AIT 10-K & 10-Q changes, risk factors and insider trading

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 below 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.

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.

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 pressurespressures, 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 affectaffecting our results of operationsoperations, financial condition, and financial condition.reputation. Our supply chain, including transportation availability, staffing, and cost, could be disrupted by natural or human-induced events or conditions, such as power or telecommunications outage,outages; security incident,incidents; terrorist attack,attacks; war,war; other geopolitical events,events; public health crisis,crises; earthquake,earthquakes; extreme weather events,events; fire,fire; flood,flood; other natural disasters,disasters; transportation disruption,disruption; labor actions, including strikes,strikes; raw materials shortages,shortages; financial problems or insolvency,insolvency; trade regulations or actions,actions; inadequate manufacturing capacity or utilization to meet demand,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, when we can find acceptable alternate sources for certain products, they may cost more. These potential impairmentimpairments 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 leadleading to volatility in our sales, thereby adversely affecting our business and financial results. Consolidation continues among both our product supplierscustomers as well as our customers.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 purchasespurchases, and we may be unable to take advantage of consolidation trends.

Our operations outside the United States increase our exposure to global economic and political conditions and currency exchange volatility.volatility, which may negatively impact our profitability. Foreign operations contributed 12% of our sales in 2025.2026. 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.

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. IfThe wedevelopment doand notimplementation 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 thesean initiativesinitiative effectively, or ifnot forfully otherrealize reasonsan theyinitiative’s areobjectives unsuccessful,or expected benefits. Any such occurrence may decrease our businessprofitability, couldcause beus to not achieve short- or long-term financial goals, harm our competitive position, or otherwise adversely affected.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,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.

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 to 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.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. In addition, a portion of ourOur own distribution costs isvary composedwith changes in the pricing of fuel for our sales and delivery vehicles, freight,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 execution,our ability to execute pricing changes, market conditions, and contractual limitations. Failing to timely pass along price increases timely(particularly in an inflationary environment,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;customers. forFor 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,markets and offer millions of products,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 operation.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,systems due to man-made or natural causes, including power or telecommunications outage, or breach in security, could materially impair fundamental business processes andprocesses, 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, whichthat results in regulated data or confidential information being accessed, obtained, damaged, disclosed, destroyed, modified, lost, or used by unauthorized persons could harm our reputationreputation. andIt 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 to 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 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,time and money,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,funds; the theft, loss, or disclosure of proprietary or confidential information,information; or the breach of customer, supplier, or employee information. A security incident involving our systems,systems or even an inadvertent failure to comply with data privacy and security laws and regulations,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 to complete future acquisitions, to integrate them effectively into our operations, or to 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 to complete acquisitions. In addition, existing and future competitors, andas 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.

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, to reduce duplicative expenses and inventory effectively, and to 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 outage,outages, security incident,incidents, terrorist attack,attacks, war, public health emergency,emergencies, earthquake,earthquakes, extreme weather events, other natural disasters, fire, flood, transportation disruption, or other interruptioninterruptions could damage our relationships and reputation, and have a material adverse effect on our business and financial results.

In addition, changes to the credit markets could result in credit markets tightening,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 belowin 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 below 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, collusioncollusion, 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,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, includingor ourif inabilitywe 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 affected.impacted. This, in turn, could materially and adversely affectharm 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 adversely affected.damaged.

Goodwill, long-lived, and other intangible assets recorded as a result of our acquisitions could become impaired.impaired and negatively impact our operating results and profitability. We review goodwill,goodwill and long-lived assets, including property, plant andplant, 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, 2025,2026, weour hadbalance remainingsheet $699.4includes $704.7 million of goodwill and $348.6$312.8 million of other intangible assets, net. The techniques used in our qualitative assessmentassessments 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.

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 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 corruptionanti-corruption laws, anti-competition laws, employment laws, and data privacy.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. TheseIn may,the forpast, example,these relateproceedings have related to product liability claims, commercial disputes, personal injuries, orand employment-related matters. InWe addition,expect weto 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 facehave claimsa material adverse effect on our business, financial condition, 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 transmissionresults of personal data.operations.

A global or regional health pandemic or epidemic has and in the future could negatively impact our business, results of operationoperations and financial condition. The emergence, severity, magnitudemagnitude, 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,pandemic or other epidemic, together with preventativepreventive 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 preventativepreventive 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 on Form 10-K.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,spread; the impact of governmental regulations that may be imposed in response,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,disease; and global economic conditions.

