Business context and reporting period
Applied Industrial Technologies, Inc. filed this Form 10-K for the fiscal year ended June 30, 2022—not a standalone 2021 Q4 report. The company distributes industrial motion, power, control, flow-control and automation products and provides related engineering, repair and other technical services. It reports two segments: Service Center Based Distribution (67% of FY2022 sales) and Fluid Power & Flow Control (33%).
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $3,810.7 million | $3,235.9 million |
| Gross margin | 29.0% | 28.9% |
| Operating income / margin | $357.9 million / 9.4% | $205.5 million / 6.3% |
| Net income | $257.4 million | $144.8 million |
| Diluted EPS | $6.58 | $3.68 |
| Cash from operations | $187.6 million | $241.7 million |
| Capital expenditures | $18.1 million | $15.9 million |
Sales grew 17.8%; operating income rose 74.2% and net income rose 77.8%. Gross profit was $1,106.9 million. Selling, distribution and administrative expense increased 10.1% to $749.1 million, but declined to 19.7% of sales from 21.0%. The effective tax rate increased to 21.9% from 18.2%.
At June 30, 2022, cash was $184.5 million, working capital $859.9 million, and the current ratio 2.7, versus $257.7 million, $768.9 million and 2.8, respectively, a year earlier. Total debt was $689.5 million, down from $829.4 million; shareholders’ equity was $1,149.4 million. The new $900 million revolving credit facility had $410.6 million drawn and $489.2 million of unused availability. The company was in compliance with its debt covenants; net indebtedness was less than 1.3 times defined EBITDA versus a covenant limit of 3.75 times.
Material changes versus the prior year
- Organic sales increased 16.6%, excluding acquisitions and foreign-currency effects. Service Center Based Distribution sales rose 16.6%; Fluid Power & Flow Control sales rose 20.1%, including $34.1 million from acquisitions.
- Management attributed growth to stronger industrial activity, break-fix MRO demand, pricing actions and internal growth initiatives. Supply-chain bottlenecks partly offset demand in Fluid Power & Flow Control.
- Operating-income and earnings growth partly reflect the absence of FY2021’s $49.5 million non-cash impairment charge and net non-routine items that reduced FY2021 operating income by $54.7 million. FY2021 net income and EPS were reduced by $41.7 million and $1.06, respectively, by those net items.
- Operating cash flow declined by $54.1 million, mainly reflecting working-capital investment: accounts receivable and inventories used cash, partly offset by higher accounts payable. Receivables were $656.4 million and inventory $449.8 million at year-end.
- Debt was refinanced through a new five-year revolving facility in December 2021; proceeds and cash on hand were used to repay the prior term loan. The company paid $51.8 million in dividends and repurchased $13.8 million of shares during FY2022.
Outlook, risks and unusual items
Management expects existing cash, operating cash flow and available debt facilities to cover normal working-capital needs, dividends, acquisitions, capital investment and debt service. FY2023 capital expenditures are forecast at $23–25 million, primarily for information-technology equipment and infrastructure. The filing provides no specific sales or earnings guidance.
Management cited inflation, labor and freight costs, product availability and supply-chain disruption, customer demand and industrial conditions, competition, supplier relationships, cybersecurity and information-system resilience, acquisition integration, foreign-exchange exposure, and interest rates as significant risks. A 1% increase in variable borrowing rates, after the interest-rate swap, was estimated to increase annual interest expense by $2.6 million. Goodwill was $563.2 million; annual impairment testing found reporting-unit fair values at least 25% above carrying values, but the auditor identified Fluid Power & Flow Control goodwill valuation as a critical audit matter because forecasts and valuation assumptions require significant judgment. Pending legal proceedings were not expected by the company to have a material adverse effect. Deloitte gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the reporting period: this filing covers the year ended June 30, 2022, despite the request metadata referring to 2021 Q4.
- Assess whether FY2022 sales growth and margin performance are sustainable amid inflation, supply-chain constraints and changing industrial demand.
- Track working-capital requirements and cash conversion, given the decline in operating cash flow and growth in receivables and inventory.
- Review debt maturities, variable-rate exposure, revolver availability and the receivables securitization facility’s borrowing conditions.
- Monitor goodwill and intangible-asset assumptions, particularly in Fluid Power & Flow Control and end markets exposed to oil and gas.