ITEM 1A. RISK FACTORS.
In addition to other information set forth in this report, you should carefully consider the following risk factors that could materially affect our business, financial condition, or results of operations and that could make an investment in Applied more speculative or risky. Certain risks are discussed in more detail in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations.” This information is incorporated here by reference. Because of the risk factors discussed herein, past financial performance should not be considered a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. For more information, see “Cautionary Statements” in Item 7.
ECONOMIC AND INDUSTRY RISKS
Our business depends heavily on the operating levels of our customers and the factors that affect them, including general economic conditions. If our customers reduce their operating levels, we may experience pricing pressures, difficulty in managing inventory, challenges in forecasting, and other adverse effects. The markets for our products and services are subject to conditions or events that affect the demand for goods and materials that our customers produce. Consequently, demand for our products and services has been and will continue to be influenced by most of the same factors that affect demand for and production of customers' goods and materials.
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 our 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. Inventory management becomes more difficult in times of economic uncertainty. Volatile economic and credit conditions also make it more difficult for us, as well as our customers and suppliers, to forecast and plan future business activities.
If our customers become unable or unwilling to pay amounts owed to us under unsecured trade credit arrangements it could materially and adversely affect our financial condition and results of operations. We extend unsecured trade credit to a broad range of customers across many industries. If our customers become financially distressed and experience deterioration in their cash flow or operating and financial performance due to economic downturns, competitive pressures, or reduced demand for their products, they may not be able to make scheduled payments, or may delay payment, of amounts due to us.
Supply chain disruptions could hinder our ability to meet demand, resulting in increased costs, or force us to find alternative suppliers which may be difficult to identify or more expensive to engage, thereby adversely affecting our results of operations, financial condition, and reputation. Our supply chain, including transportation availability, staffing, and cost, could be disrupted bynatural or human-induced events or conditions, such as power or telecommunications outages; security incidents; terrorist attacks; war; other geopolitical events; public health crises; earthquakes; 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 our control. These supply chain disruptions may result in increased costs which we may be unable to pass along to customers. In addition, if these disruptions cause us to look for acceptable alternative sources of products, they may cost more. These potential
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impairments to our ability to meet customer demand could result in lost sales, increased costs, reduced profitability, and damage to our reputation.
Consolidation in our customers' and suppliers' industries could impede our ability to negotiate favorable commercial terms in our purchase and sale contracts, placing pressure on our prices and leading to volatility in our sales, thereby adversely affecting our business and financial results. Consolidation continues among both our customers as well as our product suppliers. As customer industries consolidate or customers otherwise aggregate their purchasing power, a greater proportion of our sales could be derived from large volume contracts, which could adversely impact margins and other commercial terms that could allocate greater risk to us. Consolidation among customers can produce changes in their purchasing strategies, potentially shifting blocks of business among competing distributors and contributing to volatility in our sales and pressure on prices.
Similarly, continued consolidation among suppliers could reduce our ability to negotiate favorable pricing and other commercial terms for our inventory purchases, and we may be unable to take advantage of consolidation trends.
An increase in competition could decrease sales or earnings. We operate in a highly competitive, fragmented industry. Our principal competitors are specialist and general line distributors of bearings, power transmission products, fluid power components and systems, flow control solutions, automation technologies, industrial rubber products, linear motion components, tools, safety products, oilfield supplies, and other industrial and maintenance supplies. These competitors include local, regional, national, and multinational operations, and can include catalog and e-commerce companies. Competition is largely focused in the local service area and is generally based on product line breadth, product availability, service capabilities, and price. Existing competitors have, and future competitors may have, greater financial or other resources than we do, broader or more appealing product or service offerings, greater market presence, stronger relationships with key suppliers or customers, or better name recognition. If existing or future competitors seek to gain or to retain market share by aggressive pricing strategies or sales methods, business acquisition, or otherwise through competitive advantage, our sales and profitability could be adversely affected. Our success will also be affected by our ability to continue to provide competitive offerings as customer preferences or demands evolve, for example with respect to product and service types, brands, quality, or prices. Technological evolution or other factors can render product and service offerings obsolete, potentially impairing our competitive position and our inventory values.
Our operations outside the United States increase our exposure to global economic and political conditions and currency exchange volatility, which may negatively impact our profitability. Foreign operations contributed 12% of our sales in 2026. 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 (including corrupt practices), economic and trade policy actions. In addition, our foreign operations' results are reported in local currency and then translated into U.S. dollars at applicable exchange rates, which opens us 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.
STRATEGIC AND OPERATIONAL RISKS
Our business could be adversely affected if we do not successfully execute our operational and growth strategies, including our strategies to grow our sales and earnings. We have numerous strategies and initiatives to grow sales, leveraging the breadth of our product offering, supplier relationships, and value-added technical capabilities to differentiate us from our competitors and improve our competitive position. We also continually seek to enhance gross margins, manage costs, and otherwise improve earnings. Many of our activities target improvements to the consistency of our operating practices across all of our facilities. The development and implementation of these activities and initiatives requires us to devote significant time and to expend, or in some cases divert, significant resources. We may incur unanticipated costs, fail to meet projected implementation timelines or otherwise implement an initiative effectively, or not fully realize an initiative’s objectives or expected benefits. Any such occurrence may decrease our profitability, cause us to not achieve short- or long-term financial goals, harm our competitive position, or otherwise adversely affect our results of operations or financial condition.
Loss of key supplier authorizations, lack of product availability, or changes in distribution programs could adversely affect our sales and earnings. Our business depends on maintaining an immediately available supply of various products to meet customer demand. Many of our relationships with key product suppliers are longstanding, but are terminable by either party. The loss of key supplier authorizations or a substantial decrease in the availability of their products (including due to supply chain disruptions, as noted above), could put us at a competitive disadvantage and have a material adverse effect on our business.
In addition, as a distributor, we face the risk of key product suppliers changing their relationships with distributors generally, or us in particular, in a manner that adversely impacts us. For example, key suppliers could change the
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following: the prices we must pay for their products relative to other distributors or relative to competing brands; the geographic or product line breadth of distributor authorizations; the number of distributor authorizations; supplier purchasing incentive or other support programs; product purchase or stocking expectations; or the extent to which the suppliers seek to serve end users directly.
The purchasing incentives we earn from product suppliers can be impacted if we reduce our purchases in response to declining customer demand which may adversely affect our profitability. Certain product suppliers offer their distributors, including us, incentives for purchasing their products. In addition to market, customer account-specific, or transaction-specific incentives, certain suppliers pay incentives to us for attaining specific purchase volumes during a program period. In some cases, to earn incentives, we must achieve year-over-year growth in purchases with the supplier. When customer demand for products declines, we may be less inclined to build inventory to take advantage of certain incentive programs, thereby potentially adversely impacting our profitability.
Volatility in product, energy, labor, and other costs can affect our profitability and our relationships with our suppliers and customers. Our business, including our pricing levels, is subject to fluctuations in various costs across our product and service offerings. Product manufacturers may adjust the prices of products we distribute for many reasons, including changes in their costs for raw materials, components, energy, labor, and tariffs and taxes on imports. Our own distribution costs vary with changes in the pricing of fuel for our sales and delivery vehicles, freight expenses including tariffs and taxes on imports, and utility expenses for our facilities. After the cost of the products we sell, labor costs are our largest expense. We may experience labor shortages and higher labor costs as a result of a tightening labor market as well as salary and wage inflationary pressures in the environments in which we operate. Our ability to pass along increases in our costs in a timely manner to our customers depends on our ability to execute pricing changes, market conditions, and contractual limitations. Failing to timely pass along price increases (particularly in an inflationary environment), or not maintaining sales volume while increasing prices, could significantly reduce our profitability. It could also place pressure on, or even damage, our relationships with our customers, suppliers, and other third-party service providers.
While increases in the cost of products, labor, or energy could be damaging to us, decreases in those costs, particularly if severe, could also adversely impact us by creating deflation in selling prices, which could cause our gross profit margin to deteriorate. Changes in energy or raw materials costs can also adversely affect customers. For example, declines in oil, gas, and coal prices may negatively impact customers operating in those industries and, consequently, reduce our sales to those customers.
Changes in customer or product mix and downward pressure on sales prices could cause our gross profit percentage to fluctuate or decline. Because we serve thousands of customers in many end markets and offer millions of products with varying profitability levels, changes in our customer or product mix could cause our gross profit percentage to fluctuate or decline. Downward pressure on sales prices could also cause our gross profit percentage to fluctuate or decline. We can experience downward pressure on sales prices because of deflation, pressure from customers to reduce costs, shifts in customer preference to less costly products, or increased competition.
Our ability to transact business is highly reliant on information systems. A disruption or security breach could materially affect our business, financial condition, or results of operations. We depend on information systems to, among other things, process customer orders, manage inventory and accounts receivable collections, purchase products, manage accounts payable processes, ship products to customers on a timely basis, maintain cost-effective operations, provide superior service to customers, conduct business communications, and compile financial results. A serious, prolonged disruption of our information systems due to man-made or natural causes, including power or telecommunications outage, or breach in security, could materially impair fundamental business processes, increase expenses, decrease sales, or otherwise reduce earnings.
We are vulnerable to the growing threat of damage or intrusion from computer viruses or other cyber-attacks, including ransomware and business e-mail compromise, on our information systems due to our reliance on our information systems. These existing threats continue to grow and evolve, and any compromise of our information systems or those of businesses with which we interact, that results in regulated data or confidential information being accessed, obtained, damaged, disclosed, destroyed, modified, lost, or used by unauthorized persons could harm our reputation. It may also expose us to regulatory actions, supplier or customer attrition, remediation expenses, and claims from customers, suppliers, employees, financial institutions, and other persons, any of which could materially affect our business, financial condition, or results of operations.
Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage information systems or data on such systems change frequently and are becoming increasingly sophisticated, particularly with the expanded use of artificial intelligence, we may be unable to anticipate these techniques or implement adequate measures to prevent unauthorized access to our information systems. Even if we detect a cybersecurity incident, the nature and extent of that cybersecurity incident may not be immediately clear. Based on the sophistication of the
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threat and the size and complexity of our information system, among other factors, an investigation into a cybersecurity incident could take a significant amount of time and money to complete. In addition, while an investigation is ongoing, we may not know the full extent of the harm caused by the threat, and such harm may spread both internally and externally to third parties. These factors may inhibit our ability to provide rapid, complete, and reliable information about cybersecurity incidents to third parties, as well as the public. It may also be unclear how best to contain and remediate any harm caused by a cybersecurity incident. Any or all of these factors could further increase the costs and consequences of a cybersecurity incident to our business and materially impact our financial condition and results of operations.