Our fiscal 20252026 consolidated sales were $4.6$5.0 billion, an increase of $84.0$403.3 million or 1.9%8.8% compared to the prior year, with acquisitions contributing to sales growth by $193.0$142.2 million or 4.3%3.1% and unfavorablefavorable foreign currency translation of $23.7$15.9 million reducingincreasing sales by 0.5%.0.3%. GrossExcluding profitthe 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 increasedof 11.1% of sales for the year ended June 30, 2026, compared to 30.3%operating forincome fiscalof 2025$498.5 frommillion, 29.8%or for fiscal 2024. Operatingoperating margin decreasedof 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 10.9%$10.12 in fiscal 2025 from 11.1% in fiscal 2024.2025.

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 compared to $1,688.8$966.3 million at June 30, 2024. Working capital decreased $47.5 million from June 30, 2024 to $1,221.3 million at June 30, 2025.2026. The current ratio was 3.32.6 to 1 and 3.53.3 to 1 at June 30, 20252026 and at June 30, 2024,2025, respectively.

Applied monitors several economic indices that have beenare key indicators for industrial economic activity in the United States. These include the manufacturingManufacturing Industrial Production (IP"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 IPMCU and PMI indices increased since June 2024,2025, while the MCUMIP index remaineddecreased fairly stableslightly over the fiscal year. The ISM PMI registered 49.053.3 in June 2025,2026, an increase from the June 2024 revised2025 reading of 48.3.49.0. A reading above 50 generally indicates expansion in the U.S. manufacturing sector. The index readingsindices for the months during the most recent quarter, along with the revised indices for previousthe prior year end and prior quarter ends, were as follows:

This section provides comparisons of material changes in the consolidated financial statements for the fiscalyears ended June 30, 2026 and 2025. For the comparison of the years ended June 30, 2025 and 2024. For the comparison of the fiscal years ended June 30, 2024 and 2023,2024, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 20242025 Annual Report on Form 10-K. We disclose segment information that is consistent with the way in which management operates and views Applied.

Sales in fiscal 20252026 were $4.6$5.0 billion, which was $84.0$403.3 million or 1.9%8.8% above the prior year, with sales from acquisitions adding $193.0$142.2 million or 4.3%3.1% and unfavorablefavorable foreign currency translation reducingincreasing sales by $23.7$15.9 million or 0.5%.0.3%. There were 252.5 selling days in fiscalboth 20252026 and 251.5 selling days in 2024.2025. Excluding the impact of businesses acquired and foreign currency translation, sales were downup $85.3$245.2 million or 1.9%5.4% during the year, driven by a decrease of 2.3% reflecting continued subdued demand due to economichigher uncertainty, offset by an increasevolumes of 0.4%approximately due$136.2 tomillion and the changeremainder infrom salespositive days.price contribution.

Sales infrom our Service Center segment, which operates primarily in MRO markets, decreasedincreased $42.2$169.9 million, or 1.4%.5.6%, compared to the prior year. Acquisitions within this segment increased sales by $11.7$5.9 million or 0.4%0.2% and unfavorablefavorable foreign currency translation reducedincreased sales by $23.7$15.9 million or 0.8%.0.5%. Excluding the impact of businesses acquired and foreign currency translation, sales decreasedincreased $30.2$148.1 million or 1.0%4.9% during the year, driven by a decrease of 1.4% reflecting softer MRO spending and capital maintenance projects, offset by an increase of 0.4% due to higher volumes of approximately $80.1 million reflecting volume growth across the changeUnited inStates salesand days.the remainder from positive price contribution.

Sales infrom our Engineered Solutions segment increased $126.2$233.4 million or 8.9%.15.1%. Acquisitions within this segment increased sales $181.3$136.3 million or 12.7%.8.8%. Excluding the impact of businesses acquired, sales decreasedincreased $55.1$97.1 million or 3.8%,6.3%, drivendue byto ahigher decreasevolumes of 4.2%approximately $56.1 million primarily reflecting ongoingstronger weaknessdemand across mobileour fluid power OEMand customers,automation operations, as well as softerpositive automationprice sales, offset by an increase of 0.4% due to the change in sales days.contribution.

