Applied Industrial Technologies Inc (NYSE: AIT) Q2 2026 Earnings Call dated Jan. 27, 2026
Corporate Participants:
Ryan Cieslak — Director, Investor Relations & Treasury
Neil A. Schrimsher — President & Chief Executive Officer
David K. Wells — Vice President, Chief Financial Officer & Treasurer
Analysts:
Christopher Glynn — Analyst
David Manthey — Analyst
Brett Linzey — Analyst
Sabrina Abrams — Analyst
Ken Newman — Analyst
Chris Dankert — Analyst
Presentation:
operator
Welcome to the fiscal 2026 second quarter earnings call for Applied Industrial Technologies. My name is Mark and I will be your operator for today’s call. At this time, all participants are in listen only mode. Later we will conduct a question and answer session. If you wish to ask a question at that time, please press STAR followed by the number one on your telephone keypad. Prior to asking a question, leave your handset to ensure the best audio quality. If at any time during the conference call you need to reach an operator, please press Star zero and please note that this conference is being recorded.
I will now turn the call over to Ryan Sislak, Director of Investor Relations and Treasury. Ryan, you may begin.
Ryan Cieslak — Director, Investor Relations & Treasury
Okay, thanks Mark, and good morning to everyone. This morning we issued our earnings release and supplemental investor deck detailing our second quarter results. Both of these documents are available in the Investor relations section of applied.com before we begin, just a reminder, we’ll discuss our business outlook and make forward looking statements. All forward looking statements are based on current expectations subject to certain risks and uncertainties, including those that are detailed in our SEC filings. Actual results may differ materially from those expressed in the forward looking statements. The Company undertakes no obligation to update publicly or revise any forward looking statement.
In addition, the conference call will use non GAAP financial measures which are subject to the qualifications referenced in those documents. Our speakers today include Neil Scrimsher, Applied’s President and Chief Executive Officer, and Dave Wells, our Chief Financial Officer. With that, I’ll turn it over to Neil.
Neil A. Schrimsher — President & Chief Executive Officer
Thanks Ryan and good morning everyone. We appreciate you joining us. I’ll begin today with perspective and highlights on our results, including an update on industry conditions and the expectations going forward. Dave will follow with more financial detail on the quarter’s performance and provide additional color on our updated outlook. I’ll then close with some final thoughts. Overall, we continue to effectively manage through a mixed yet evolving end market backdrop. During the second quarter, sales and EBITDA margins were in line with guidance despite higher than expected LIFO expense and seasonally weak sales activity in December. Our team responded well with strong underlying margin performance and cost control while continuing to expand backlogs and business funnels, supporting a stronger sales trajectory into calendar 2026.
We also remain active with capital deployment across many fronts supported by our free cash generation and balance sheet capacity as it relates to sales trends in the quarter. Reported year over year organic growth of 2.2% was modestly below last quarter of 3%. Underlying sales growth showed signs of strengthening as the quarter progressed with November sales up by a nearly mid single digit percent organically over the prior year following a low single digit percent increase in October. However, growth moderated in December with average daily sales rates notably below normal. Seasonal Patterns While monthly sales trends have been choppy for most of the year, we do not view December’s weakness as indicative of the underlying sales trend developing across the business.
Of note, December is always a noisy month given seasonal factors that can drive variability in how customers operate plants and phase shipments. This dynamic was further influenced this year by the midweek timing of the holidays. In addition, we’re encouraged by early fiscal third quarter trends, with organic sales month to date in January trending up by a mid single digit percent year over year. Booking rates are also continue to show positive momentum across both segments. In particular, orders in our Engineered Solutions segment increased over 10% year over year in the second quarter. This is the strongest quarterly order growth rate in the Engineered Solutions segment in over four years, with the two year stack trend continuing to improve sequentially.
These positive trends are more in line with various underlying demand signals that have developed over the last several quarters, including improved customer sentiment and ongoing growth across our business funnels. We’re also seeing slightly more positive trends across several of our primary end markets year over year. Trends across our top 30 end markets were relatively unchanged sequentially, with 15 generating positive sales growth compared to 16 last quarter, though this is up from 11 in the prior year. Second Quarter in addition, when looking at our top 10 verticals, we saw 6 positive year over year compared to 5 last quarter and 3 in the second quarter of fiscal 2025.
Growth was strongest in metals, aggregates, utilities and energy, mining, machinery, transportation and construction during the quarter. This was offset by declines primarily in lumber and wood, chemicals, oil and gas, rubber and plastics, and refining. From an operational profitability standpoint, we delivered solid performance that helped balance softer sales activity in December and greater than expected LIFO expense as well as a difficult prior year margin comparison, as we had previously highlighted. Of note, LIFO expense came in at roughly 7 million. This was above the 4 to 5 million dollars range we had assumed in guidance and compares to the less than 1 million in the prior year.
Second quarter as in prior periods of increasing LIFO expense, our teams responded with a focus on internal initiatives, effective management of product inflation and strong channel execution. Dave will provide more details shortly, but when excluding the impact of lifo, gross margins were up both year over year and sequentially and EBITDA margins held firm over the prior year against a difficult prior year comparison the this performance reinforces the durability of our operating model and various self help opportunities across the business. We also continue to execute thoughtfully against our capital deployment priorities. Of note, this morning we announced an 11% increase in our quarterly dividend following a 24% increase last year.