Our information technology and enterprise risk management efforts cannot eliminate all systemic risk. Breaches of our systems could not only cause business disruption, but could also result in the theft of funds; the theft, loss, or disclosure of proprietary or confidential information; or the breach of customer, supplier, or employee information. A security incident involving our systems or even an inadvertent failure to comply with data privacy and security laws and regulations could negatively impact our sales, damage our reputation, and cause us to incur unanticipated legal liability, remediation costs, and other losses and expenses.
Acquisitions are a key component of our anticipated growth. We may not be able to identify or complete future acquisitions, integrate them effectively into our operations, or realize their anticipated benefits. Many industries we serve are mature. As a result, acquisitions have been, and will continue to be, important to our growth. While we wish to continue to make acquisitions, we may not be able to identify and to negotiate suitable acquisitions, to obtain financing for them on satisfactory terms, or to otherwise complete acquisitions. In addition, existing and future competitors, as well as private equity firms, increasingly compete with us for acquisitions, which can increase the cost of potential acquisitions and reduce the number of suitable opportunities. Acquisitions made by competitors can also adversely impact our market position.
We seek acquisition opportunities that complement and expand our operations; however, substantial costs, delays, or other difficulties related to integrating acquisitions could adversely affect our business or financial results. For example, we could face significant challenges in consolidating functions, integrating information systems, personnel, and operations, and implementing procedures and controls in a timely and efficient manner.
Further, even if we successfully integrate an acquired business with our operations, we may not be able to realize cost savings, sales, profit levels, or other benefits that we anticipate, either as to amount or in the time frame we expect. Our ability to realize anticipated benefits may be affected by a number of factors, including the following: our ability to achieve planned operating results, reduce duplicative expenses and inventory effectively, and consolidate facilities; economic and market conditions; the incurrence of significant integration costs or charges in order to achieve those benefits; our ability to retain key product supplier authorizations, customer relationships, and employees; our ability to address competitive, distribution, and regulatory challenges arising from entering into new markets (geographic, product, service, end-industry, or otherwise), especially those in which we may have limited or no direct experience; and exposure to unknown or contingent liabilities of the acquired company. In addition, acquisitions could place significant demand on our administrative, operational, and financial resources.
An interruption of operations at our headquarters or distribution centers, or in our means of transporting product, could adversely impact our business. Our business depends on maintaining operating activity at our headquarters and distribution centers and being able to receive and deliver product in a timely manner. A serious, prolonged interruption due to power or telecommunications outages, security incidents, terrorist attacks, war, public health emergencies, earthquakes, extreme weather events, other natural disasters, fire, flood, transportation disruption, or other interruptions could damage our relationships and reputation, and have a material adverse effect on our business and financial results.
FINANCIAL AND REPORTING RISKS
Our indebtedness entails debt service commitments that could adversely affect our ability to fulfill our obligations and could limit or reduce our flexibility. As of June 30, 2026, we had total debt obligations outstanding of $262.3 million. Our ability to service our debt and fund our other liquidity needs will depend on our ability to generate cash in the future. Our debt commitments may (i) require us to dedicate a substantial portion of our cash flows from operations to the payment of debt service, reducing the availability of our cash flow to fund planned capital expenditures, pay dividends, repurchase our shares, complete other acquisitions or strategic initiatives, and other general corporate purposes; (ii) limit our ability to obtain additional financing in the future (either at all or on satisfactory terms) to enable us to react to changes in our business or execute our growth strategies; and (iii) place us at a competitive disadvantage compared to other companies in our industry that may have lower levels of indebtedness. Additionally, our inability to comply with covenants in the instruments governing our debt could
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result in an event of default. Any of the foregoing events or circumstances relating to our indebtedness may adversely affect our business, financial position, or results of operations and may cause our stock price to decline.
In addition, changes to the credit markets could result in credit markets tightening or create an instance where obtaining additional or replacement financing could be more difficult and the cost of issuing new debt or replacing a credit facility could increase.
For more information regarding borrowing and interest rates, see the following sections in this Form 10-K: “Liquidity and Capital Resources” in Item 7 under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations;” Item 7A under the caption “Quantitative and Qualitative Disclosures about Market Risk;” and Notes 6 and 7 to the consolidated financial statements, included in Item 8 under the caption “Financial Statements and Supplementary Data.” That information is incorporated here by reference.
Our ability to maintain effective internal control over financial reporting may be insufficient to allow us to accurately report our financial results or prevent fraud, and this could cause our financial statements to become materially misleading and adversely affect the trading price of our common stock. We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, collusion, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we cannot provide reasonable assurance with respect to our financial statements and effectively prevent fraud, our financial statements could be materially misstated which could adversely affect the trading price of our common stock.
If we are not able to maintain the adequacy of our internal control over financial reporting, or if we are unable to implement (or experience difficulty in implementing) required new or improved controls, our business, financial condition, and operating results could be harmed. Any material weakness could affect investor confidence in the accuracy and completeness of our financial statements. As a result, our ability to obtain any additional financing, or additional financing on favorable terms, could be materially and adversely impacted. This, in turn, could materially harm our business, financial condition, and the market value of our common stock and require us to incur additional costs to improve our internal control systems and procedures. In addition, perceptions of the Company among customers, suppliers, lenders, investors, securities analysts, and others could also be damaged.
Goodwill, long-lived, and other intangible assets recorded as a result of our acquisitions could become impaired and negatively impact our operating results and profitability. We review goodwill and long-lived assets, including property, plant, equipment and identifiable amortizing intangible assets, for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. In addition, we review goodwill on a reporting unit basis annually for impairment in our third quarter. Factors which may cause an impairment of long-lived assets include significant changes in the manner of use of these assets, negative industry or market trends, significant underperformance relative to historical or projected future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life.
As of June 30, 2026, our balance sheet includes $704.7 million of goodwill and $312.8 million of other intangible assets, net. The techniques used in our qualitative assessments for impairment and goodwill impairment tests incorporate a number of estimates and assumptions that are subject to change. Any changes to these assumptions and estimates due to market conditions or otherwise may lead to an outcome where impairment charges would be required in future periods.
GENERAL RISK FACTORS
Our business depends on our ability to attract, develop, motivate, and retain qualified employees. Our success depends on hiring, developing, motivating, and retaining key employees, including executive, managerial, sales, professional, and other personnel. We may have difficulty identifying and hiring qualified personnel. In addition, we may have difficulty retaining such personnel once hired, and key people may leave and compete against us. With respect to sales and customer service positions in particular, we greatly benefit from having employees who are familiar with the products and services we sell, and their applications, as well as with our customer and supplier relationships. The loss of key employees or our inability to attract and retain other qualified workers could disrupt or adversely affect our business. In addition, our operating results could be adversely affected by increased competition for employees, shortages of qualified workers, higher employee turnover (including through retirement as the workforce ages), or increased employee compensation or benefit costs.
We are subject to complex laws, rules, and regulations and any failure to comply could result in the imposition of sanctions or other penalties, or the institution of litigation, any of which may have a material adverse effect on our
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business. We are subject to a wide array of laws and regulations, including with respect to taxes, international trade including import and export requirements, anti-bribery and anti-corruption laws, anti-competition laws, employment laws, and data privacy laws. We are also subject to governmental audits and inquiries in the normal course of business operations. Changes in the legal and regulatory environment in which we operate, including any governing body's responses to any legal or regulatory changes enacted by the United States, could adversely and materially affect our operating results.
In addition, from time to time, we are involved in lawsuits or other legal proceedings that arise in the normal course of business operations. In the past, these proceedings have related to product liability claims, commercial disputes, personal injuries, and employment-related matters. We expect to continue to be involved in legal proceedings in the ordinary course of business in the future. The defense and ultimate outcome of such proceedings may result in higher operating expenses, the inability to participate in existing or future government contracts, or other adverse consequences, any of which could have a material adverse effect on our business, financial condition, or results of operations.
In addition, we could face claims or additional costs arising from our compliance with regulatory requirements, including those relating to the following: our status as a public company; our government contracts; tax compliance; our engagement in international trade; and our collection, storage, or transmission of personal data.
We maintain insurance policies that provide limited coverage for some, but not all, of the potential risks and liabilities associated with our business. The policies are subject to limits, deductibles, and exclusions that result in our retention of a level of risk on a self-insured basis.
A global or regional health pandemic or epidemic has and in the future could negatively impact our business, results of operations and financial condition. The emergence, severity, magnitude, and duration of global or regional pandemics, epidemics, or other health crises are uncertain and difficult to predict. The COVID-19 pandemic created significant volatility, uncertainty, and economic disruption, and resulted in lost or delayed sales to us, and we experienced business disruptions as we modified our business practices. A similar pandemic or other epidemic, together with preventive measures taken to contain or mitigate such crises, could impact our results of operations and financial condition in a variety of ways, such as: impact our customers such that the demand for our products and services could change; disrupt our supply chain and impact the ability of our suppliers to provide products as required; disrupt or limit our ability to sell and provide our products and services and otherwise limit our ability to operate or otherwise operate effectively; increase incremental costs resulting from the adoption of preventive measures and compliance with regulatory requirements; create financial hardship on customers, including by creating restrictions on their ability to pay for our services and products; result in closures of our facilities or the facilities of our customers or suppliers; and reduce customer demand on purchasing incentives we earn from suppliers.
In addition, a pandemic or other public health emergency could impact the proper functioning of financial and capital markets, foreign currency exchange rates, product and energy costs, labor supply and costs, and interest rates. Any pandemic or other public health emergency could also amplify the other risks and uncertainties described in this Annual Report.
We cannot reasonably predict the ultimate impact of any pandemic or other public health emergency, including the extent of any adverse impact on our business, results of operations and financial condition, which will depend on, among other things, the duration and spread; the impact of governmental regulations that may be imposed in response; the effectiveness of actions taken to contain or mitigate the outbreak, the availability, safety and efficacy of vaccines, including against emerging variants of the infectious disease; and global economic conditions.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 1C. CYBERSECURITY.