Sales in our U.S. operations increased $68.8$384.4 million or 1.7%,9.6%, with acquisitions contributing $154.4$142.2 million or 3.9%.3.6%. Excluding the impact of businesses acquired, sales in the United States were downup $85.6$242.2 million or 2.2%,6.0%, drivenreflecting byvolume agrowth 2.6%of decrease$136.2 duemillion toand lowerprice demandcontribution across both segments, offset by an increase of 0.4% due to the changeService inCenter salesand days.Engineered Solutions segments. Sales from our Canadian operations decreasedincreased $13.6$4.2 million or 4.4%.1.4%. UnfavorableFavorable foreign currency translation loweredincreased Canadian sales by $9.0$3.0 million or 2.9%.1.0%. Excluding the impact of foreign currency translation, Canadian sales were downup $4.6$1.2 million or 1.5%, driven by a 1.9% decrease due to lower demand, offset by an increase of 0.4% due to the change in sales days.0.4%. Sales in other countries increased $28.8$14.7 million or 12.2%,5.5%, primarily due to acquisitions contributing $38.6 million or 16.3%. Unfavorablefavorable foreign currency translation reduced other countries'increasing sales by $14.7$12.9 million or 6.2%.4.8%. Excluding the impact of businesses acquired and foreign currency translation, other countries' sales were up $4.9$1.8 million or 2.1%.0.7%.

The following table shows the changes in selling, distribution, and administrative expense, including depreciation ("SD&A").

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management, and marketingmarketing, 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 expensesexpenses. andSD&A expensesincreased incurred$72.7 inmillion acquiringor businesses.8.2% during 2026 compared to 2025. As a percentage of sales, SD&A was 19.4%19.3% ofduring sales in fiscal 20252026 compared to 18.8%19.4% in fiscal 2024, an increase of $43.8 million or 5.2% compared to the prior year.2025. SD&A from businesses acquired added $58.1$41.4 million or 6.9%,4.7%, including $8.7$10.2 million of intangibles amortization related to acquisitions. Changes in foreign currency exchange rates reducedincreased SD&A by $4.4$3.2 million or 0.5%0.4% compared to the prior year.2025. Excluding the impact of businesses acquired and the favorable impact from foreign currency translation, SD&A decreasedincreased $9.9$28.1 million or 1.2%3.1% during fiscal 20252026 compared to fiscal2025 2024, as total compensation decreased $21.2 million during fiscal 2025primarily due to cost controls, efficiency gains, and lower incentivehigher compensation based on Company performance. This reduction in total compensation was offset by a $4.2 million increase in occupancy costs (excluding acquisitions) and a $6.2 million increase in bad debt expense during fiscal 2025 compared to the prior year. All other expenses within SD&A were up $0.9 million.costs.

Operating income increased $2.7$50.9 million, or 0.5%,10.2%, to $549.5 million during 2026 from $498.5 million during fiscal 2025 from $495.8 million during fiscal 2024,2025, and as a percentage of sales, decreasedincreased to 10.9%11.1% from 11.1%.10.9%.

Other (income) expense,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 fiscal2025. 2025Other comparedincome, tonet $5.1for million of income in fiscal 2024. Current year income2026 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 millionmillion, 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. Fiscal 2024 income consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $3.3 million, foreign currency transaction gains of $1.1 million, and life insurance income of $0.9 million, offset by other periodic post-employment costs of $0.1 million and other expense of $0.1 million.

As a result of the factors discussed above, net income for fiscal 20252026 increased $7.2$21.5 million from the prior year.2025. Diluted net income per share was $10.95 per share for 2026 compared to $10.12 per share for fiscal2025, 2025an comparedincrease toof $9.83 per share for fiscal 2024 due to higher net income and lower diluted shares outstanding.8.2%.

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. ASCThe 740,Company “Incomeis Taxes”,required requiresto recognize the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, asAs of the date of enactment, and during the three months ended SeptemberJune 30, 2025,2026, the Company willcompleted evaluateits all deferred tax balances under the newly enacted tax lawevaluation and identifyas a result, did not have any othermaterial changes requiredadjustments to its financial statements asresulting afrom resultthe enactment of the OBBBA. There is no effect on the Company's fiscal 2025 results. The Company is still evaluating the impact of the OBBBA and the results of such evaluations will be reflected on the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2026.

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At June 30, 20252026, we had total debt obligations outstanding of $572.3$262.3 million compared to $597.4$572.3 million at June 30, 2024.2025. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations,operations will be sufficientsufficient, 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 on commercially acceptable terms if necessary based on the Company’s credit standing and financial strength.

The Company’s working capital at June 30, 20252026 was $1,221.3$966.3 million compared to $1,268.8$1,221.3 million at June 30, 2024.2025. 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 at June 30, 2025 and 3.5 to 1 at June 30, 2024.2025.

Net cash used in investing activities during fiscal2026 decreased compared to 2025 increased from the prior year primarily due to $11.4 million used for acquisitions in 2026 compared to $293.4 million used for acquisitions in fiscal 2025 compared to $72.1 million used for acquisitions during fiscal 2024.2025.