The increase is consistent with our expectation of ongoing dividend growth as we align annual increases with normalized earnings growth and our favorable cash generation profile. We also remain active with share buybacks deploying over 140 million on repurchases during the first half of fiscal 2026. These actions reflect confidence in our cash flow generation as well as the value we see across applied from our strategy and long term earnings potential. Further, we continue to evaluate various M and A opportunities across both our segments that could drive a more active pace of acquisitions over the next 12 to 18 months.
Our acquisition priorities remain unchanged with an ongoing focus on expanding our technical engineered solutions position across automation, fluid power and flow control. We also remain opportunistic with M and A opportunities across our service center network aimed at optimizing our local market coverage and service capabilities. Today’s announced acquisition of Thompson Industrial Supply is a great example of this. With expected annual sales of 20 million, Thompson is a nice service center bolt on acquisition that will enhance our footprint in Southern California. They bring strong technical knowledge and align supplier relationships as well as in house belting and fabrication capabilities that strengthen our value added services and competitive position in the region.
We’re excited to welcome Thompson to the applied team and look forward to leveraging their capabilities as it relates to what we see ahead. I remain constructive on our growth potential entering the second half of fiscal 2026 and beyond. While end markets remain mixed and choppy, several growth catalysts are becoming more evident. First, our service center segment is well positioned to support our customers heightened technical MRO needs as they catch up on required maintenance across an aged installed equipment base. We believe there’s a clear underlying trend developing around this theme. Of note, our U.S. service center sales were up over 4% year over year in the second quarter inclusive of seasonally weak December activity.
We saw growth across both strategic national accounts as well as our local accounts. Local account sales growth strengthened as the quarter progressed, which is an encouraging signal for broader industrial activity. We also continue to see stronger activity across several of our heavy US Industrial verticals that are break fix intensive. This includes primary metals and aggregate markets where related service center sales were up by a double digit percent year over year in the quarter segment booking rates were positive in the quarter while month to date in January, segment organic sales are trending up by a mid single digit percent year over year.
Our scale, local and consistent service capabilities and technical knowledge of motion control products and solutions are driving greater growth opportunities in both legacy and and emerging end markets. We also continue to benefit from sales process initiatives and ongoing pricing actions as well as increased traction from our cross selling efforts. During November, our Service center leadership teams gathered in Cleveland to collaborate on our strategic growth initiatives, cross selling opportunities and operational requirements. Moving Forward There remains significant excitement and energy surrounding our core business today and our teams are making notable progress deploying a number of strategic actions designed to further catalyze our growth long term.
Within our engineered solutions segment, we expect positive order momentum over the past several quarters to translate into more meaningful sales growth beginning in the second half of fiscal 2026. We’re starting to see this play out with segment organic sales trending up by a high single digit percent year over year month to date in January. In addition, we expect increased customer activity across our technology vertical which represents about 15% of our engineered solutions segment. Of note, we continue to receive positive demand signals from our semiconductor customer base. This aligns with broader market indications suggesting a multi year up cycle is emerging for semi wafer fab equipment.
As a reminder, semiconductor space drives the bulk of our technology vertical participation where we provide various fluid conveyance, pneumatic and automation solutions to wafer fab equipment manufacturers and other providers along the value chain. Many of our solutions are directly specified into wafer fab equipment across both new and established equipment platforms. I would also highlight recent investments we’ve made in engineering systems and production capacity that should provide support to fully leverage these demand tailwinds moving forward. Combined with new business tied to broader data center buildout, we believe our technology vertical could provide a nice tailwind to our organic growth in coming quarters.
Our automation operations are also in solid position to drive stronger growth moving forward. Automation orders were up 20% year over year in the second quarter. We expect various secular tailwinds to continue to positively influence demand for our advanced automation solutions, including structural labor constraints, heightened focus on safety and quality and North American reshoring activity. These dynamics are accelerating the adoption of collaborative and mobile robots, machine vision and IoT solutions, as well as require strong application and engineering support that aligns well with our market approach and value proposition. In addition, our flow control team is focused on capturing growth developing within life science, pharmaceutical and power generation markets across the US with established product portfolios and leading technical capabilities around calibration services, instrumentation, steam and process heating and filtration, we are favorably positioned to win in these markets year to date.
Flow Control sales have been modestly lower year over year, partially reflecting muted activity across the chemicals end market as well as a slow pace to project shipment phasing and prior year comparisons. However, Flow Control orders were up by a high single digit percent year over year in the second quarter and we expect more productive backlog conversion into the second half of fiscal 2026 based on customer indications and firming end market trends as well as broadening maintenance and capital spending on process flow infrastructure across the US in support of energy security and power generation capacity. Lastly, we’re encouraged by improving trends across our industrial and mobile OEM Fluid Power operations where organic sales were positive year over year for the first time in two years during the second quarter while orders were up by a double digit percent over the prior year.
This positive development is notable considering the drag this area of our business has had on our growth the past several years. As a reminder, our Fluid Power customer base includes thousands of small and mid sized specialty OEMs across a diversified industry base. Our leading innovative engineering capabilities, access to premier supplier technologies and customer reach are driving new business opportunities with these OEMs as they begin to integrate advanced power and control features into their next generation equipment. We believe demand for these features will be structurally higher as OEMs begin to reaccelerate production, giving an increased focus on power consumption, machine performance and automation.