RISK MANAGEMENT AND STRATEGY
Our cybersecurity program is informed by various industry frameworks, including the National Institute of Standards and Technology (NIST) Cybersecurity Framework, and our security management is ISO/IEC 27001:2022 certified. Our management, with oversight from our Board, performs an annual enterprise-wide risk assessment (ERA) to identify key existing and emerging risks. One of the main risks identified and assessed annually through this process is cybersecurity and data privacy, which remains a key focus for us and our Board.
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We maintain multiple layers of security designed to detect and block cybersecurity events, as well as employ a dedicated team of cybersecurity personnel and professionals, who assist our Vice President – Information Technology in helping to assess, identify, monitor, detect and manage cybersecurity risks, threats, vulnerabilities, and incidents.Further, we have various processes and programs designed to manage cybersecurity risks associated with our use of third-party vendors and suppliers.
When we implement significant changes to our information systems, we conduct risk-based security and privacy impact assessments and deploy technical safeguards that are designed to reasonably protect our technology and information systems from cybersecurity threats. We actively monitor and proactively research potential cybersecurity threats to our information systems, and we use what we learn to evolve our security controls over time to mitigate risks posed by such threats.
We also engage third party service providers when necessary to both expand our capabilities and capacity as well as assess the effectiveness of our cybersecurity program, including hosting regular table-top exercises meant to evaluate and improve the overall effectiveness of our cybersecurity program.
Our Incident Response Plan provides a framework for responding to cybersecurity incidents. The plan governs activities such as preparation, detection, coordination, eradication, and recovery, as well as appropriate escalations to our senior management and Board and disclosure under applicable rules and regulations. The Incident Response Plan is routinely reviewed and updated as appropriate by our Vice President – Information Technology and other senior management members.
We provide recurring mandatory information security training (which includes cybersecurity training) to our associates based on access, risk, roles, and behaviors.
Overall, we implement, develop, and maintain systems and operate programs that seek to prevent and mitigate the impact of cybersecurity incidents. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage information systems or data on such systems, change frequently, we must continually monitor and update these systems and programs. See “Risk Factors” in Item 1A of Part I in this Annual Report for additional information on risks related to our business, including risks related to cybersecurity incidents and privacy and data protection.
GOVERNANCE
Our Vice President – Information Technology leads our assessment and management of cybersecurity risk. Reporting directly to our President & Chief Executive Officer, the incumbent is a member of our senior management team, providing cybersecurity updates to that group monthly, with more frequent updates as needed. He has more than 35 years of experience within industrial distribution, the majority of which was focused on managing and maintaining information systems. In addition, he leads a team of individuals that focus on monitoring our information systems and data for intentional and unintentional actions that could cause harm to our information systems or the data on such systems.
As indicated above, we, with oversight from the Board, perform an annual ERA and cybersecurity is among the main risks identified by the ERA for Board-level oversight.Our full Board has oversight of our efforts in cybersecurity and meets regularly with our Vice President – Information Technology (three times during 2026) on our cybersecurity risks and programs. The Board is also updated as needed on cybersecurity threats, incidents, or new developments in our cybersecurity risk profile.
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ITEM 2. PROPERTIES.
We believe having a local presence is important to serving our customers; therefore, we maintain service centers and other operations in local markets throughout the countries in which we operate. At June 30, 2026, we owned 109 and leased 433 real properties. Certain properties house more than one operation.
The following were our principal owned real properties (each of which has more than 50,000 square feet of floor space) at June 30, 2026:
Location of Principal OwnedReal Property Type of Facility
Cleveland, Ohio Corporate headquarters
Florence, Kentucky Distribution center and hose and reducer assembly shops
Baldwinsville, New York Fluid power shop
Carlisle, Pennsylvania Distribution center and hose shop
Fort Worth, Texas Distribution center and rubber shop
Our principal leased real properties (each of which has more than 50,000 square feet of floor space) at June 30, 2026, were:
Location of Principal LeasedReal Property Type of Facility
Newark, California Fluid power shop
Midland, Michigan Flow control shop
Strongsville, Ohio Offices and warehouse
Portland, Oregon Distribution center and hose and reducer assembly shops
Sherwood, Oregon Automation operation
Austin, Texas Fluid power shop
Fort Worth, Texas Fluid power shop
Houston, Texas Fluid power shop
Stafford, Texas Offices, warehouse, and flow control shop
Longview, Washington Service center and rubber and fluid power shops
Appleton, Wisconsin Service center and rubber, hose and fluid power shops
Nisku, Alberta Distribution center, service center, and belt and rubber shops
The properties in Baldwinsville, Newark, Midland, Stafford, Austin, Houston, and Fort Worth are used in our Engineered Solutions segment. The Fontana, Longview and Appleton properties are used in both the Service Center segment and the Engineered Solutions segment. The remaining properties are used in the Service Center segment.
We consider our properties generally sufficient to meet our requirements for office space and inventory stocking.
A service center's size is primarily influenced by the amount and types of inventory required to meet customers' needs.
When opening new operations, we have tended to lease rather than purchase real property. We do not consider any service center, distribution center, or shop property to be material because we believe that if it becomes necessary or desirable to relocate an operation, other suitable property could be found.
In addition to the above operating facilities, we own or lease certain properties which, in the aggregate, are not material and are either for sale, lease, or sublease to third parties due to a relocation or closing. We also may lease or sublease unused portions of buildings to others.
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ITEM 3. LEGAL PROCEEDINGS.
From time to time, Applied and/or one of our subsidiaries may be a party to pending legal proceedings with respect to product liability, commercial, personal injury, employment, and other routine litigation matters incidental to our business. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss associated with any of them, we do not expect, based on circumstances currently known, that the ultimate resolution of any of these proceedings will have, either individually or in the aggregate, a material adverse effect on Applied's consolidated financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this Annual Report on Form 10-K.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS.
Applied's executive officers are elected by the Board of Directors for a term of one year, or until their successors are chosen and qualified, at the Board's organization meeting held following the annual meeting of shareholders.
The following is a list of the executive officers and a description of their business experience during the past five years. Except as otherwise stated, the positions and offices indicated are with Applied, and the persons were most recently elected to their current positions on October 22, 2025:
Name Positions and Experience Age
Kurt W. Loring Vice President-Chief Human Resources Officer since 2014. 57
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Applied's common stock, without par value, is listed for trading on the New York Stock Exchange with the ticker symbol “AIT.” On July 31, 2026, there were 7,375 shareholders of record including 6,459 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan.
The following table summarizes Applied's repurchases of its common stock in the quarter ended June 30, 2026.
(1)On April 29, 2025, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Company's common stock (the "2025 Authorization"). Purchases under this authorization were made in the open market or in privately negotiated transactions.
On April 22, 2026, the Board of Directors authorized the repurchase of up to 3.0 million shares of the Company's common stock (the "2026 Authorization"), replacing the April 29, 2025 authorization, which was terminated upon and effective as of the date of the 2026 Authorization. Purchases can be made in the open market or in privately negotiated transactions. The authorization is in effect until all shares are purchased, or the Board revokes or amends the authorization.
(2)During April 2026, the Company acquired 112,000 shares of its common stock under the 2025 Authorization and the remaining shares were acquired under the 2026 Authorization.
ITEM 6. RESERVED.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
We are a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve Maintenance, Repair & Operations ("MRO") and Original Equipment Manufacturer ("OEM") end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During 2026, business was conducted primarily in North America, as well as, Australia, New Zealand, and Singapore from 580 facilities.
The following is Management's Discussion and Analysis of significant factors that have affected our financial condition, results of operations, and cash flows during the periods included in the accompanying consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows in Item 8 under the caption "Financial Statements and Supplementary Data." When reviewing the discussion and analysis set forth, please note that a significant number of SKUs ("Stock Keeping Units") we sell, or the products we sell in our Engineered Solutions segment, in any given period were not sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes due to volumes, product mix and price.
OVERVIEW
Our 2026 consolidated sales were $5.0 billion, an increase of $403.3 million or 8.8% compared to the prior year, with acquisitions contributing to sales growth by $142.2 million or 3.1% and favorable foreign currency translation of $15.9 million increasing sales by 0.3%. Excluding the impact of businesses acquired and foreign currency translation, sales increased $245.2 million or 5.4% during the year due to higher volumes of approximately $136.2 million and the remainder from positive price contribution. The Company generated operating income of $549.5 million, or operating margin of 11.1% of sales for the year ended June 30, 2026, compared to operating income of $498.5 million, or operating margin of 10.9% of sales in the prior year. The Company generated net income of $414.5 million and $393.0 million during the years ended June 30, 2026 and 2025, respectively. Our diluted earnings per share was $10.95 in 2026 compared to $10.12 in 2025.
Shareholders’ equity was $1,861.7 million at June 30, 2026 compared to $1,844.5 million at June 30, 2025. Working capital decreased $255.0 million from June 30, 2025 to $966.3 million at June 30, 2026. The current ratio was 2.6 to 1 and 3.3 to 1 at June 30, 2026 and 2025, respectively.
Applied monitors several economic indices that are key indicators for industrial economic activity in the United States. These include the Manufacturing Industrial Production ("MIP") and Manufacturing Capacity Utilization ("MCU") indices published by the Federal Reserve Board and the Purchasing Managers Index ("PMI") published by the Institute for Supply Management ("ISM"). Historically, our performance correlates well with the MCU, which measures productivity and calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery more frequently and require replacement parts.
The MCU and PMI indices increased since June 2025, while the MIP index decreased slightly over the fiscal year. The ISM PMI registered 53.3 in June 2026, an increase from the June 2025 reading of 49.0. A reading above 50 generally indicates expansion in the U.S. manufacturing sector. The indices for the months during the most recent quarter, along with the indices for the prior year end and prior quarter ends, were as follows:
Index Reading
Month MCU PMI MIP
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RESULTS OF OPERATIONS
This section provides comparisons of material changes in the consolidated financial statements for the years ended June 30, 2026 and 2025. For the comparison of the years ended June 30, 2025 and 2024, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2025 Annual Report on Form 10-K. We disclose segment information that is consistent with the way in which management operates and views Applied.
The following table is included to aid in review of Applied’s statements of consolidated income.