Net cash used in financing activities during fiscal 20252026 increased fromcompared theto prior year2025 primarily due to $152.8$317.2 million of cash used to repurchase shares of common stock in fiscal 2025 compared to $73.4 million of cash used to repurchase1,162,863 shares of common stock in fiscal2026 2024.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, $63.7$72.6 million of cash was used for dividend payments in fiscal 20252026 compared to $55.9$63.7 million of cash used for dividend payments in fiscal2025. 2024.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.

We expect capital expenditures for fiscal 20262027 to be in the $30.0$35.0 million to $35.0$40.0 million range, primarily consisting of capital associated with focused investments for growth and information technology equipment maintenance.

The Board of Directors has authorized the repurchase of shares of the Company’s common stock. These purchases may be made in open market or throughand negotiated transactions, from time to time, depending upon market conditions. AtOn JuneApril 30,22, 2025,2026, wethe hadBoard remainingof authorizationDirectors authorized the repurchase of up to purchase3.0 an additional 1,300,000 shares. Subsequent to June 30, 2025, we repurchased 128,401million shares of the Company's common stockstock, atreplacing anthe averageprior priceauthorization. perAt shareJune of30, $258.36.2026, we had authorization to repurchase 2,854,252 shares.

A summary of long-term debt,debt includingis the current portion,as follows (amounts are in thousands):

In DecemberOctober 2021,2025, 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. TheThis revolving credit facilityagreement 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 $500.0$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 election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on the Company's net leverage ratio or Secured Overnight Financing Rate ("SOFR") plus a margin that ranges from 80 to 155 basis pointspoints, both of which are based on the Company's net leverage ratio. Borrowing capacity under this facility, without exercising the accordion feature, totaled $515.8$825.8 million at June 30, 20252026 and June 30, 2024, andwhich is available to fund future acquisitions or other capital and operating requirements. TheseThis amountsamount areis net of outstanding letters of credit of $0.2 million at June 30, 2025 and June 30, 2024,2026 to secure certain insurance obligations. The interest rate on the revolving credit facility was 5.23% and 6.24%4.44% as of June 30, 2025 and June 30, 2024, respectively.2026.

Additionally, the Company had letters of credit outstanding not associated with the revolving credit agreement, in the amount of $5.3 million and $4.0 million as of June 30, 20252026 and June 30, 2024, respectively,2025 in order to secure certain insurance obligations.

InOn AugustJuly 2018,10, 2025, the Company establishedamended aits 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, 20252026 and June 30, 20242025 was 5.32%4.55% and 6.35%,5.32%, respectively. On July 10, 2025, the Company amended the AR Securitization Facility and extended the term to July 10, 2028.

The credit facility and the unsecured shelf facility containcontains restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2025,2026, 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, 2025,2026, the Company's net indebtedness was less than 0.40.2 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, 2025.2026.

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 56.6 at June 30, 2025 versus 56.2 at June 30, 2024. Approximately 2.1% of our accounts receivable balances are more than 90 days past due at June 30, 2025 compared to 1.5% at June 30, 2024. On an overall basis, ourwe provisionrecorded modest provisions for losses fromon uncollected receivables representsrepresenting 0.13%0.09% of our sales for the year ended June 30, 2025,2026, compared to 0.00%0.13% of sales for the year ended June 30, 2024.2025. TheThis increasechange primarily relates to provisions recorded in the current fiscal year for customer credit deterioration and bankruptciesis primarily in the U.S. operations of the Service Center segment,segment compareddue to recoveriesfewer recordedpast-due inaccounts thereceivable samebalances operationspast in the prior fiscal year.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.

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.inventory Managementand calculatesbelieves thisthat using average costs to determine the inventory turnover ratio oninstead anof annualLIFO ascosts well asprovides a quarterlymore basisuseful and uses inventory valued at average costs.analysis. The annualized inventory turnover (usingbased on average costs) was 4.5 and 4.3 for both the years ended June 30, 20252026 and 2024.2025, respectively.

(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations net of receipts under the terms of the interest rate swap.obligations. Rates in effect as of June 30, 20252026 are used for variable rate debt.

CRITICAL ACCOUNTING POLICIESESTIMATES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” 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. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) 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 the secondthird quarter of fiscal 2026, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, Singapore, and Costa Rica from 591589 facilities.

