Business context and reporting period
Applied Industrial Technologies distributes industrial products and provides engineered solutions across North America and selected international markets. Its two reportable segments are Service Center Based Distribution and Engineered Solutions. The filing covers the quarter and nine months ended March 31, 2023, with comparisons to the same periods in 2022. Although the request metadata says “2022 Q3,” the filing itself is for fiscal 2023 third quarter.
Financial performance
Amounts below are in millions, except per-share data. Fiscal Q3 results were strong: sales grew 15.4%, operating margin expanded, and net income rose 42.3% year over year.
| Metric | Three months ended Mar. 31, 2023 | Three months ended Mar. 31, 2022 | Nine months ended Mar. 31, 2023 | Nine months ended Mar. 31, 2022 |
|---|---|---|---|---|
| Net sales | $1,132.0 | $980.7 | $3,254.7 | $2,749.2 |
| Gross profit / margin | $333.1 / 29.4% | $287.3 / 29.3% | $948.4 / 29.1% | $800.3 / 29.1% |
| Operating income / margin | $126.9 / 11.2% | $95.8 / 9.8% | $346.3 / 10.6% | $248.6 / 9.0% |
| Net income | $97.2 | $68.3 | $254.5 | $178.3 |
| Diluted EPS | $2.47 | $1.75 | $6.49 | $4.56 |
- Quarterly organic sales growth, excluding acquisitions and currency effects, was 15.0%; nine-month organic growth was 18.4%. Quarterly segment sales increased 15.6% in Service Center Based Distribution and 15.2% in Engineered Solutions.
- Operating cash flow was $164.0 million for the nine months, versus $133.8 million a year earlier. Investing cash outflow was $56.3 million, including $35.7 million for acquisitions and $20.8 million of capital expenditures. Financing cash outflow was $111.5 million; cash declined $2.3 million to $182.1 million.
- At March 31, 2023, total debt was $622.3 million, down from $689.5 million at June 30, 2022. Cash was $182.1 million; cash less total debt was approximately $440.2 million. The revolving facility had $516.2 million of unused capacity. The current ratio was 3.1, and working capital was $1,026.2 million.
- Accounts receivable, net, was $705.6 million and inventory was $527.0 million. Allowance for doubtful accounts was 3.1% of gross receivables, versus 2.6% at June 2022; DSO was 56.1 days.
Changes, outlook, and risks
- Quarterly sales growth was primarily organic; acquisitions added 0.7 percentage points and unfavorable currency translation reduced growth by 0.3 points. SD&A rose 7.7%, slower than sales, declining to 18.2% of sales from 19.5%. Management cited higher compensation and travel/fleet costs, partly offset by lower bad-debt expense in the quarter.
- Management attributed demand to resilient underlying activity, growth initiatives, pricing, and U.S. manufacturing support. It also noted slower order activity in the technology sector and continuing supply-chain constraints. U.S. manufacturing indicators weakened versus June 2022: March PMI was 46.3 and capacity utilization was 79.8.
- The company acquired Automation, Inc. for $25.7 million and Advanced Motion Systems for $10.0 million during fiscal 2023; both were added to Engineered Solutions. Acquisition purchase allocations are preliminary.
- Management expects the fiscal 2023 full-year effective tax rate to be 22%–24%. No sales or earnings guidance is stated in the supplied filing text. It expects cash, operating cash flow, and available borrowing capacity to fund ordinary needs, dividends, acquisitions, capital investment, debt service, and potential share repurchases.
- Variable-rate borrowing costs increased: the revolver rate was 5.79% and the receivables securitization rate was 5.82% at March 31, 2023. An interest-rate swap fixed a portion of variable-rate debt. The company was in compliance with debt covenants, with net indebtedness below 1.0 times the defined EBITDA measure versus a 3.75-times covenant limit.
- Risks identified include changes in customer activity and economic conditions, inflation and product availability, supply-chain and transportation disruption, customer credit deterioration, foreign exchange, cybersecurity and information systems, acquisition execution, and access to capital. Pending legal matters include product liability, commercial, personal injury, and employment claims; management did not expect them to materially affect the company based on currently known circumstances.
- Unusual items included a $3.7 million valuation-allowance benefit that reduced the quarterly effective tax rate by 3.0 percentage points, and a $1.2 million loss related to termination of a defined-benefit pension plan during the nine-month period. U.S. inventory LIFO expense was $26.1 million year to date, versus $15.6 million a year earlier.
Investor verification priorities
- Confirm whether organic sales momentum and segment margins persist as manufacturing indicators soften and technology-sector orders slow.
- Track receivables aging, the higher doubtful-account allowance, and customer credit deterioration or bankruptcies.
- Assess exposure to higher variable interest rates, the March 2024 securitization-facility termination date, and scheduled note maturities.
- Monitor acquisition integration and returns from Automation, Inc. and Advanced Motion Systems, along with ongoing supply-chain constraints.
- Verify the sustainability of reported earnings growth, including the quarterly tax benefit and higher year-to-date LIFO expense.