Year Ended June 30,As a % of Net Sales Change in $'s Versus Prior Period
Selling, Distribution & Administrative Expense 19.3 % 19.4 % 8.2 %
Sales in 2026 were $5.0 billion, which was $403.3 million or 8.8% above the prior year, with sales from acquisitions adding $142.2 million or 3.1% and favorable foreign currency translation increasing sales by $15.9 million or 0.3%. There were 252.5 selling days in both 2026 and 2025. Excluding the impact of businesses acquired and foreign currency translation, sales were up $245.2 million or 5.4% during the year, due to higher volumes of approximately $136.2 million and the remainder from positive price contribution.
The following table shows changes in sales by reportable segment.
Amounts in millions Amount of change due to
Year ended June 30, Sales Increase Acquisitions Foreign Currency Organic Change
Sales from our Service Center segment, which operates primarily in MRO markets, increased $169.9 million, or 5.6%, compared to the prior year. Acquisitions within this segment increased sales by $5.9 million or 0.2% and favorable foreign currency translation increased sales by $15.9 million or 0.5%. Excluding the impact of businesses acquired and foreign currency translation, sales increased $148.1 million or 4.9% during the year, due to higher volumes of approximately $80.1 million reflecting volume growth across the United States and the remainder from positive price contribution.
Sales from our Engineered Solutions segment increased $233.4 million or 15.1%. Acquisitions within this segment increased sales $136.3 million or 8.8%. Excluding the impact of businesses acquired, sales increased $97.1 million or 6.3%, due to higher volumes of approximately $56.1 million primarily reflecting stronger demand across our fluid power and automation operations, as well as positive price contribution.
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The following table shows changes in sales by geographical area. Other countries include Mexico, Australia, New Zealand, Singapore, and Costa Rica.
Amounts in millions Amount of change due to
Year ended June 30, Sales Increase Acquisitions Foreign Currency Organic Change
Sales in our U.S. operations increased $384.4 million or 9.6%, with acquisitions contributing $142.2 million or 3.6%. Excluding the impact of businesses acquired, sales in the United States were up $242.2 million or 6.0%, reflecting volume growth of $136.2 million and price contribution across both the Service Center and Engineered Solutions segments. Sales from our Canadian operations increased $4.2 million or 1.4%. Favorable foreign currency translation increased Canadian sales by $3.0 million or 1.0%. Excluding the impact of foreign currency translation, Canadian sales were up $1.2 million or 0.4%. Sales in other countries increased $14.7 million or 5.5%, primarily due to favorable foreign currency translation increasing sales by $12.9 million or 4.8%. Excluding the impact of foreign currency translation, other countries' sales were up $1.8 million or 0.7%.
Our gross profit margin was 30.3% in both 2026 and 2025. The gross profit margin for the current year was negatively impacted by 0.3% due to higher LIFO expense as compared to the prior year. This was offset by price contribution and channel execution, as well as favorable mix impacts from the growth in revenues in the Engineered Solutions segment.
Segment gross profit margin for the Service Center segment was 29.2% in both 2026 and 2025, as a 0.2% negative margin impact from higher LIFO expense was offset by price and channel execution. Segment gross profit margin for the Engineered Solutions segment decreased to 32.4% during the current year compared to 32.5% in 2025, as acquisition growth increased margins by 0.3%, which was more than offset by higher LIFO expense that negatively impacted margins by 0.3%.
The following table shows the changes in selling, distribution, and administrative expense, including depreciation ("SD&A").
Amounts in millions Amount of change due to
Year ended June 30, SD&A Increase Acquisitions Foreign Currency Organic Change
SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management, and marketing, and distribution of the Company’s products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility-related expenses. SD&A increased $72.7 million or 8.2% during 2026 compared to 2025. As a percentage of sales, SD&A was 19.3% during 2026 compared to 19.4% in 2025. SD&A from businesses acquired added $41.4 million or 4.7%, including $10.2 million of intangibles amortization related to acquisitions. Changes in foreign currency exchange rates increased SD&A by $3.2 million or 0.4% compared to 2025. Excluding the impact of businesses acquired and the impact from foreign currency translation, SD&A increased $28.1 million or 3.1% during 2026 compared to 2025 primarily due to higher compensation costs.
Segment SD&A for the Service Center segment increased $17.5 million, to $503.2 million during 2026 from $485.7 million during 2025 primarily due to higher compensation costs. As a percentage of sales, segment SD&A was 15.8% in 2026 compared to 16.1% in 2025. Segment SD&A for the Engineered Solutions segment increased $51.7 million, to $367.0 million during 2026 from $315.2 million during 2025, which reflects an increase of $43.7 million from acquisitions completed within this segment in 2025, coupled with higher compensation costs. As a percentage of sales, segment SD&A was 20.6% in 2026 compared to 20.3% in 2025.
Operating income increased $50.9 million, or 10.2%, to $549.5 million during 2026 from $498.5 million during 2025, and as a percentage of sales, increased to 11.1% from 10.9%.
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Segment operating income for the Service Center segment increased $32.7 million to $426.1 million during 2026, from $393.5 million during 2025 primarily due to higher gross profit driven by stronger revenues, partially offset by higher SD&A expenses. As a percentage of sales, segment operating income increased to 13.4% in 2026 from 13.1% in 2025. Segment operating income for the Engineered Solutions segment increased $21.8 million to $210.5 million during 2026 from $188.7 million during 2025 due to incremental gross profit driven by stronger revenues and the impact from recent acquisitions, partially offset by higher SD&A expenses. As a percentage of sales, segment operating income decreased to 11.8% in 2026 from 12.2% in the prior year.
The Company had net interest expense in 2026 of $7.9 million compared to net interest expense of $0.6 million in 2025 primarily reflecting higher net interest expense following the January 2026 maturity of our interest rate swap, as well as lower interest income on reduced cash balances as compared to the prior year.
Other income, net, represents certain non-operating items of income and expense, and was $2.7 million of income in 2026 compared to $3.1 million of income in 2025. Other income, net for 2026 primarily consists of unrealized gains on investments held by non-qualified deferred compensation trusts of $4.3 million, life insurance income of $0.9 million and other income of $0.3 million, offset by foreign currency transaction losses of $2.6 million and other periodic post-employment costs of $0.1 million. Other income, net for 2025 consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $2.7 million, life insurance income of $0.8 million, and other income of $0.2 million, offset by foreign currency transaction losses of $0.5 million and other periodic post-employment costs of $0.1 million.
The effective income tax rate was 23.8% for 2026 compared to 21.6% for 2025. The increase in the effective tax rate is primarily due to an increase of 0.8% resulting from higher discrete tax expense from changes in estimates related to prior year tax returns identified as part of the preparation of our tax returns, coupled with an increase of 0.7% resulting from lower benefit from changes in unrecognized tax benefits due to expirations of statutes of limitations in the prior year and an increase of 0.5% resulting from lower benefit from the research and development tax credit due to lower qualifying activities in 2026.
As a result of the factors discussed above, net income for 2026 increased $21.5 million from 2025. Diluted net income per share was $10.95 per share for 2026 compared to $10.12 per share for 2025, an increase of 8.2%.
At June 30, 2026, we had approximately 580 operating facilities versus 600 at June 30, 2025. The approximate number of Company employees was 6,900 at June 30, 2026 and 6,800 at June 30, 2025.
RECENT DEVELOPMENTS
On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted into law. The OBBBA makes permanent key elements of the Tax Cuts and Jobs Act of 2017, as amended, including 100% bonus depreciation, domestic research cost expensing, and the business interest expense limitation. The Company is required to recognize the effects of changes in tax rates and laws on deferred tax balances in the period in which the legislation is enacted. As of June 30, 2026, the Company completed its evaluation and as a result, did not have any material adjustments to its financial statements resulting from the enactment of the OBBBA.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At June 30, 2026, we had total debt obligations outstanding of $262.3 million compared to $572.3 million at June 30, 2025. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations will be sufficient, for the next 12 months and beyond, to finance normal working capital needs in each of the countries in which we operate, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company’s credit standing and financial strength.
The Company’s working capital at June 30, 2026 was $966.3 million compared to $1,221.3 million at June 30, 2025. The decline is primarily due to lower cash and cash equivalents on hand at June 30, 2026 as a result of debt repayments and share repurchases. The current ratio was 2.6 to 1 at June 30, 2026 and 3.3 to 1 atJune 30, 2025.
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Net Cash Flows
The following table is included to aid in review of Applied’s statements of consolidated cash flows.
Amounts in thousands Year Ended June 30,
Net Cash Provided by (Used in):
Exchange Rate Effect 69 (226)
Decrease in Cash and Cash Equivalents $ (261,287) $ (72,200)
Cash provided by operating activities during 2026 declined $8.3 million as compared to the prior year primarily due to an increase in working capital of $65.8 million offset by higher net income of $21.5 million and higher deferred tax provision of $32.6 million reflecting the reduction of the deferred tax asset associated with capitalized R&D costs due to changes from the OBBBA. The increase in working capital was primarily due to higher accounts receivable of $61.5 million due to stronger revenues generated in the second half of 2026 as compared to 2025.
Net cash used in investing activities during 2026 decreased compared to 2025 primarily due to $11.4 million used for acquisitions in 2026 compared to $293.4 million used for acquisitions during 2025.
Net cash used in financing activities during 2026 increased compared to 2025 primarily due to $317.2 million of cash used to repurchase 1,162,863 shares of common stock in 2026 compared to $152.8 million used to repurchase 655,791 shares of common stock in 2025, coupled with higher net long-term debt repayments in the current year of $310.0 million as compared to $25.1 million in the prior year. Further, $72.6 million of cash was used for dividend payments in 2026 compared to $63.7 million of cash used for dividend payments in 2025. The increase in dividends over the year is the result of regular increases in our dividend payout rates. We paid aggregate dividends of $1.94 and $1.66 per share in 2026 and 2025, respectively.
Capital Expenditures
We expect capital expenditures for 2027 to be in the $35.0 million to $40.0 million range, primarily consisting of capital associated with focused investments for growth and information technology equipment maintenance.
Share Repurchases
The Board of Directors authorized the repurchase of shares of the Company’s common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. On April 22, 2026, the Board of Directors authorized the repurchase of up to 3.0 million shares of the Company's common stock, replacing the prior authorization. At June 30, 2026, we had authorization to repurchase 2,854,252 shares.