The following is Management's Discussion and Analysis of significant factors which have affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows. When reviewing the discussion and analysis set forth below, please note that thea significant number of SKUs ("Stock Keeping Units") we sell, or the products we sell in our Engineered Solutions segment, in any given period are not necessarily sold in the comparable period of the prior year, resulting in the inability to quantify certainwith certainty commonly used comparative metrics analyzing sales, such as changes indue to volumes, product mix and volume.price.

Consolidated sales for the quarter ended DecemberMarch 31, 20252026 increased $90.0$84.7 million or 8.4%7.3% compared to the prior year quarter, with acquisitions contributing to sales growth by $64.9$5.5 million or 6.0%,0.5% includingand favorable foreign currency translation ofcontributing $2.2$9.5 million or 0.2%.0.8% to sales growth. Excluding the impact of businesses acquired and foreign currency translation, sales increased $69.7 million or 6.0% during the quarter primarily reflecting volume growth in both the Service Center and Engineered Solutions segment and modest price contribution. The Company hadgenerated operating income of $123.2$137.9 million, or operating margin of 10.6%11.0% of sales for the quarter ended DecemberMarch 31, 20252026, compared to an operating income of $120.9$129.4 million, or operating margin of 11.3%11.1% of sales for the same quarter in the prior year. NetThe Company generated net income of $95.3$99.8 million increased 2.2% compared toboth the priorquarters yearended quarter.March 31, 2026 and March 31, 2025.

Applied monitors several economic indices that are key indicators for industrial economic activity in the United States. These include the Manufacturing Industrial Production (IP"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.

Through DecemberMarch 2025,2026, both the MCU and IPall indices declined slightlyincreased since September 2025. The MCU for December 2025 wasreflecting 75.6,growing whichindustrial isactivity down fromin the SeptemberUnited and June 2025 readings of 75.9 and 76.8, respectively. The ISM PMI registered 47.9 in December 2025, down from the September and June 2025 readings of 49.1 and 49.0, respectively.States. The indices for the months during the current quarter, along with the indices for the prior fiscal year end and prior quarter end, were as follows:

The number of Company employees was 6,7946,859 at DecemberMarch 31, 2025,2026, 6,837 at June 30, 2025, and 6,9166,818 at DecemberMarch 31, 2024.2025. The number of operating facilities totaled 591589 at DecemberMarch 31, 2025,2026, 596 at June 30, 2025, and 624619 at DecemberMarch 31, 2024.2025.

Three Months Ended DecemberMarch 31, 20252026 and 20242025

During the quarter ended DecemberMarch 31, 2025,2026, sales increased $90.0$84.7 million or 8.4%7.3% compared to the prior year quarter, with sales from acquisitions adding $64.9$5.5 million or 6.0%,0.5%, and favorable foreign currency translation increasing sales by $2.2$9.5 million or 0.2%.0.8%. There were 6263 selling days in both the quarters ended DecemberMarch 31, 20252026 and DecemberMarch 31, 2024.2025. Excluding the impact of businesses acquired and foreign currency translation, sales increased $22.9$69.7 million or 2.2%6.0% during the quarter primarilydue reflectingto higher volumes of approximately $40.0 million with the remainder attributed to positive price contribution and modest volume growth in the Service Center segment.contribution.

Sales from our Service Center segment, which operates primarily in MRO markets, increased $23.5$43.3 million or 3.2%.5.7% Favorablecompared to the prior year quarter. Acquisitions within this segment increased sales by $1.8 million or 0.2% and foreign currency translation increased sales by $2.2$9.5 million or 0.3%.1.3%. Excluding the impact of businesses acquired and foreign currency translation, sales increased $21.3$32.0 million or 2.9%,4.2%, primarilydue to higher volumes of approximately $13.0 million reflecting priceimproving contribution,end-market demand and progress with internal growth initiatives across the United States, as well as apositive modestprice increasecontribution inof volumesapproximately tied$19.0 to internal growth initiatives and firming demand.million.