Combined with our enhanced footprint and capabilities following our Hydrodyne acquisition last year, our Fluid Power operations are in a strong position moving forward as it relates to Hydrodyne. We marked the acquisition’s one year anniversary at the end of December. I want to take a moment to thank our team’s combined efforts over the past year in making this acquisition a great early success. We’ve achieved notable growth and operational momentum from this transaction that stands to further augment our earnings potential as underlying end market demand begins to build. Of note, Hydrodyne generated over 30 million of EBITDA in the first 12 months of ownership with contribution building year to date in fiscal 2026.
As we continue to align teams and realize Synergies during the second quarter, Hydrodyne’s EBITDA margins exceeded 13% and were modestly accretive to our consolidated EBITDA margin performance. We’ve made tremendous progress in leveraging complementary solutions, harmonizing technical capabilities and systems, and driving operational efficiencies across the combined operating platforms. We’re connecting Hydrodyne with new growth opportunities by cross selling their value added Fluid power repair solutions across our legacy US Southeastern customer base. We’re also enhancing their capabilities serving the rapid pace of innovation developing across fluid power mobile systems as well as providing fluid conveyance solutions tied to data center thermal management needs.
Moving forward, we expect Hydrodyne’s contribution to be increasingly accretive to our underlying growth and margin performance as this positive momentum feathers into our organic results. At this time, I’ll turn it over to Dave for additional detail on our results and outlook.
David K. Wells — Vice President, Chief Financial Officer & Treasurer
Thanks Neil. Just as a reminder before I begin, as in prior quarters, we have posted a quarterly supplemental investor presentation to our investor site for additional reference as we recap our most recent quarter performance. Turning now to our financial performance in the quarter, Consolidated sales increased 8.4% over the prior year Quarter acquisitions contributed 6 points of growth while the impact from foreign currency translation was a positive 20 basis point impact. The number of selling days in the quarter was consistent year over year. Netting these Factors, sales increased 2.2% after an organic basis. As it relates to pricing, we estimate the contribution of product pricing on year over year sales growth was approximately 250 basis points for the quarter.
This is up from approximately 200 basis points in the first quarter and primarily reflects the effective pass through of incrementals announced supplier price increases in recent periods. Moving to consolidate gross margin performance, as highlighted on page 7 of the deck, gross margin of 30.4% was down 19 basis points compared to the prior year level of 30.6%. During the quarter we recognized LIFO expense of $6.9 million, which was 2 to $3 million above our expectations and up meaningfully from prior year second quarter LIFO expense of $0.7 million on a net basis. This resulted in an unfavorable 54 basis point year over year impact on gross margins during the quarter.
While the LIFO expense increase partially reflects broader product inflation and supplier price increases. We also prudently increased our level of inventory investment in the quarter based on our outlook and Fermi demand developing across the business. As a reminder, our use of lifeo accounting accelerates the recognition of product inflation on our results which during periods of increasing inflation and inventory expansion reduces our tax burden and drives cash savings. Importantly, from a reported gross margin standpoint, the impact is more about timing of when we recognize product inflation and is not a change in the underlying economics of the business.
As inflation levels out and eventually normalizes, we would expect this impact to unwind accordingly as we saw in prior periods of greater inflation and LIFO expense. That said, as Neil mentioned earlier, our team responded well to these inflationary headwinds through various countermeasures including effectively managing supplier price increases, channel execution and margin initiatives. We also benefited from positive mix tied to our Hydrolyne acquisition as well as stronger growth across local accounts. Excluding LACREL 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 year levels.
On an organic constant currency basis, SDNA expense was up 1.4% year over year compared to a 2.2% increase in organic sales during the quarter. Ongoing inflationary headwinds and growth investments were balanced by solid cost control and internal productivity initiatives. Overall, modest organic sales growth public with MA contribution, favorable underlying gross margin performance and cost control resulted in reported EBITDA increasing 3.9% year over year inclusive of a 460 basis point year over year LIFO expense headwind. This resulted in EBITDA margins of 12.1% which was down 52 basis points from the prior year level of 12.6% inclusive of a 54 basis point year over year headwind from higher lifo expense.
The 12.1% reported EBITDA margin was within our second quarter guidance range of 12 to 12.3% despite greater than expected lifo expense which was approximately 15 to 25 basis points unfavorable to our expectations. Reported earnings per share of $2.51 was up 4.6% from prior year EPS of $2.39 on a year over year basis. EPS benefited from a lower tax rate and reduced share count, partially offset by increased interest and other expense on a net basis. Turning now to sales performance by segment, as highlighted on slides 8 and 9 of the presentation, sales in our service center segment increased 2.9% year over year on an organic basis when excluding a 30 basis point positive impact from foreign currency translation.
The organic sales increase in the quarter was primarily driven by price contribution as volumes were relatively unchanged year over year reflecting seasonally slow sales activity in December and lower international shipments. Across our U.S. operations, sales increased more than 4% over the prior year reflecting growth across both our national and local account base. U.S. service center sales benefited from firming demand across several core end markets as well as sales force investments and cross selling actions that continue to read through within a mixed demand backdrop. Segment trends also continue to be supported by favorable growth across Fluid Power MRO sales segment.