In 2026, we acquired 1,162,863 shares of the Company's common stock on the open market for $317.2 million. In 2025, we acquired 655,791 shares of the Company's common stock on the open market for $152.8 million. Subsequent to June 30, 2026, we acquired 105,285 shares of the Company's common stock on the open market for $34.7 million.
Borrowing Arrangements
A summary of long-term debt is as follows (amounts are in thousands):
In October 2025, the Company entered into a new five-year revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for future acquisitions, ongoing working capital and other general corporate purposes. This agreement provides a $900.0 million unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $800.0 million. The new revolving credit facility also provides for a $25.0 million sublimit for swing line loans and a $50.0 million sublimit for letters of credit. Borrowings under this agreement bear interest, at the Company's
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election, at either the base rate plus a margin that ranges from 0 to 55 basis points or Secured Overnight Financing Rate ("SOFR") plus a margin that ranges from 80 to 155 basis points, both of which are based on the Company's net leverage ratio. Borrowing capacity under this facility, without exercising the accordion feature, totaled $825.8 million at June 30, 2026 which is available to fund future acquisitions or other capital and operating requirements. This amount is net of outstanding letters of credit of $0.2 million at June 30, 2026 to secure certain insurance obligations. The interest rate on the revolving credit facility was 4.44% as of June 30, 2026.
The new credit facility replaced the Company's previous revolving credit facility. Borrowing capacity under the previous facility, net of outstanding letters of credit of $0.2 million to secure certain insurance obligations, totaled $515.8 million at June 30, 2025. The interest rate on the previous revolving credit facility was 5.23% as of June 30, 2025.
The Company paid $1.6 million of debt issuance costs related to the new revolving credit facility in 2026, which are included in other current assets and other assets on the consolidated balance sheet as of June 30, 2026 and will be amortized over the five-year term of the new credit facility. The Company analyzed the unamortized debt issuance costs related to the previous credit facility. As a result of this analysis, less than $0.1 million of unamortized debt issuance costs were expensed and included within interest expense, net in the statements of consolidated income in the twelve months ended June 30, 2026, and $0.8 million of unamortized debt issuance costs were deferred related to the new credit facility and will be amortized over the five-year term of the new credit facility.
Additionally, the Company had letters of credit outstanding not associated with the revolving credit agreement, in the amount of $5.3 millionas of June 30, 2026 and 2025 in order to secure certain insurance obligations.
On July 10, 2025, the Company amended its existing trade receivable securitization facility (the "AR Securitization Facility") and extended its maturity to July 10, 2028. The AR Securitization Facility effectively increases the Company's borrowing capacity by collateralizing a portion of the amount of the U.S. operations' trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt. The AR Securitization Facility's maximum borrowing capacity is $250.0 million and fees on amounts borrowed are 0.90% per year.Borrowing capacity is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable portfolio and, therefore, at certain times, we may not be able to fully access the $250.0 million of borrowing capacity available under the AR Securitization Facility. Borrowings under the AR Securitization Facility carry variable interest rates tied to SOFR. The interest rate on the AR Securitization Facility as of June 30, 2026 and 2025 was 4.55% and 5.32%, respectively.
The credit facility contains restrictive covenants regarding liquidity, financial ratios, and other covenants. At June 30, 2026, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At June 30, 2026, the Company's net indebtedness was less than 0.2 times consolidated income before interest, taxes, depreciation and amortization (as defined in these agreements). The Company was in compliance with all financial covenants at June 30, 2026.
Cash Flow Hedge Maturity
As disclosed in Note 7, the interest rate swap the Company entered into in January 2019 matured on January 31, 2026. The Company reduced outstanding borrowings under its revolving credit facility by a net $310.0 million, using available cash to mitigate the impact of higher interest costs due to the maturity of this instrument.
Accounts Receivable Analysis
The following table is included to aid in the analysis of accounts receivable and the associated provision for losses on accounts receivable (all dollar amounts are in thousands):
Allowance for doubtful accounts, % of gross receivables 1.8 % 2.1 %
Provision for losses on accounts receivable $ 4,613 $ 5,978
Provision as a % of net sales 0.09 % 0.13 %
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Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding ("DSO") and the aging of receivables for each of the Company's operations.
On a consolidated basis, DSO was 55.3 at June 30, 2026 versus 56.6 at June 30, 2025. Approximately 1.1% of our accounts receivable balances are more than 90 days past due at June 30, 2026 compared to 2.1% at June 30, 2025.
On an overall basis, we recorded modest provisions for losses on uncollected receivables representing 0.09% of our sales for the year ended June 30, 2026, compared to 0.13% of sales for the year ended June 30, 2025. This change is primarily in the U.S. operations of the Service Center segment due to fewer past-due accounts receivable balances past due. Historically, this percentage is around 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.
Inventory Analysis
Inventories are valued using the LIFO method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs was 4.5 and 4.3 for the years ended June 30, 2026 and 2025, respectively.
CONTRACTUAL OBLIGATIONS
The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 2026 (in thousands):
Total Period LessThan 1 yr Period2-3 yrs Period4-5 yrs PeriodOver 5 yrs Other
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in effect as of June 30, 2026 are used for variable rate debt.
Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including interest and penalties in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions, and estimates at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but are not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities, and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the consolidated financial statements.
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LIFO Inventory Valuation and Methodology
Inventories are valued at the average cost method, using the LIFO method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in 1974. Approximately 13.2% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $254.4 million as reflected in our consolidated balance sheet at June 30, 2026. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products, and other products.
LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the
consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data,"
for further information.
Allowances for Slow-Moving and Obsolete Inventories
We evaluate the recoverability of our slow-moving and inactive inventories at least quarterly. We estimate the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, and the physical condition of the inventory, as well as assumptions regarding future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. A significant portion of the products we hold in inventory have long shelf lives and are not highly susceptible to obsolescence.
As of June 30, 2026 and 2025, the Company's reserve for slow-moving or obsolete inventories was $51.0 million and $50.5 million, respectively, recorded in inventories in the consolidated balance sheets.
Allowances for Doubtful Accounts
We evaluate the collectability of trade accounts receivable based on a combination of factors. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool, and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur.
As of June 30, 2026 and 2025, our allowance for doubtful accounts was 1.8% and 2.1% of gross receivables, respectively. Our provision for losses on accounts receivable was $4.6 million and $6.0 million in 2026 and 2025, respectively.
Goodwill and Intangibles
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names, and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model.
We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit, or sustained decrease in share price. Each year, we may elect to perform a qualitative assessment to determine whether it is more likely
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than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a one-step approach. The fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Goodwill on our consolidated financial statements relates to both the Service Center and the Engineered Solutions segments. The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2026. Based on the assessment performed, we concluded that the fair value of all of the reporting units exceeded their carrying amount as of January 1, 2026, therefore no impairment exists.
The fair values of the reporting units in accordance with the annual goodwill impairment assessment were determined using the income and market approaches. The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins, and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and multiples that are applied to management’s forecasted revenues and EBITDA estimates.
Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where impairment charges would be required in future periods. Specifically, actual results may vary from the forecasts used in an annual goodwill impairment assessment and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ due to prevailing market conditions. Further, continued adverse market conditions could result in the recognition of impairment if we determine that the fair value of a reporting unit has fallen below its carrying value.
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CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This Annual Report on Form 10-K, including Management’s Discussion and Analysis, contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance,” “expect,” “believe,” “plan,” “intend,” “will,” “should,” “could,” “would,” “anticipate,” “estimate,” “forecast,” “may,” “potential,” "optimistic," and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995, as amended, and by the Securities and Exchange Commission in its rules, regulations, and releases.
Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.
Important risk factors include, but are not limited to, the following: risks relating to the operating levels of our customers and the factors that affect them, including general economic conditions, changes in supply and demand, supply chain and labor challenges, unfavorable exchange rates, adverse governmental regulations and trade policies, and other factors; the potential inability or unwillingness of our customers to pay amounts owed to us under unsecured trade credit arrangements; supply chain disruptions; consolidation in our customers' and suppliers' industries and our potential inability to negotiate favorable contract terms as a result; competitive pressures; the risks associated with our global operations, including exposure to global economic and political conditions, currency exchange volatility, and differing cultural and legal norms and practices; our ability to execute our operational and growth strategies and the risks associated therewith, including the expenditure of significant resources and the potential failure of Applied to successfully or effectively implement such strategies; loss of key supplier authorizations, lack of product availability (such as due to supply chain strains), and changes in supplier distribution programs; reduction in supplier inventory purchase incentives; volatility in product, energy, labor, and other costs, including as a result of tariffs and other trade policies; changes in customer or product mix and downward pressure on sales prices; our reliance on information systems and risks relating to their proper functioning, cybersecurity, and data; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability, timing and nature of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; an interruption of operations at our headquarters or distribution centers, or in the transportation of products; risks related to our level of indebtedness and debt service commitments, including potential reduction in the availability of our cash flow to fund operations, limitations on our ability to obtain additional financing in the future, and competitive disadvantages; our ability to maintain effective internal control over financial reporting; the potential for goodwill, long-lived, and other intangible asset impairment; our ability to attract, hire, and retain qualified sales and customer service personnel and other skilled executives, managers, and professionals, and to successfully execute succession plans for key employees; legal and regulatory risks, including those resulting from changes and variations in law across the jurisdictions in which we operate, litigation, and compliance with complex regulatory schemes; and global or regional health epidemics and other public health emergencies.
We discuss certain of these matters and other risk factors more fully throughout our Form 10-K, as well as other of our filings with the Securities and Exchange Commission.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates.
We occasionally utilize derivative instruments as part of our overall financial risk management policy, and do not use derivative instruments for speculative or trading purposes.
Foreign Currency Exchange Rate Risk
As we operate throughout North America, Singapore, Australia and New Zealand, and approximately 12% of our 2026 net sales were generated outside the United States, foreign currency exchange rates can impact our financial position, results of operations, and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive income as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than any of our subsidiaries' functional currency are recognized in the statements of consolidated income as a component of other income, net. We do not currently hedge the net investments in our foreign operations.