Sales from our Engineered Solutions segment increased $66.5$41.4 million or 19.1%.10.2%. Acquisitions within this segment increased sales by $64.9$3.7 million or 18.6%.0.9%. Excluding the impact of businesses acquired, sales increased $1.6$37.7 million, or 0.5%,9.3%, due to higher volumes of approximately $27.0 million primarily reflecting pricestronger contribution,demand across our fluid power and automation operations, as well as modest volumedemand growthimprovement across fluid power mobile and industrial OEM customers, partially offset by lowerour flow control sales.operations and the remainder is positive price contributions.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Sales in our U.S. operations increased $94.6$74.9 million or 10.2%,7.2%, as acquisitions added $64.9$5.5 million or 7.0%.0.5%. Excluding the impact of businesses acquired, sales in the United States increased $29.7$69.4 million or 3.2% due6.7% primarily toreflecting stronger pricedemand contributionin the Engineered Solutions segment and modest volume growth in the Service Center segment.segment, as well as positive price contribution year over year. Sales from our Canadian operations decreased $3.3$0.8 million or 4.2%.1.1%. Favorable foreign currency translation increased Canadian sales by $0.2$3.4 million or 0.3%.4.8%. Excluding the ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION impact of foreign currency translation, Canadian sales decreased $3.5$4.2 million or 4.5%5.9% due to softer end-market demand in the Service Center segment. Sales in other countries decreasedincreased $1.3$10.6 million or 1.9%.16.9%. Favorable foreign currency translation increased sales $2.0$6.1 million or 3.1%.9.7%. Excluding the impact of foreign currency translation, sales in other countries decreasedincreased $3.3$4.5 million or 4.9%7.2% due primarily to lowerhigher demand infor Mexico.fluid power solutions.

Our gross profit margin was 30.4% in the quarter ended DecemberMarch 31, 20252026 compared to 30.6%30.5% in the prior year quarter. The gross profit margin for the current year quarter was negatively impacted by a0.3% $6.3due millionto increase inhigher LIFO expense as compared to the prior year quarter,quarter. This was partially offset byfrom positivefavorable mix impacts from recentthe acquisitionsgrowth asin wellrevenues asin solidthe channelEngineered execution.Solutions segment.

OperatingSegment income,gross asprofit a percentage of salesmargin for the Service Center segment,segment decreased to 12.6%29.2% induring the current year quarter fromcompared 12.7%to 29.3% in the prior year quarter.quarter Operatingdue income,to ashigher aLIFO percentageexpense ofthat salesnegatively impacted margins by 0.3%, partially offset by price contribution and channel execution. Segment gross profit margin for the Engineered Solutions segment,segment decreasedof to32.6% 11.5%remained inthe same during the current year quarter fromcompared 14.0% into the prior year quarter,quarter dueas tohigher recentLIFO acquisitions.expense negatively impacted margins by 0.3%, which was offset by favorable mix and price contribution.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION The Company had net interest expense in the current year period of $0.9$2.4 million compared to net interest income of $0.9 million in the prior year period primarily reflecting lower interest income on lower cash balances in the March 2026 quarter as compared to the prior year period.

Other income,expense, net, which represents certain non-operating items of income and expense, was incomeexpense of $0.5$0.4 million in the current year quarter compared to incomeexpense of $0.8$1.3 million in the prior year quarter. Current quarter incomeexpense primarily consists of unrealized gainslosses on investments held by non-qualified deferred compensation trusts of $0.7 million and foreign currency transaction losses of $0.2 million, offset by life insurance income of $0.5 million. Other income, net inDuring the prior quarteryear consistedquarter, primarilyother ofexpense, net included $0.7 million in unrealized gainslosses on investments held by non-qualified deferred compensation trusts ofand $0.2$1.0 million andin foreign currency transaction gains of $0.3 million.losses.

The effective income tax rate was 22.3%26.2% for the quarter ended DecemberMarch 31, 20252026 compared to 23.9%21.6% for the quarter ended DecemberMarch 31, 2024.2025. The decreaseincrease in the effective tax rate is primarily due to the reversal of adiscrete tax valuationexpense allowancefrom changes in estimates related to Mexicoprior duringyear tax returns of $2.5 million identified as part of the quarterpreparation endedof Decemberthe 31,tax 2025.return, coupled with lower benefit from the research and development tax credit due to lower qualifying activities in 2026. In the prior year period, there was a discrete tax benefit of $1.7 million from changes in estimates related to prior year tax returns.

As a result of the factors addressednoted above, net income for the quarter ended DecemberMarch 31, 20252026 increased $2.1less than $0.1 million or 2.2% compared to the prior year quarter. Diluted net income per share was $2.51$2.65 per share for the quarter ended DecemberMarch 31, 20252026 compared to $2.39$2.57 per share in the prior year quarter, an increase of 5.0%.3.1%.