EBITDA increased 2.2% over the prior year inclusive of a 340 basis point year over year LIFO headwind while segment EBITDA margin of 13.3% declined 14 basis points inclusive of a 45 basis point year over year LIFO headwind excluding the impact of LIFO the year over year improvement in segment EBITDA and EBITDA margin primarily reflects underlying operating leverage on stronger U.S. sales channel execution and cost control. Within our Engineered Solutions segment, sales increased 19.1% over the prior year quarter with acquisitions contributing 18.6 points of growth. On an organic basis Segment sales increased 0.5% year over year.
The increase was primarily driven by price contribution as well as modest volume growth across Fluid, Power, mobile and industrial OEM customers, partially offset by lower flow control sales. Sales across our automation business increased 3% on an organic basis over the prior year, representing the third great quarter of positive organic growth. Segment EBITDA increased 4.4% year over year over the prior year inclusive of a 400 basis point year over year LIFO headwind primarily reflecting contribution from our Hydrodyne acquisition partially offset by lower organic EBITDA on muted sales trends in the quarter segment EBITDA margin of 14.3% was down roughly 200 basis points from prior year levels inclusive of a 55 basis point year over year LIFO headwind excluding the LIFO impact.
The segment EBITDA margin decline was primarily driven by lower flow control sales and unfavorable MA mix, as well as a difficult prior year comparison from record performance across our Engine Solutions segment during the second quarter of fiscal 2025 tied to favorable mix as we had previously highlighted. Moving to our cash flow performance, cash generated from operating activities during the second quarter was $99.7 million, while free cash flow totaled $93.4 million, representing conversion of 98% relative to net income compared to the prior year. Free cash was up slightly as greater working capital investment was balanced by ongoing progress with internal initiatives.
From a balance sheet perspective, we ended December with approximately $406 million of cash on hand and net leverage at 0.3 times EBITDA. Our balance sheet is in a solid position to support our capital deployment initiatives moving forward, including accretive MA dividend growth and opportunistic share buybacks. During the second quarter, we repurchased over 346,000 shares for $90 million, bringing the year to date total to over 550,000 shares for $143 million. Turning now to our outlook, as indicated in today’s press release and detailed on page 12 of our presentation we are adjusting our full year fiscal 2026 EPS guidance following our first performance and updated outlook, we now project EPS within a range of $10.45 to $10.75 based on sales growth of up 5.5 to up 7% and EBITDA margins of 12.2 to 12.4%.
Previously, our guidance assumed EPS at $10.10 to $10.85 on sales growth of 4 to 7% and EBITDA margins Of 12.2% to 12.5%. Our updated guidance now assumes LIFO expense of 24 to $26 million compared to prior guidance of 14 million to $18 million. In addition, we now assume 210 to 230 basis points of year over year sales contribution from pricing upper prior guidance of 150 to 200 basis points. From an organic sales perspective, we are now assuming a 2.5% to 4% increase for the full year compared to our prior assumption of up 1 to 4%.
This takes into account first half organic sales performance as well as early third quarter organic sales trends which as noted earlier are trending up by mid single digit percent over the prior year in January. I would note prior year sales comparisons are slightly more difficult in February and March compared to January. In addition, we continue to assume ongoing macro and policy uncertainty will influence customer spending behavior and shipment activity near term. We believe this could result in ongoing variability in monthly sales growth pending greater clarity on the macro backdrop or incremental support from lower interest rates and fiscal policy.
At the midpoint of our updated guidance, we assume organic sales increased by approximately 4% year over year in the second half of fiscal 2026 with third quarter organic sales expected to increase by a low single digit to mid single digit percent over the prior year. We also project Inorganic M and A data sales and MOZ foreign currency tailwinds to contribute approximately 50 basis points of year year growth in the second half of the year. The M and A contribution includes today’s announced acquisition of Thomson Industrial Supply as well as our May 2025 acquisition of Iris Factory Automation.
Our guidance does not include contribution from future MA or additional share repurchases in the second half of the year. From a margin perspective, we expect third quarter gross margins to decline sequentially to a low 30% range. This assumes a more normalized level of gross margin execution relative to our strong underlying second quarter performance as well as slightly higher LIFO expense sequentially combined with modestly stronger operating leverage and greater sales growth as well as ongoing inflationary headwinds anticipate growth investments in our annual merit increase effective January 1st. We expect third quarter EBITDA margins to be within a range of 12.2% to 12.4%.
Lastly, some housekeeping items. Our updated guidance does assume a slightly lower share count following second quarter share repurchases as well as a tax rate assumption of approximately 23% for the full year compared to our prior range of 23 to 24%. These slight EPS tailwinds are partially offset by an increase in net interest expense into the second half of our fiscal year following the net impact of our interest rate swap maturing at the end of January. With that, I will now turn the call back over to Neil for some final comments.
Neil A. Schrimsher — President & Chief Executive Officer
So to wrap up our team executed well through the first half of fiscal 2026. We’re delivering on our financial commitments and making strong progress on our strategic initiatives as we enter the second half of the year. We do so from a position of strength with signs of emerging growth catalyst developing across several areas of our business. Early fiscal third quarter sales trends are encouraging and provide a nice jump off point though we remain prudent with our guidance as we look for greater consistency in sales trajectories as we move into more meaningful seasonal months while balancing the near term timing impact of LIFO accounting.