During the course of the year, the Canadian and New Zealand currency exchange rates weakened in relation to the U.S. dollar by 3.7% and 6.7%, respectively, while the Mexican and Australian currency exchange rates strengthened in relation to the U.S. dollar by 7.7% and 5.5%, respectively. During 2026, we experienced net foreign currency translation gains totaling $2.7 million, which were included in other comprehensive income. We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. A 10% strengthening of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during 2026 would have resulted in a $2.7 million decrease in net income to our 2026 results.
Interest Rate Risk
Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon our leverage level and market interest rates. We used interest rate swap instruments to mitigate variability in forecasted interest rates.
Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving credit facility with a capacity of up to $900.0 million in borrowings with $74.0 million outstanding at June 30, 2026, and a $250.0 milliontrade receivable securitization facility, of which $188.3 million was outstanding at June 30, 2026. In January 2019, we entered into an interest rate swap on $463.0 million of our U.S. dollar-denominated unsecured variable rate debt. The interest rate swap matured as scheduled in January 2026 and as such, the derivative asset was derecognized. We had total average variable interest rate bank borrowings of $483.3 million during 2026. The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings would have resulted in a $4.8 million increase in interest expense.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Notes 6 and 7 to the consolidated financial statements in Item 8 of this Annual Report. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” of this Annual Report for additional risk factors relating to our business.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Applied Industrial Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the "Company") as of June 30, 2026 and June 30, 2025, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended June 30, 2026, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2026 and June 30, 2025, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2026, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2026, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 13, 2026, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill - A reporting unit within the Engineered Solutions segment - Refer to Notes 1 and 5 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the income and market approaches. The determination of the fair value using the income approach requires management to make significant estimates and assumptions related to forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA), and discount rates. The determination of the fair value using the market approach requires management to make significant estimates and assumptions related to the forecasts of future revenues, EBITDA and multiples that are applied to management’s forecasted revenues and EBITDA estimates. The fair value of all reporting units exceeded their carrying value as of the measurement date and, therefore, no impairment was recognized.
Given the nature of operations for one reporting unit within the Engineered Solutions segment, the sensitivity of this reporting unit to changes in the economy, this reporting unit’s historical performance as compared to projections, and the difference between its fair value and the carrying value, auditing management’s judgments regarding forecasts of future revenues and EBITDA, as well as selection of the discount rate, and selection of multiples applied to
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management’s forecasted revenues and EBITDA estimates for this reporting unit, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future revenues and EBITDA (“forecasts”), and the selection of the discount rate and selection of multiples applied to management’s forecasted revenues and EBITDA estimates (“market multiples”) for this reporting unit included the following, among others:
•We tested the design, implementation, and operating effectiveness of controls over management’s goodwill impairment evaluation, such as controls related to management’s forecasts and the selection of the discount rate and market multiples used.
•We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s forecasts by comparing the current forecasts to (1) historical results, (2) internal communications to management and the Board of Directors at the reporting unit level and/or at a consolidated level, and (3) forecasted information included in industry reports for the various industries the reporting unit operates within.
•With the assistance of our fair value specialists, we evaluated the discount rate and the long-term rate of return, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rate selected by management.
•With the assistance of our fair value specialists, we evaluated the market multiples by evaluating the selected comparable publicly traded companies and the adjustments made for differences in growth prospects and risk profiles between the reporting unit and the comparable publicly traded companies. We tested the underlying source information and mathematical accuracy of the calculations.
Inventory - Refer to Notes 1 and 4 to the financial statements
Critical Audit Matter Description
As of June 30, 2026, the Company holds inventory across a large number of locations, including distribution centers, service centers, repair shops and engineered solutions operations. The Company’s processes to track and determine consolidated inventory relies on a perpetual inventory system that varies by location based in part upon the information technology (IT) system relevant to the location. Auditing the existence of inventory requires significant effort and auditor judgment in testing due to the disaggregation of inventory across the locations and the processes and controls in place. Judgment relates to assessing whether we have obtained sufficient audit evidence, including determining the number of locations to visit.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the existence of inventory included the following, among others:
•With the assistance of our IT specialists, we tested the design, implementation, and operating effectiveness of controls over management’s process to account for the physical existence of inventory, which included general IT controls as well as automated and manual business process controls.
•We involved senior team members to determine the extent and number of location counts to test.
•As part of our testing of the design, implementation, and operating effectiveness of controls and of inventory, we observed management’s count procedures at certain locations and obtained and evaluated management’s audit evidence over counts at certain locations.
•We performed independent test counts at certain locations as of year-end.
•We investigated any identified variations in inventory counts performed and considered the impact in the context of the inventory balance as a whole.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
August 13, 2026
We have served as the Company's auditor since 1966.
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STATEMENTS OF CONSOLIDATED INCOME
(In thousands, except per share amounts)
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands)
Other comprehensive loss, before tax:
Post-employment benefits:
Actuarial gain (loss) on re-measurement 117 (42) (134)
Unrealized gain (loss) on cash flow hedge 262 (357) 5,958
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
(In thousands)
Assets
Current assets
Property — at cost
Liabilities
Current liabilities
Shareholders’ Equity
Accumulated other comprehensive loss (94,796) (91,686)
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
Cash Flows from Operating Activities
Provision for losses on (recoveries of) accounts receivable 4,613 5,978 (205)
Changes in operating assets and liabilities, net of acquisitions:
Cash Flows from Investing Activities
Life insurance proceeds — — 971
Cash Flows from Financing Activities
Repayments under revolving credit facility (310,000) — —
Borrowings under revolving credit facility — — 408
Payment of debt issuance costs (1,611) — —
Exercise of stock appreciation rights and options — — 127
Effect of exchange rate changes on cash 69 (226) (2,937)
Supplemental Cash Flow Information
Cash paid during the year for:
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands)
Treasury shares issued for:
Exercise of stock appreciation rights and options 73 (3,611) (3,886) (7,497)
Compensation expense — stock appreciation rights 3,448 3,448
Other share-based compensation expense 9,496 9,496
Treasury shares issued for:
Exercise of stock appreciation rights and options 36 (2,110) (2,710) (4,820)
Compensation expense — stock appreciation rights 4,713 4,713
Other share-based compensation expense 7,289 7,289
Treasury shares issued for:
Exercise of stock appreciation rights and options 55 (4,043) (3,237) (7,280)
Compensation expense — stock appreciation rights 5,519 5,519
Other share-based compensation expense 7,385 7,385
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES
Business
Applied Industrial Technologies, Inc. and subsidiaries (the “Company,” “Applied,” "us," "we," or "our") is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies and related maintenance supplies. We market our products with a set of service solutions including inventory management, engineering, design, assembly, repair, and systems integration, as well as customized mechanical, fabricated rubber, and shop services. Our customers use our products and services for both Maintenance, Repair, and Operations ("MRO"), Original Equipment Manufacturing ("OEM"), and new system installation applications across a variety of end markets primarily in North America, as well as Australia, New Zealand, and Singapore. The Company operates on a fiscal year ending June 30.
Consolidation
The consolidated financial statements include the accounts of Applied and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency
The local currency of foreign operations is generally considered to be their functional currency. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) income in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other income, net.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
Marketable Securities
The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other income, net in the statements of consolidated income.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While the Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand.
Accounts Receivable
Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers.
Allowances for Doubtful Accounts
The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be greater credit risks, trends within the entire customer
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pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. The allowance for doubtful accounts was $15,455 and $16,462 at June 30, 2026 and 2025, respectively.
Inventories
Inventories are valued at average cost, using the last-in, first-out ("LIFO") method for U.S. inventories and the average cost method for foreign inventories. At June 30, 2026, approximately 13.2% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products, and other products. LIFO layers and/or liquidations are determined consistently year-to-year.
The Company evaluates the recoverability of its slow moving and inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs.
Supplier Purchasing Programs
The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase volumes and are received either monthly, quarterly, or annually. The incentives are generally a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the Company’s inventory accounting methods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheets as an offset to amounts due to the related supplier.
Property and Related Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution, and administrative expense in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the asset group's recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between the carrying amount of an asset group and its fair value.
Goodwill and Intangible Assets
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company utilizes the income and market approaches to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management, including estimated future operating results, estimated future cash flows, the long-term rate of growth of the
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business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly.
The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles are amortized using the sum-of-the-years-digits method or the expected cash flow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is included in selling, distribution, and administrative expense in the accompanying statements of consolidated income. Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. If circumstances require a finite-lived intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the finite-lived intangible asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value determined through a discounted cash flow model. Identifiable intangible assets with indefinite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indefinite-lived identifiable intangible assets.
Self-Insurance Liabilities
The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models, and assumptions based on historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment.
Revenue Recognition
The Company primarily sells purchased products distributed through its network of service centers and other facilities, and recognizes revenue 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 recognized over time is not significant. 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 that will be remitted to governmental authorities. Shipping and handling costs are recognized in net sales when they are billed to the customer. The Company has elected to account for shipping and handling activities as fulfillment costs. There are no significant costs associated with obtaining customer contracts.
Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant.
Depending on the terms of the contracts with certain customers, the Company may receive payments from customers before the goods or services are delivered, typically as down payments for products to be delivered in the future. These amounts are recorded as contract liabilities (deferred revenue), included in other current liabilities on the consolidated balance sheet as the performance obligations have not yet been satisfied. Revenue is recognized when the Company satisfies its performance obligation by delivering the products to the customer. The Company’s contract assets consist of unbilled amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer. Contract assets are included in other current assets on the consolidated balance sheet.
The Company’s products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits, or rebates. Product returns are estimated based on historical return rates. The product returns reserve was $12,230 and $10,869 at June 30, 2026 and 2025, respectively.
The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services
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to a customer. The Company records variable consideration as an adjustment to the transaction price in the period it is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.
Shipping and Handling Costs
The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution, and administrative expense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution, and administrative expense were approximately $21,850, $26,440, and $24,620 during 2026, 2025, and 2024, respectively.
Income Taxes
Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. The impact of uncertain tax positions are recognized in the provision for income taxes if that position is more-likely-than-not to be sustained upon examination by a taxing authority based upon the merits of the position. The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes. Income tax effects resulting from adjusting temporary differences recorded in accumulated other comprehensive loss are released when the circumstances on which they are based cease to exist.
Share-Based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees under the Company's 2023 Long-Term Performance Plan or the 2019 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Stock appreciation rights ("SARs") are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes-Merton option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. SARs vest ratably over four years of continuous service and have ten-year contractual terms. The fair value of restricted stock awards ("RSAs"), restricted stock units ("RSUs"), and performance shares are based on the closing market price of Company common stock on the grant date.