SixNine Months Ended DecemberMarch 31, 20252026 and 20242025

During the sixnine months ended DecemberMarch 31, 2025,2026, sales increased $190.6$275.3 million or 8.8%8.2% compared to the prior year period,year, with sales from acquisitions adding $133.0$138.6 million or 6.1%4.2% and favorable foreign currency translation accounting for an increase of $1.4$10.9 million or 0.1%.0.3%. There were 126189 selling days in both the sixnine months ended DecemberMarch 31, 20252026 and DecemberMarch 31, 2024.2025. Excluding the impact of businesses acquired and foreign currency translation, sales increased $56.2$125.8 million or 2.6%,3.7%, primarilydue reflectingto higher volumes of approximately $46.0 million and the remainder from positive price contribution and volume growth in the Service Center segment.contribution.

Sales from our Service Center segment increased $56.2$99.5 million,million or 3.8%.4.5%. Acquisitions within this segment increased sales by $0.5$2.3 million or less than 0.1% and favorable foreign currency translation increased sales by $1.4$10.9 million or 0.1%.0.5%. Excluding the impact of businesses acquired and foreign currency translation, sales increased $54.3$86.3 million or 3.7%,3.9%, primarilydue to higher volumes of approximately $39.0 million reflecting price contribution, as well as an increase in volumes tied to internalvolume growth initiativesacross the United States and firmingthe demand.remainder from positive price contribution.

Sales from our Engineered Solutions segment increased $134.4$175.8 million or 19.2%.15.9%. Acquisitions within this segment increased sales by $132.5$136.3 million or 19.0%.12.3%. Excluding the impact of businesses acquired, sales increased $1.9$39.5 million or 0.2%,3.6%, due to higher volumes of approximately $7.0 million primarily reflecting stronger demand across our fluid power and automation operations, as well as positive price contribution,contributions offsetof byapproximately lower$32.0 flow control sales.million.

Sales in our U.S. operations increased $193.9$268.6 million or 10.3%,9.2%, as acquisitions added $133.0$138.6 million or 7.0%.4.7%. Excluding the impact of businesses acquired, sales in the United States increased $60.9$130.0 million or 3.3%,4.5%, reflecting price contribution and volume growth inand the Service Center segment. Sales from our Canadian operations increased $0.5 million or 0.4%. Unfavorable foreign currency translation decreased Canadian sales by $0.4 million or 0.3%. Excluding the impact of foreignprice ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION contribution in the Service Center segment, coupled with price contribution in the Engineered Solutions segment. Sales from our Canadian operations decreased $0.2 million or 0.1%. Favorable foreign currency translation increased Canadian sales by $3.0 million or 1.4%. Excluding the impact of foreign currency translation, Canadian sales were updown $0.9$3.2 million or 0.7%1.5% primarily reflecting price contribution and modest volume growth.decline compared to the prior year. Sales in other countries decreasedincreased $3.8$6.9 million or 2.8%.3.5%. Favorable foreign currency translation increased sales $1.8$7.9 million or 1.3%.4.0%. Excluding the impact of foreign currency translation, sales in other countries decreased $5.6$1.0 million or 4.1%0.5% due primarily to lower demand in Mexico.

Our gross profit margin was 30.3% in the sixnine months ended DecemberMarch 31, 20252026 compared to 30.1%30.2% in the prior year period.year. The gross profit margin for the current year period was positively impacted by favorable acquisition mix andof solid channel execution,0.3%, partially offset by a $6.9 million increase inhigher LIFO expense asthat comparednegatively toimpacted themargins priorby year period.0.3%.

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing 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 was 19.6%19.5% of sales in the sixnine months ended DecemberMarch 31, 20252026 compared to 19.3% in the prior year period,year, an increase of $43.4$60.4 million or 10.4%9.4% compared to the prior year period.year. SD&A from businesses acquired added $38.9$40.6 million or 9.3%6.3% of SD&A expenses, including $6.1$6.3 million of intangibles amortization related to acquisitions. Changes in foreign currency exchange rates increased SD&A during the sixnine months ended DecemberMarch 31, 20252026 by $0.2$2.2 million or 0.1%0.3% compared to the prior year period.year. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased $4.3$17.6 million or 1.0%2.8% during the sixnine months ended DecemberMarch 31, 20252026 compared to the prior year period primarily due to higher compensation costs.

Operating income increased $18.2$26.7 million,million or 7.8%,7.4%, to $252.2$390.2 million in the current year period from $234.0$363.4 million during the prior year period,year, and as a percentage of sales decreased to 10.7%10.8% from 10.8%10.9% during the prior year period.year.