Importantly, sentiment from both our customers and our sales teams continue to be directionally positive and our business funnels are expanding. Technical MRO requirements are heightened, entering what should be a more productive operating environment as we move through calendar 2026 when considering potential support from lower interest rates, a more favorable tax policy and deregulation. In addition, our industry position places us in a unique and comprehensive position. Thank you to capture growth as capital spending broadens across many of our customer verticals. This includes pro business policies supporting greater production and investments in core legacy verticals such as metals, mining and machinery, as well as clear secular and structural tailwinds supporting multi year cycles across semiconductor, power generation and energy end markets.
We also expect to play a greater role across the data center space given our expertise and product offering in areas of thermal management, robotics and fluid conveyance. With our deep technical industrial facility domain expertise, access to critical higher engineered industrial products and balance sheet capacity, we’re well positioned to capitalize on these growth opportunities. We also remain positive on our margin expansion potential as these tailwinds drive stronger top line growth. We continue to see a clear path to achieve our mid to high teen incremental EBITDA margin target at mid single digit organic sales growth. This is supported by inherent operating leverage across our business model, combined with mixed tailwinds tied to the ongoing expansion of Engineered Solutions segment and local account growth within our Service center segment.
Additional support should emerge as we continue to scale our automation platform following various growth investments in recent years. Overall, we look forward to fully capturing this growth potential through the remainder of fiscal 2026 and years to come. And as always, we thank you for your continued support. With that, we’ll open up the lines for your questions.
Questions and Answers:
operator
Thank you. We will now begin the question and answer session. If you would like to ask a question, please pick up your handset. Press Star followed by the number one on your telephone keypad. If you would like to withdraw your question from the queue, press Star one again. As a reminder, if at any time you need to reach an operator, please press Star zero. We’ll pause for just a moment to compile the Q and A roster. And our first question comes from the line of Christopher Glean with Oppenheimer. Christopher, please go ahead.
Christopher Glynn
Thanks. Good morning guys. Just wanted to dive into the engineered solutions orders in the quarter up over 10%. I assume that was an organic basis. Just want to clarify as well as you know what degree of positive book to Bill that might denote.
Neil A. Schrimsher
Yes, so that would be on an organic basis. And you know, as we think about it, it broke out across the segments with automation as we talked about plus 20 fluid power low teens 13 and flow control high single digit 8% into the side book to bill was above one during the quarter and you know now has been three of the last four quarters in that site.
Christopher Glynn
Great, thanks. And on the fluid power comparisons, you know, you’ve got the destock comparison so you know, curious if you could sort of dissect the kind of end demand trend versus you know, better kind of kind of sell through there in alignment.
Neil A. Schrimsher
Yeah, I think really the stock destock, given how that’s elongated out has really been worked through. So the performance that we saw in the mobile off highway part of flu Fluid power is encouraging as well as the work that’s going on with those mid tier and smaller OEMs. We’re also encouraged on the fluid power side of the amount of industrial activity. I think that’s similar to service centers on technical MRO requirements that industrial customers are having to look at the aging of that installed base of producing equipment and is giving us opportunities. And then right as we talked about in the comments, we think the technology side of our fluid power is really set up well as we think about semi wafer fab equipment and Also that growing participation in data center.
Christopher Glynn
Okay, and last one for me, I think in the January sales up mid single digits. You mentioned engineered solutions was up high single digits. And you mentioned February and March a bit more difficult comp. So just want to make sure I have all that right. And also just on the thought that maybe January had a benefit from neutralizing the December pause.
Neil A. Schrimsher
Yeah. You know, you think about it, there could be right from the December. Right. Which we talked about or looked at from that side from normal seasonal patterns there. Right. Running lower. So there could be. But I think the height of some of that growth and increase we take as favorable that it’s more than just a little bit of timing.
Ryan Cieslak
And Chris, the other thoughts on the trends in engineered solutions being up high single digits in January is correct. And there was maybe another part of your question that maybe we didn’t answer, but let us know.
Christopher Glynn
Appreciate that. I think we got it.
Ryan Cieslak
Okay, thanks.
operator
And our next question comes from the line of David Manti with Baird. David, please go ahead.
David Manthey
Morning guys. My first question is on fdna Organic constant currency SDNA growth was less than organic revenue growth again this quarter which looks really good. I’m wondering as we lap hydrodyne here, should overall FDA come in closer to overall revenue growth next quarter? And then as we look forward, is there anything unusual in the fourth quarter of fiscal 25 on SDNA? It looked like the sequential from the third quarter was up a greater than normal dollar amount there. And I’m just wondering if there was something unusual we should know about.
David K. Wells
Yeah, we’ll start with the sequential increase. In 25 third to fourth quarter. David, a couple things came into play there. There was an increase in benefit costs. There’s variability obviously in our our self insured medical expense, but also about a million five, you know, that swapped around with, you know, Rabbi Trust or deferred comp that you know, gets offset in other income. So that did skew SDNA just a little bit as you think about, you know, kind of now as we move into third quarter, we do have the focal mirror point coming in, you know, and lapping Hydrodyne to your point. So we would still work to, you. Know, so an increase less than the. Rate of the sales increase. But I expected given that the last quarter was about half the rate of the sales increase in terms of the SDA increase, we’d expect that gap to close just a little bit just given those factors coming into play.
