on cost control and strategic capital deployment preserved operating resilience. With automation and fluid power segments showing accelerating momentum, AIT enters the second half positioned to capitalize on secular tailwinds and backlog conversion.
Summary
- Engineered Solutions Demand Surges: Organic orders rose over 10%, outpacing sales and expanding backlog visibility.
- Margin Resilience Amid LIFO Pressure: Excluding LIFO, underlying gross and EBITDA margins improved year over year.
- Capital Deployment Remains Aggressive: Buybacks, dividend hikes, and M&A signal confidence in free cash flow and multi-segment growth.
Performance Analysis
AIT’s Q2 2026 results reflected modest organic sales growth in a choppy demand environment, with consolidated sales up 8.4% year over year, driven by acquisitions and a 2.2% organic increase. Engineered Solutions, technical project-based segment, posted just 0.5% organic sales growth but saw order rates accelerate over 10% organically—the strongest in four years—highlighting a backlog build that should support future revenue conversion. Service Center, core MRO and distribution segment, delivered 2.9% organic growth, with U.S. operations exceeding 4% as technical MRO needs and cross-selling gained traction.
Gross margin of 30.4% was pressured by a $6.9 million LIFO expense, but excluding LIFO, gross margin rose 34 bps year over year. EBITDA margin came in at 12.1%, within guidance, and would have been higher without the LIFO headwind. Free cash flow conversion remained robust at 98% of net income, supporting ongoing buybacks and an 11% dividend increase. Segment performance was mixed: automation orders rose 20%, fluid power OEM sales turned positive for the first time in two years, while flow control lagged but showed improving order trends.
- Order Momentum Outpaces Sales: Engineered Solutions and automation delivered double-digit order growth, setting up a stronger second half.
- Gross Margin Management: Underlying margins improved despite inflation and inventory-driven LIFO expense, highlighting pricing power and mix benefits.
- Cash Flow Enables Flexibility: High conversion rates and low leverage (0.3x EBITDA) support strategic capital allocation across buybacks, M&A, and dividends.
While December’s sales were seasonally weak, January trends rebounded to mid-single-digit growth, and management expects backlog conversion and secular demand to drive improved performance through fiscal 2026.
Executive Commentary
"Orders in our engineered solution segment increased over 10% year over year in the second quarter. This is the strongest quarterly order growth rate in the engineered solution segment in over four years, with the two-year stack trend continuing to improve sequentially."
Neal Cremshaw, CEO & President
"Excluding life expense, gross margins of 31% were up 34 basis points year-over-year against the strong prior year comparison. As it relates to our operating cost, Selling, distribution, and administrative expenses increased 11.1% compared to prior levels. On an organic, constant currency basis, SD&A expense was up 1.4% year-over-year compared to a 2.2% increase in organic sales."
Dave, Chief Financial Officer
Strategic Positioning
1. Engineered Solutions Backlog as Growth Catalyst
Engineered Solutions’ organic order growth above 10% signals a multi-quarter backlog build that should support revenue acceleration in the second half. Automation and fluid power sub-segments contributed, with automation orders up 20%. This backlog strength is reinforced by a book-to-bill above one for three of the last four quarters, providing visibility and confidence in future conversion.
2. Resilient Service Center Platform
Service Center, MRO-focused business, demonstrated resilience with U.S. sales up over 4% despite December softness, benefiting from technical maintenance demand and cross-selling. Growth was strongest in metals, aggregates, utilities, and transportation, offsetting declines in cyclical verticals like chemicals and oil and gas. Local account momentum and break-fix industrial activity are emerging as reliable drivers.
3. Margin Management and Cost Discipline
AIT offset inflation and LIFO headwinds through pricing actions and mix improvement, particularly from the Hydrodyne acquisition. Excluding LIFO, gross and EBITDA margins improved year over year. SD&A expense rose slower than sales, reflecting ongoing productivity initiatives and disciplined investment in growth areas.
4. Capital Allocation: Balanced and Opportunistic
Free cash flow and low leverage are enabling active capital deployment: $143 million in buybacks YTD, an 11% dividend hike, and bolt-on M&A (such as Thompson Industrial Supply and Hydrodyne) that expand technical capabilities and regional reach. Management reiterated M&A as a priority, targeting engineered solutions, automation, and service center optimization.