Treasury Shares
Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital. In accordance with the Inflation Reduction Act of 2022, as amended, the Company is subject to a 1% excise tax on the net repurchase of its stock, which is recorded as a direct cost of the transaction in the period of repurchase.
Derivatives
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
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Retirement Savings Plan
Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan, a 401(k) plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to maximums set forth in the Internal Revenue Code of 1986, as amended. The Company partially matches 401(k) contributions by participants. The Company’s expense for matching of employees’ 401(k) contributions was $11,218, $6,177 and $9,670 during 2026, 2025 and 2024, respectively.
Deferred Compensation Plans
The Company maintains deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Rabbi trusts have been established to hold and provide a measure of security for investments that fund benefits payments under these plans. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock.
Post-employment Benefit Plans
The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded:
Supplemental Executive Retirement Benefits Plan
The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan ("SERP") effective December 31, 2011. The Company recorded net periodic benefit costs associated with the SERP of $211, $260, and $289 during 2026, 2025, and 2024, respectively. The Company expects to make payments of approximately $49 under the SERP in 2027.
Key Executive Restoration Plan
During 2012, the Company adopted the Key Executive Restoration Plan ("KERP"), a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $403, $820, and $446 of expense associated with this plan during 2026, 2025, and 2024, respectively.
Retiree Health Care Benefits
The Company provides health care benefits through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are subsidized by the Company. The Company recorded net periodic benefits associated with these plans of $106, $115, and $186 during 2026, 2025, and 2024, respectively.
The Company has determined that the related disclosures under ASC Topic 715 - Compensation, Retirement Benefits, for these post-employment benefit plans are not material to the consolidated financial statements.
Leases
The Company leases facilities for certain service centers, warehouses, distribution centers, and office space. The Company also leases office equipment and vehicles. All leases are considered to be operating leases. The Company’s leases expire at various dates through 2039, with terms ranging from 1 year to 15 years. Many of the Company’s real estate leases contain renewal provisions to extend lease terms for up to 5 years. The exercise of renewal options is solely at the Company’s discretion. The Company’s lease agreements do not contain material variable lease payments, residual value guarantees, or restrictive covenants. The Company does not recognize right-of-use assets or lease liabilities for short-term leases with initial terms of 12 months or less. All other leases are recorded on the balance sheet with right-of-use assets representing the right to use the underlying asset for the lease term and lease liabilities representing lease payment obligations. The Company’s leases do not provide implicit rates; therefore, the Company uses its incremental borrowing rate as the discount rate for measuring lease liabilities. Non-lease components are accounted for separately from lease components. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, distribution, and administrative expense in the statements of consolidated income.
Asset Retirement Obligations
The Company records a liability to recognize the legal obligation to remove an asset when the legal liability arises. The liability is recorded for the present value of the ultimate obligation by discounting the estimated future cash flows using a credit-adjusted risk-free interest rate. The liability is accreted over time, with the accretion charged to expense within selling, distribution, and administrative expense, including depreciation. An asset equal to the fair
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value of the liability is recorded concurrent with the liability and depreciated over the life of the underlying asset. As of June 30, 2026, the Company's asset retirement obligation reserve was $4.5 million.
Recently Adopted Accounting Guidance
In December 2023, the Financial Accounting Standards Board ("FASB") issued its final Accounting Standard Update ("ASU") to improve income tax disclosures. This standard, issued as ASU 2023-09, requires public business entities to annually disclose specific categories in the income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. This update is effective for annual periods beginning after December 15, 2024 and permits adoption on a prospective or retrospective basis. We elected to adopt on a retrospective basis. The adoption of the ASU only affected the Company's income taxes disclosures and did not affect the consolidated financial statements. See the Income Tax note for further information.
Recently Issued Accounting Guidance
In December 2025, the FASB issued its final ASU which makes improvements to the Accounting Standards Codification ("ASC") in response to feedback from stakeholders. This standard, issued as ASU 2025-12, specifically updates the Codification for a broad range of Topics arising from technical corrections, unintended application of the Codification, clarifications, and other minor improvements. This update is effective for annual reporting periods beginning after December 15, 2026, including interim reporting periods within those annual reporting periods. The Company is currently evaluating the effect of this guidance on its financial statements and related disclosures.
In December 2025, the FASB issued its final ASU which amends and clarifies the interim disclosure requirements associated with ASC Topic 270 - Interim Reporting. This standard, issued as ASU 2025-11, provides clarity about current requirements to help entities determine whether disclosures not specified in ASC 270 should be provided in interim reporting periods. This update is effective for interim reporting periods beginning after December 15, 2027. The Company is currently evaluating the effect of this guidance on its financial statements and related disclosures.
In September 2025, the FASB issued its final ASU which amends certain aspects of existing guidance on the accounting for and disclosure of software costs. This standard, issued as ASU 2025-06, removes all references to project stages throughout existing accounting literature and clarifies the threshold entities apply to begin capitalizing costs. This update is effective for annual periods beginning after December 15, 2027, and interim reporting periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. The Company is currently evaluating the effect of this guidance on its financial statements and related disclosures.
In July 2025, the FASB issued its final standard which amends the guidance on the measurement of credit losses for accounts receivable and contract assets. This standard, issued as ASU 2025-05, provides a practical expedient to assume that current conditions as of the balance sheet date will persist through the reasonable and supportable forecast period for eligible assets. Entities will still be required to adjust historical data used in the estimation of expected credit losses to reflect current conditions. The amendments will be effective for annual periods beginning after December 15, 2025, and interim reporting periods within those annual periods. Early adoption is permitted in both interim and annual reporting periods in which financial statements have not yet been issued or made available for issuance. The Company is currently evaluating the effect of this guidance on its financial statements and related disclosures.
In November 2024, the FASB issued its final standard on the Disaggregation of Income Statement Expenses ("DISE"). This standard, issued as ASU 2024-03, requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. This update is effective for annual periods beginning after December 15, 2026, and interim periods within annual periods beginning after December 15, 2027. The requirements can be applied prospectively with the option for retrospective application. The Company is currently evaluating the impacts of this guidance on its financial statements and related disclosures.
NOTE 2: REVENUE RECOGNITION
Disaggregation of Revenues
The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the years ended June 30, 2026, 2025, and 2024. Other countries consist of Mexico, Australia, New Zealand, Singapore, and Costa Rica.
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Service Center Engineered Solutions Total
Geographic Areas:
Service Center Engineered Solutions Total
Geographic Areas:
Service Center Engineered Solutions Total
Geographic Areas:
The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the years ended June 30, 2026, 2025, and 2024:
Service Center Engineered Solutions Total
Cement & Aggregate 7.4 % 1.3 % 5.3 %
Transportation 3.5 % 4.5 % 3.9 %
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Service Center Engineered Solutions Total
Cement & Aggregate 7.3 % 1.4 % 5.3 %
Transportation 3.6 % 4.9 % 4.1 %
Service Center Engineered Solutions Total
Cement & Aggregate 7.4 % 1.3 % 5.5 %
Transportation 3.7 % 4.2 % 3.8 %
The following tables present the Company’s percentage of revenue by reportable segment and product line for the years ended June 30, 2026, 2025, and 2024:
Service Center Engineered Solutions Total
Bearings, Linear & Seals 25.8 % 0.8 % 16.8 %
Specialty Flow Control — % 27.4 % 9.8 %
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Service Center Engineered Solutions Total
Bearings, Linear & Seals 25.8 % 0.4 % 17.3 %
Specialty Flow Control — % 32.6 % 11.0 %
Service Center Engineered Solutions Total
Bearings, Linear & Seals 26.1 % 0.4 % 18.0 %
Specialty Flow Control — % 34.8 % 11.0 %
Contract Assets and Liabilities
Activity related to contract assets and contract liabilities, which are included in other current assets and other current liabilities on the consolidated balance sheet, is as follows:
The change in balances noted above of the Company's contract assets primarily results from the timing difference between the Company's performance and when the customer is billed.
NOTE 3: BUSINESS COMBINATIONS
The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition.
2026 Acquisitions
On January 17, 2026, the Company acquired substantially all the net assets of Thompson Industrial Supply ("Thompson"), a Los Angeles, California based provider of industrial bearings, power transmission, hydraulics, pneumatics, linear motion products, and service solutions. Thompson is included in the Service Center segment. The purchase price for Thompson was $9,000, net tangible assets acquired were $1,414, identifiable intangible assets were $3,800, and goodwill was $3,786; the values are based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The areas that remain open primarily relate to working capital
adjustments. The purchase accounting will be finalized within one year from the acquisition date. The purchase price includes $1,350 of acquisition holdback payments, which is included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2026, and will be paid on the first and second anniversary of the acquisition date with interest at a fixed rate of 1.0% per annum. The Company funded this acquisition using available cash. The results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
There was an additional acquisition in the year that was not material for disclosure.
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2025 Acquisitions
On December 31, 2024, the Company acquired all of the membership interests of Hydradyne, LLC ("Hydradyne"), a Dallas, Texas based provider of fluid power solutions and value-added services including product offerings in hydraulics, pneumatics, electromechanical, instrumentation, filtration, and fluid conveyance. The purchase price was $282,136, which was funded using available cash. Hydradyne is included in the Engineered Solutions segment.
The following table summarizes the assets acquired and liabilities assumed in connection with this acquisition based on their fair values at the acquisition date.
Hydradyne Acquisition
Cash and cash equivalents $ 13,146
Accounts receivable 42,436
Other current assets 996
Operating lease assets 52,257
Identifiable intangible assets 126,050
Other assets 111
Total assets acquired $ 353,781
Accounts payable and accrued liabilities 15,771
Other current liabilities 4,546
During 2026, the Company recorded purchase accounting working capital adjustments related to the Hydradyne acquisition, which decreased the fair value of net tangible assets acquired by $314, and increased goodwill by $314.
The acquired goodwill is expected to be deductible for income tax purposes. The Company incurred $1,608 in third-party costs pertaining to the acquisition of Hydradyne, which are included in selling, distribution, and administration expense in the statement of consolidated income for the year ended June 30, 2025.
Net sales and net income from the Hydradyne acquisition included in the Company's results since December 31, 2024, the date of the acquisition, were $124,529 and $4,366, respectively, for the year ended June 30, 2025.