Ryan Cieslak
Hey Dave, just also on the prior year, fourth quarter for fiscal 25, it was impacted if you recall by some AR provisioning that we had in the quarter, I think that was over over 2 million or so year over year. So that’s part of the year over year or the uptick in the fourth quarter trend you see there?
David Manthey
Yeah, thanks. And based on your guidance, it would appear that the fourth quarter of this year is a more normal kind of, I don’t know, 10 million quarter to quarter increase, which looks more normal. Okay, thank you for that. And then on capital allocation, I’m not sure if it’s in the deck here, but did you mention the shares left under your repurchase authorization? And I guess in the context of I think you have about 1 billion and a half dollars of borrowing capacity including some accordion features. Does share repurchase take priority over debt pay down in the near term given your ample access to capital and kind of the relative share price.
David K. Wells
You know, we’ll still be opportunistic. When you look at the share repurchase, you know, we are contemplating some debt pay down, you know, not the entirety of it, but given the, you know, in January the swap will roll off. So we’ll work to neutralize a little bit that, you know, added interest expense that would come with that. So you know, here again taking it in rank order priority, it’s going to be the organic growth investment followed by M and A, followed by the dividend increase 11% this quarter coming off the 24% last year increase. So continuing to move that in line with our increase in earnings in the business as well as then the opportunistic share repurchase. So we’ll balance all those. To your point, plenty of dry powder given the billion 5 capacity and leverage at 0.3 times to really work all those angles.
Ryan Cieslak
And then Dave, we have I think about 700,000 shares left on the current authorization that we had, which we had, you know, updated I think last, last August time frame. And so we’ll continue to look at that as we, as we continue to buy back shares and update it, update that accordingly as, as we progress through that, the current program.
Neil A. Schrimsher
And then lastly, David, I’d just say on the M and A side, as we touched in the remarks, we feel good about the pipeline, the work, the activity, touch on the potential for greater activity as we look out over the 12 to 18 months really around our stated priorities of continuing to build out engineered solutions with some more select opportunities for differentiation around the service center side. So we’re low CapEx requirements, we’ll continue to make those, they generate strong returns but the M and a opportunity for us we think remains a good priority for us as we operate through the rest of this fiscal year and look out beyond.
David Manthey
Thanks guys. Appreciate it.
operator
And your next question comes from the line of Brett Linzey with Mizuho Pratt. Please go ahead.
Brett Linzey
Hey good morning all. Wanted to come back to the Automation orders up 20% I guess how much of that do you think is related to pent up needs that were put on hold that are just starting to release verse new projects capital formation that’s being driven by incremental onshoring your customers might be focused on?
Neil A. Schrimsher
Yeah Brett, I don’t know if I got a perfect answer to that. Obviously we’ve had growing funnel within our automation group and also with our service center teams walking in here today a couple of releases are getting highlighted on projects that were in flight. But there’s also a great amount of work. If we consider what is coming to the US from a reshoring standpoint we have more customers reaching out. How can they drive their efficiencies and productivity where collaborative or mobile robots will help if they’re looking at quality control or quality and inspection where vision systems can help and even just connectivity products right to monitor KPI and performance where perhaps people did that manually in the past at equipment the way to have visual panels and boards on that.
So I think both are going to be continued drivers for us as we look out over calendar 2026. Things that we worked on on ideas and solutions but also increase new opportunities as we think about the backdrop. And then things like tax policy and outlooks are probably going to help further accelerate some of that look from customers.
Brett Linzey
Yeah, that’s great. And then just my follow ups on price. So the contribution was 250bps in the quarter. Curious what you’re seeing here in calendar 26 from a vendor price standpoint. And how should we think about pricing contributions for the balance of this fiscal year in Q3 and Q4 as you got some wraparound and maybe some incremental coming through?
Neil A. Schrimsher
We think about activity from our suppliers. Obviously those that are more calendar year based and increases we we see those in place. We did see some that are later year perhaps mid year around their fiscal year events accelerate. So we think to a large part there’s more of that that is in now we would think the third quarter has the potential to be similar to the second quarter. So 250 basis points in that and then with the fourth quarter given perhaps that aging or overlapping of some prior increases maybe that moderates to a couple hundred basis points impact in the fourth quarter.
So that’s what’s encapsulated in our outlook. If we look beyond that. Right. Hey, we will see there could be a path to higher upside in that area as we think about the direction of LIFO that we’ll have into that side of it as well.
Brett Linzey
All right, got it. Thanks. Best of luck.
operator
And our next question comes from the line of Sabrina Abrams with Bank of America. Sabrina, please go ahead.
Sabrina Abrams
Hey, good morning everyone.
Neil A. Schrimsher
Good morning.
Sabrina Abrams
Question. So I know you guys did raise the pricing guide this quarter and pricing I guess accelerated nicely quarter over quarter. But you know, you did raise LIFO expense and would just like to ask why not assume price is going to accelerate into the second half? Because I would think price continues to accelerate from here, but just any color around that assumption.