5. Secular Tailwinds and Strategic Investments
AIT is positioned to capture secular trends: automation adoption, reshoring, and data center buildout. Investments in engineering, systems, and production capacity, especially in automation and semiconductor verticals, should enable outperformance as these markets recover and expand. The Hydrodyne integration is driving margin accretion and cross-sell opportunities, particularly in fluid power and thermal management for data centers.
Key Considerations
This quarter’s results highlight AIT’s ability to balance short-term volatility with long-term positioning. The company’s exposure to diverse end markets, disciplined cost management, and active capital deployment underpin its growth thesis.
Key Considerations:
- Order Backlog Visibility: Engineered Solutions and automation order surges provide multi-quarter revenue visibility and de-risk near-term growth.
- Inflation and LIFO Dynamics: LIFO expense remains a timing headwind, but underlying margin improvement and pricing power are intact.
- Automation and Fluid Power Acceleration: Both segments are benefiting from secular drivers and strategic investment, with automation orders up 20% and fluid power OEM sales turning positive.
- Capital Allocation Firepower: Ample cash, low leverage, and a robust M&A pipeline enable AIT to pursue bolt-on acquisitions, buybacks, and dividend growth without operational compromise.
- End Market and Policy Exposure: Cyclical verticals remain choppy, but AIT’s diversified customer base and exposure to pro-business policy trends (reshoring, infrastructure, energy) offer optionality.
Risks
Persistent LIFO expense volatility and macro uncertainty could pressure margins and sales cadence, especially if inflation or inventory trends shift unexpectedly. Cyclical exposure in chemicals and oil and gas, as well as potential delays in capital spending from key customers, represent ongoing risk. Execution on M&A integration and realizing expected synergies, particularly with recent bolt-ons, will be crucial to sustaining margin expansion.
Forward Outlook
For Q3 2026, AIT guided to:
- Organic sales growth in the low to mid-single-digit percent range year over year
- EBITDA margin of 12.2% to 12.4%, with gross margin expected to dip to the low 30% range due to higher LIFO expense
For full-year 2026, management raised guidance:
- EPS of $10.45 to $10.75 (prior $10.10 to $10.85)
- Sales growth of 5.5% to 7% (prior 4% to 7%)
- EBITDA margin of 12.2% to 12.4%
Management highlighted:
- Backlog conversion and order momentum in Engineered Solutions and automation as key drivers for the second half
- Ongoing pricing contribution and disciplined cost control to offset inflation and LIFO headwinds
Takeaways
AIT is leveraging order momentum, diversified end markets, and disciplined execution to navigate a volatile industrial landscape and position for accelerated growth in the back half of fiscal 2026.
- Backlog-Driven Growth: Engineered Solutions and automation order surges will drive revenue acceleration, supporting guidance raises and margin expansion in coming quarters.
- Margin and Cash Flow Strength: Underlying margin improvement and robust free cash flow enable continued capital deployment and strategic investment, even amid inflationary headwinds.
- Secular and Policy Tailwinds: Exposure to automation, reshoring, and data center buildout, coupled with pro-business policy trends, provides optionality and long-term growth levers.
Conclusion
AIT’s Q2 2026 results reinforce its ability to balance near-term volatility with long-term strategic execution. Order momentum, margin discipline, and capital allocation firepower position the company to capitalize on secular tailwinds and backlog conversion, supporting a constructive outlook for the remainder of the year and beyond.
Industry Read-Through
AIT’s experience highlights a broader industrial sector trend: while top-line growth remains mixed, order and backlog strength in technical, automation, and engineered solutions segments are signaling a recovery cycle for capital goods and MRO suppliers. The persistent LIFO and inflation headwinds reflect sector-wide cost management challenges, but companies with pricing power and diversified end markets are navigating these pressures more effectively. Secular trends in automation, reshoring, and data center infrastructure are accelerating, offering multi-year growth opportunities for industrial distributors and technical solution providers. Investors should watch for similar backlog-driven inflections and capital deployment strategies across the industrial peer set.