The following unaudited pro forma consolidated results of operations are prepared as if the Hydradyne acquisition (including the related acquisition costs) occurred at the beginning of 2024:
Diluted net income per share 10.23 9.88
The pro forma amounts are calculated after applying the Company's accounting policies and adjusting the results to reflect additional amortization that would have been recorded assuming the fair value adjustments to identified intangible assets were applied as of July 1, 2023. Additional amortization of $5,473 and $11,454 is included in the pro forma results for 2025 and 2024, respectively. In addition, pro forma adjustments of $5,643 and $11,285for 2025 and 2024, respectively, were made for interest income that would not have been earned as a result of the cash used for the acquisition. The pro forma net income amounts also incorporate an adjustment to the recorded income tax expense for the income tax effect of the pro forma adjustments described above. These pro forma results of operations do not include any anticipated synergies or other effects of the planned integration of Hydradyne; accordingly, such pro forma adjustments do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred as of the date indicated or that may result in the future.
The Company funded the following acquisitions using available cash. The results of operations for the acquired entities were not material in relation to the Company's consolidated financial statements.
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On May 1, 2025, the Company acquired substantially all of the net assets of IRIS Factory Automation ("IRIS"), an Aurora, Illinois based provider of automation products, services, and turn-key productized solutions focused on optimizing material handling and traceability workflows across production environments. IRIS is included in the Engineered Solutions segment. The purchase price for IRIS was $14,696, net liabilities assumed were $144, identifiable intangible assets were $7,810, and goodwill was $7,030; the values are based upon their fair values at the acquisition date.
On August 1, 2024, the Company acquired substantially all of the net assets of Total Machine Solutions ("TMS"), a Fairfield, New Jersey based provider of electrical and mechanical power transmission products and solutions including bearings, drives, motors, conveyor components, and related repair services. TMS is included in the Service Center segment. The purchase price for TMS was $6,025, net tangible assets acquired were $1,115, identifiable intangible assets were $2,738, and goodwill was $2,172 based upon their fair values at the acquisition date.
On August 1, 2024, the Company acquired 100% of the outstanding shares of Stanley Proctor, a Twinsburg, Ohio based provider of hydraulic, pneumatic, measurement, control, and instrumentation components, as well as fluid power engineered systems. Stanley Proctor is included in the Engineered Solutions segment. The purchase price for Stanley Proctor was $3,924, net tangible assets acquired were $362, identifiable intangible assets were $1,725, and goodwill was $1,837based upon their fair values at the acquisition date.
2024 Acquisitions
The Company funded the following acquisitions using available cash. The results of operations for the acquired entities were not material in relation to the Company's consolidated financial statements.
On May 1, 2024, the Company acquired 100% of the outstanding shares of Grupo Kopar ("Kopar"), a Monterrey, Mexico based provider of emerging automation technologies and engineered solutions. Kopar is included in the Engineered Solutions segment. The purchase price for the acquisition was $61,870, net liabilities assumed were $4,089, and intangible assets including goodwill were $65,959 based upon their fair values at the acquisition date.
On September 1, 2023, the Company acquired substantially all of the net assets of Bearing Distributors, Inc. ("BDI"), a Columbia, South Carolina based provider of bearings, power transmission, industrial motion products, and related service and repair capabilities. BDI is included in the Service Center segment. The purchase price for the acquisition was $17,926, net tangible assets acquired were $4,102, and intangible assets including goodwill were $13,824 based upon their fair values at the acquisition date. The purchase price includes $1,800 of acquisition holdback payments, of which $900 was paid during 2025, and the remaining $900 was paid during 2026.
On August 1, 2023, the Company acquired substantially all of the net assets of Cangro Industries, Inc. ("Cangro"), a Farmingdale, New York based provider of bearings, power transmission, industrial motion products, and related service and repair capabilities. Cangro is included in the Service Center segment. The purchase price for the acquisition was $6,219, net tangible assets acquired were $2,070, and intangible assets including goodwill were $4,149 based upon their fair values at the acquisition date. The purchase price includes $930 of acquisition holdback payments, of which $620 was paid through 2026. The remaining balance of $310is included in other current liabilities and other liabilities on the consolidated balance sheet as of June 30, 2026, and will be paid on the third anniversaries of the acquisition date with interest at a fixed rate of 1.0% per annum.
NOTE 4: INVENTORIES
Inventories consist of the following:
Less: Excess of average cost over LIFO cost for U.S. inventories 254,431 232,676
The overall impact of LIFO layer liquidations increased gross profit by $1,575, $393, and $1,160 in 2026, 2025, and 2024, respectively.
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NOTE 5: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center segment and the Engineered Solutions segment for the years ended June 30, 2026 and 2025 are as follows:
Service Center Engineered Solutions Total
Other, primarily currency translation (130) — (130)
Other, primarily currency translation (522) — (522)
During 2026, the Company recorded purchase accounting working capital adjustments, which increased the purchase price by $696, increased Goodwill by $1,555 and decreased the fair value of net tangible assets acquired by $859.
The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2026. Based on the assessment performed, the Company concluded that the fair value of all of the reporting units exceeded their carrying amount as of January 1, 2026, therefore no impairment exists.
At June 30, 2026 and 2025, accumulated goodwill impairment losses subsequent to 2002 totaled $64,794 related to the Service Center segment and $167,605 related to the Engineered Solutions segment.
The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
June 30, 2026 Amount AccumulatedAmortization NetBook Value
Finite-Lived Intangibles:
June 30, 2025 Amount AccumulatedAmortization NetBook Value
Finite-Lived Intangibles:
Amounts include the impact of foreign currency translation. Fully amortized finite-lived identifiable intangible assets are written off in the period when they become fully amortized.
During 2026, the Company acquired identifiable intangible assets with an acquisition cost allocation and weighted-average life as follows:
Acquisition Cost Allocation Weighted-Average Life
Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable.
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Amortization of identifiable intangibles totaled $40,072, $35,581, and $28,923 during 2026, 2025, and 2024, respectively, and is included in selling, distribution, and administrative expense in the statements of consolidated income. Estimated future amortization expense by year (based on the Company’s identifiable intangible assets as of June 30, 2026) for the next five years are as follows: $37,400 for 2027, $34,900 for 2028, $32,800 for 2029, $30,800 for 2030, and $28,700 for 2031.
NOTE 6: DEBT
A summary of long-term debt is as follows:
Revolving Credit Facility
In October 2025, the Company entered into a new five-year revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for future acquisitions, ongoing working capital and other general corporate purposes. This agreement provides a $900,000 unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $800,000. The new revolving credit facility also provides for a $25,000 sublimit for swing line loans and a $50,000 sublimit for letters of credit. Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points or Secured Overnight Financing Rate ("SOFR") plus a margin that ranges from 80 to 155 basis points, both of which are based on the Company's net leverage ratio. Borrowing capacity under this facility, without exercising the accordion feature, totaled $825,757 at June 30, 2026 which is available to fund future acquisitions or other capital and operating requirements. This amount is net of outstanding letters of credit of $243 at June 30, 2026 to secure certain insurance obligations. The interest rate on the revolving credit facility was 4.44% as of June 30, 2026.
The new credit facility replaced the Company's previous revolving credit facility. Borrowing capacity under the previous facility, net of outstanding letters of credit of $209 to secure certain insurance obligations, totaled $515,791 at June 30, 2025. The interest rate on the previous revolving credit facility was 5.23% as of June 30, 2025.
The Company paid $1,611 of debt issuance costs related to the new revolving credit facility in the year ended 2026, which are included in other current assets and other assets on the consolidated balance sheet as of June 30, 2026 and will be amortized over the five-year term of the new credit facility. The Company analyzed the unamortized debt issuance costs related to the previous credit facility. As a result of this analysis, $47 of unamortized debt issuance costs were expensed and included within interest expense, net in the statements of consolidated income in the twelve months ended June 30, 2026, and $804 of unamortized debt issuance costs were deferred related to the new credit facility and will be amortized over the five-year term of the new credit facility.
Additionally, the Company had letters of credit outstanding, not associated with the revolving credit agreement in the amount of $5,336as of June 30, 2026 and 2025, in order to secure certain insurance obligations.
Trade Receivable Securitization Facility
On July 10, 2025, the Company amended its existing trade receivable securitization facility (the "AR Securitization Facility") and extended its maturity to July 10, 2028. The AR Securitization Facility effectively increases the Company's borrowing capacity by collateralizing a portion of the amount of the U.S. operations' trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt. The AR Securitization Facility's maximum borrowing capacity is $250,000 and fees on amounts borrowed are 0.90% per year.Borrowing capacity is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable portfolio and, therefore, at certain times, we may not be able to fully access the $250,000 of borrowing capacity available under the AR Securitization Facility. Borrowings under the AR Securitization Facility carry variable interest rates tied to SOFR. The interest rate on the AR Securitization Facility as of June 30, 2026 and 2025 was 4.55% and 5.32%, respectively.
Other Long-Term Borrowing
In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note, held by the State of Ohio Development Services Agency, was fully paid in November 2024.
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The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next five years:
Year Ended June 30, Aggregate Maturity
Covenants
The credit facility contains restrictive covenants regarding liquidity, financial ratios, and other covenants. At June 30, 2026, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At June 30, 2026, the Company's net indebtedness was less than 0.2 times consolidated income before interest, taxes, depreciation and amortization (as defined in these agreements). The Company was in compliance with all financial covenants at June 30, 2026.
NOTE 7: DERIVATIVES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative instrument is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. This reclassification occurs when interest payments are made on the Company’s variable-rate debt.
In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on $463,000 of the Company’s U.S. dollar-denominated unsecured variable rate debt. The notional amount declined over time to $384,000 as principal payments were made. The interest rate swap effectively converted a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and was accounting for this derivative as a cash flow hedge. During 2021, the Company completed a transaction to amend and extend the interest rate swap agreement which resulted in an extension of the maturity date to January 31, 2026. The pay-fixed interest rate swap was considered a hybrid instrument with a financing component and an embedded at-market derivative that was designated as a cash flow hedge. The weighted average fixed pay rate is 1.58% and the interest rate swap was indexed to SOFR. The Company made various accounting elections related to changes in critical terms of the hedging relationship due to reference rate reform to preserve the hedging relationship.