Neil A. Schrimsher
Yes. So as we think about we touched on just a little bit there. We’re seeing the announced increases from our suppliers as we think about for much of 26 are perhaps likely in place now. And then if we think about the aging or the overlap of prior increases, that’s what we’re saying perhaps the price moderates to that couple hundred basis points in the fourth quarter compared to this 250 level that we have today. Obviously a will be close to the inputs of looking at any other metals material increases that will be coming through with suppliers and work with them to orderly take them through to the markets.
But hey, that that’s our view now and perhaps the tariff environment is going to stay moderated at its current level right now as we look out over the rest of the fiscal year.
David K. Wells
I’d say too, I’d add the, you know, obviously you’re seeing in the, as you start looking at the comps in the back half of 25 some higher levels of pricing that you know, that does skew year over year just a bit versus the first half. And then thinking about the LIFO doesn’t necessarily travel in exact tandem with the dynamics that we see on the pricing and supply of price increases because that’s also influenced by the mix of what we’re purchasing. So we did have a heavier concentration this quarter of parts that we had not purchased for two or three years which attracted a fair amount of, you know, LIFO increase as we looked at the, you know, the buy versus you know, kind of the two or three year ago price that we were carrying at.
So you know that that is also a factor as you try to, you know, correlate those two.
Sabrina Abrams
Thank you. And just on guidance on my math, I think there’s an extra versus the prior guide. I think there’s an extra 18 cents from LIFO expense going up impacted embedded in the new EPS guide and there’ a couple cents of interest expense. And then on the other side you have the benefit of, you know, maybe a lower share count and like very, very modest impact from the acquisition you did. And just like, as I think about these moving pieces and the narrowed guidance maybe is the right way to think about it that the core guide has been raised.
Because if I sort of back out all this other stuff I’m getting to like core EBIT is higher versus last versus last quarter. But I just want to clarify with you guys whether that’s the correct way to think about it and any moving pieces that might be missing.
David K. Wells
Yeah, I think there’s a modest increase. There resulting from really the strong margin performance here. Again, if you strip out that LIFO 31% gross margin performance against a very difficult comp. You know, like I said, you think about the year over year, you know, still being up partially driven by that hydrodyne mix benefit, but nonetheless very pleased with the team’s response to the inflationary environment. So you’re seeing some of that read through. We’ll still be cost conscious and kind of continuing to look at that. So I’d say it’s a modest increase there in the core. And then think about the guide really kind of tightening the guide at the upper end of the previous guidance.
Sabrina Abrams
And just to clarify. Oh, sorry, sorry. You guys finished?
Ryan Cieslak
Yeah, no, that’s very. So I think if you look at the midpoint of the guidance, the organic growth we’re assuming in the back half of the year is up slightly from what we were assuming in the prior guidance that we provided and maybe even a more meaningful amount. We look at it at the high end and so not a huge change, but we are assuming a little bit greater growth, organic growth on sales in the back half relative to what we were prior.
Sabrina Abrams
Thank you. And just one last quick follow up to that. Is that on the raised pricing assumption or is implicitly. Did you raise your volume assumption?
Ryan Cieslak
Yeah, I’d say it’s primarily tied to the raised pricing assumption, but still some volume, volume assumptions as well in there as well.
Sabrina Abrams
Thank you, I’ll pass it on.
operator
And our next question comes from the line of Ken Newman with Keypan Capital Markets. Ken, please go ahead.
Ken Newman
Hey, morning guys. Thanks for squeezing me in. Wanted to first just touch on the margin guidance if we could. You know, I guess there’s a headwind due to LIFO here in the back half. I think the math is around like 30, 40 basis points on EBITDA. But you know I would think that the high single digit, the low double digit sales growth and engineered and then the automation orders being up 20% would be a decent mix offset. So maybe can you just help us think about bucketing the various moving pieces in the margin guide and what that assumes for mix versus price costs and LIFO headwinds.
Ryan Cieslak
Yeah, I can start. So just as we think right. And we talked about hey perhaps we moderate below the 30.4 that we had in the second quarter that 10 to 30 basis points on gross margin on the guide. I think you’re right. And potential for lifo to be 30 to 40 basis point headwind path to things that could counteract. Right one will be a. What is that true path of LIFO in the second half. To your point on mixed dynamics engineered solutions, local account growth and service centers would both be the potential for benefit in that the further path on M and A performance hydrodyne as it comes in would have the perhaps continued improvement.
And then obviously we’ll be focused on our price actions and ongoing margin initiatives that we have across that benefited us in the second quarter. But hey, as we see sit here today, right. We say there is that potential for that to show up including that higher LIFO expense that we had in the second quarter somewhat to continue on at that 7 to 8 million impact.
David K. Wells
Yeah, I think you stripped that out. Sorry. Yeah, you stripped that out, Ken. I’d say, you know the LIFO expense. It’S a good story. In terms of incrementals we’re up over 20%. You know what that implies in terms of the guidance in the back half in terms of increasing metals ex lifo. So you are seeing all those things Neil indicated and highlighted there in terms of the mix Benefit flow control sales coming back, the acquisition Mix Benefit stronger engineered solutions shipments which help from mix standpoint as well. So all those things play in in addition to the work around pricing and kind of the channel optimization.