The Company had net interest expense in the current year period of $1.9$4.4 million compared to net interest income of $1.6$0.7 million in the prior year period primarily reflecting lower interest income on lower cash balances as compared to the prior year period.year.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Other expense (income),income, net was income of $1.1$0.7 million for the sixnine months ended DecemberMarch 31, 2025,2026, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $1.9$1.3 million and $0.4$0.8 million of otherlife incomeinsurance income, offset by foreign currency transaction losses of $1.2$1.4 million. During the prior year period, other expense (income),income, net was income of $3.0$1.8 million, which primarily consisted of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.5$0.7 million andmillion, foreign currency transaction gains of $1.2$0.2 million, and life insurance income of $0.7 million.

As a result of the factors addressed above, net income for the sixnine months ended DecemberMarch 31, 20252026 increased $10.8 million or 5.8%3.8% compared to the prior year period.year. Diluted net income per share was $5.14$7.79 per share for the sixnine months ended DecemberMarch 31, 20252026 compared to $4.76$7.33 per share in the prior year period,year, an increase of 8.0%.6.3%.

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. ASC 740, “Income Taxes”, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, during the sixnine months ended DecemberMarch 31, 2025,2026, the Company evaluated all deferred tax balances under the newly enacted tax law and identified any other changes required to its financial statements as a result of the OBBBA. The provisions of the OBBBA did not have a material impact to our income tax expense or effective tax rate. We expect the provisions of the OBBBA to result in a reduction ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION to our cash tax payments for our fiscal year ended June 30, 2026. The Company will continue to evaluate the impact of the OBBBA as additional guidance becomes available.

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. We had total debt obligations outstanding of $365.3 million and $572.3 million atas bothof DecemberMarch 31, 20252026 and June 30, 2025.2025, respectively. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations will be sufficient 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 DecemberMarch 31, 20252026 was $1,273.0$1,044.6 million, compared to $1,221.3 million at June 30, 2025. The current ratio was 3.72.9 to 1 at DecemberMarch 31, 20252026 and 3.3 to 1 at June 30, 2025.

Net cash used in investing activities during the sixnine months ended DecemberMarch 31, 20252026 decreased from the prior period primarily due to $2.4$11.4 million used for acquisitions in the sixnine months ended DecemberMarch 31, 20252026 compared to $273.1$273.3 million used for acquisitions in the prior year period.year.

Net cash used in financing activities during the sixnine months ended DecemberMarch 31, 20252026 increased from the prior year period primarily due to $143.4higher share repurchase activity in 2026 coupled with higher debt repayments. The Company used $236.4 million of cash used to repurchase 550,636897,115 shares of common stock during the sixnine months ended DecemberMarch 31, 20252026 as compared to $30.1$79.8 million used to repurchase 127,376331,876 shares of common stock in the prior year period.year. This was partiallycoupled offsetwith byhigher lowernet long-term debt repayments in the current year periodof of$207.0 million as compared to $25.1 million.million in the prior year.

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. At DecemberMarch 31, 2025,2026, we had authorization to repurchase 749,364402,885 shares. During the three months ended DecemberMarch 31, 2025,2026, the Company acquired 346,500346,479 shares of the Company's common stock on the open market for $89.0$93.0 million. During the sixnine months ended DecemberMarch 31, 2025,2026, the Company acquired 550,636897,115 shares of the Company's common stock on the open market for $143.4$236.4 million. During the three months ended DecemberMarch 31, 2024,2025, the Company acquired 75,376204,500 shares of treasury stock on the open market for $20.0$49.3 million. During the sixnine months ended DecemberMarch 31, 2024,2025, the Company acquired 127,376331,876 shares of treasury stock on the open market for $30.0$79.8 million.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION A summary of long-term debt, including theboth current portion,and long-term debt is as follows (amounts 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 ongoing working capital and other general corporate purposes. The revolving credit facility 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 election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on the Company's net leverage ratio or Secured Overnight Financing Rate (SOFR) plus a margin that ranges from 80 to 155 basis points based on the Company's net leverage ratio. Borrowing capacity under this facility, without exercising the accordion feature, totaled $515.7$722.8 million at DecemberMarch 31, 20252026 and is available to fund future acquisitions or other capital and operating requirements. This amount is net of outstanding letters of credit of $0.3$0.2 million at DecemberMarch 31, 20252026 to secure certain insurance obligations. The interest rate on the revolving credit facility was 4.52%4.47% as of DecemberMarch 31, 2025.2026.

The new credit facility replaced the Company's previous credit facility agreement. Unused lines under the previous facility, net of outstanding letters of credit of $0.2 million to secure certain insurance obligations, totaled $515.7$515.8 million at June 30, 2025, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the termrevolving loancredit facility was 5.23% as of June 30, 2025.