Ken Newman
Okay, that’s, that’s helpful. And then you know just for my follow up, you know it was here, it was nice to hear you guys reiterating the mid teen incremental EBITDA margin target on mid single digit growth. You know I think the midpoint of the of this quarter’s guide is slightly below that. But I wanted to get your thoughts on you know one do you think you could reach that target exiting this fiscal year and if so, you know do you need a specific number or contribution of volume growth to kind of get there? And maybe also, you know, if we get incremental pricing versus what you’re already expecting in the guide today, would you expect that to be neutral to the operating leverage or accretive?
Neil A. Schrimsher
You know I can start as we think about that leverage and then some of our targets that we have for the business, we think about them really from an annualized basis. But to your point, you know we’ve demonstrated strong incrementals with low single digit in volumes as we move up. Right. Those have the opportunities to improve. So as I think as we look out over calendar 26 we see that opportunity for that to play out and develop for us.
Ryan Cieslak
Yes. And I would say that at the midpoint of the guidance we would assume that the fourth quarter gets to call it a mid teen incremental margin on EBITDA at call it that 4% or so type of organic growth that we have baked into the guidance at this point. And that includes the LIFO increased LIFO year over year. As mentioned earlier, we will have a benefit year over year in the fourth quarter assuming normalized AR provisioning given that prior year impact that we had. And so we’re getting to that, you know call it mid teen to high teen range, you know at slightly below mid single digit organic growth but feel very good as we move into more stabilized and firm mid single digit organic growth environment that those that incremental margin guide is achievable.
And then as it relates to pricing and anything incremental, a team is doing a great job of managing pricing, a number of other initiatives that we have on gross margin and countermeasures to manage through that. And we’ll see how it all plays out. But obviously inflationary environment, but the team’s doing a good job executing through it.
Ken Newman
Very helpful. Take care.
operator
And our next question comes from the line of Chris Dankert with Loop Capital Markets. Chris, please go ahead.
Chris Dankert
Hey Morin, thanks for fitting me in here. I guess just under the third quarter guide, if I’m looking at what you guys have staked out from organic sales growth perspective, that seems to imply kind of a below typical seasonal growth level. I mean I think plus 5% sequentially is kind of what the midpoint implies. Longer term you’re typically up in the high single digit range. I guess when we consider the December holiday timing impact the ES orders make metal pricing. Can you kind of help us square the below seasonal midpoint of that sales guidance for fiscal 3Q.
Neil A. Schrimsher
Actually Chris, if y ou look at it the, you know, given the low to mid single digit assumption for Q3, you know, 4% here again, you know, organic for the total back half. That would assume for the first quarter in quite a while we’ve been, you know, kind of last quarter was 200 basis points below the typical seasonality. But that’s really back in line with what we’d say is normal seasonality as we transition from Q2 to Q3.
Chris Dankert
Got it, got it. Well, it gets in the interest of time. I’ll leave it there, but thanks so much.
operator
And our next question comes from the line again from Christopher Glean with Oppenheimer. Christopher, please go ahead.
Christopher Glynn
Yeah, thanks. Just one on the mechanics of lifo. I, you know, definitely don’t claim a deep appreciation of how it all works, but I’m wondering about the lead time dynamics, what they’ve been like for supply price negotiations. Are they, you know, faster cycling than normal or have the signals been too varied? I’m just wondering if there’s perhaps an opportunity to standardize the pre planning communications with suppliers a little bit more just given your long term distinguished excellence in data and analytics throughout the organization on many dimensions.
Neil A. Schrimsher
Yeah, Agatha. Sorry, Chris. I think suppliers are being orderly in this and you know, hey, that’s our expectations as they’re working on them as they develop. Obviously you need the data, you need the files to work through on that to be able to effectively implement. So we’re not changing our expectations or views that that has to be orderly. And so I think suppliers are understand that it’s best for them as well. So they’re working to do that. And so it kind of led a little bit. I think most of the annual increases are in, I think those that we’re contemplating are more historically kind of mid or their more fiscal year side have accelerated.
I think most of those are in. So from a price increase standpoint, I won’t say that they’re finished the metals or something else moves, but I think most of those are in place right now.
Ryan Cieslak
Yes, Christy, I think the other piece of LIFO to consider as relates to how it moves quarter to quarter obviously is what we decide to bring in as relates to inventory investment. Right. And so that remains a fluid sort of dynamic and we feel good that what we’re seeing in the back half as demand is starting to firm, we’re starting to bring more inventory on as we talked about in a prudent way. And so that drove some of the, I think increase in LIFO maybe relative to what we expected last October. We talked about LIFO expense guidance, so that’s probably a piece of it.
Just to keep in mind that that will continue to fluctuate depending on the demand backdrop.
David K. Wells
Put in context, operating about a point and a half in terms of 1/2% in terms of the sequential change in the quarter, as you see that demand firming. And we brought in some of the inventory to support that.
Christopher Glynn
Thanks, everybody.
operator
At this time, I’m showing we have no further questions. I will now turn the call over to Mr. Scrimscher for closing remarks.
Neil A. Schrimsher
Thank you. I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter.
operator
Thank you, l adies and gentlemen. T his concludes today’s conference call. Thank you for participating. You may now disconnect.