Applied Industrial Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, the first quarter of fiscal 2022. Applied is a value-added distributor and technical solutions provider serving industrial MRO and OEM markets. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
- Revenue: $891.7 million, up 19.2% year over year. Acquisitions contributed $15.4 million and favorable currency translation $6.0 million; organic sales increased $122.5 million, or 16.3%.
- Profitability: Gross profit was $255.3 million, up 18.3%; gross margin was 28.6%, versus 28.9%. Operating income rose 42.6% to $74.6 million, with operating margin expanding to 8.4% from 7.0%. Net income increased 52.3% to $53.0 million; diluted EPS was $1.36 versus $0.89. Net margin was 5.9%, versus 4.7%.
- Segments: Service Center Based Distribution sales were $600.9 million, up 17.1%, and segment operating margin was 10.8%, versus 9.7%. Fluid Power & Flow Control sales were $290.8 million, up 24.0%, and segment operating margin was 12.0%, versus 11.0%. Segment operating income is reported before certain corporate expenses and intangible amortization.
- Cash flow: Operating cash flow was $48.6 million, down from $81.8 million. Investing cash outflow was $25.5 million, including $14.8 million of company-owned life insurance loan payments and $7.1 million for an acquisition. Financing cash outflow was $32.0 million. Cash decreased $10.4 million to $247.3 million.
- Liquidity and debt: Working capital was $743.7 million; the current ratio was 2.6, down from 2.8 at June 30, 2021. Total debt was $819.6 million, compared with $829.4 million at June 30; cash was $247.3 million. The company had $249.8 million of unused revolving credit capacity and reported compliance with debt covenants.
- Balance sheet and shareholder returns: Total assets were $2.303 billion and shareholders’ equity was $976.6 million at September 30. The company paid $12.7 million in dividends and repurchased 76,658 shares on the open market for $6.5 million.
Changes and management commentary
- Sales growth reflected stronger demand and ongoing end-market recovery across both segments; management said industry-wide supply chain constraints partially offset growth.
- Gross margin fell 0.3 percentage points, including a 25-basis-point impact from a $2.4 million increase in LIFO expense. SD&A declined as a share of sales to 20.3% from 21.9%, supporting operating margin expansion. Higher compensation partly reflected reinstatement of temporary COVID-19 cost reductions from the prior year.
- Lower operating cash flow reflected working-capital movements, including increases in receivables and inventory, partly offset by improved operating results. Net receivables were $530.8 million and inventory was $378.0 million at quarter-end.
- On August 18, 2021, Applied acquired substantially all net assets of R.R. Floody for $8.1 million, funded with cash. The acquisition was described as not material to consolidated results.
Outlook, risks and contingencies
- No consolidated sales or earnings forecast was provided in the supplied filing text. Management expected the fiscal 2022 effective tax rate to be 22.0%–23.0% and expected year-end inventory turnover to be similar to or slightly better than the quarter’s 4.5 annualized ratio.
- Management said existing cash, operating cash flow and available credit should support working capital, dividends, acquisitions, capital spending and debt service. The term loan facility expires in January 2023; $40 million of Series C notes is due in July 2022. The receivables securitization facility’s availability may be limited by customer credit ratings, concentration and receivable characteristics.
- Key disclosed risks include supply availability and transportation disruptions, COVID-19 and customer demand, pricing and operating-cost pressures, receivable collectability, foreign exchange, acquisition integration, and goodwill impairment. The FCX reporting unit, with $309.0 million of goodwill, had estimated fair value 14% above carrying value in the January 2021 impairment test; adverse results or assumptions could require future impairment testing or charges.
- Pending product liability, commercial, personal injury, employment and other legal matters were not expected by management to have a material adverse effect, based on currently known circumstances. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether strong organic sales growth persists and whether supply constraints, LIFO costs or pricing affect gross margins.
- Whether working-capital investment reverses and operating cash flow improves as receivables and inventory grow.
- Debt maturities, covenant headroom, and the practical availability and cost of revolving and receivables-backed funding.
- Performance and valuation assumptions for the FCX goodwill reporting unit, and integration or returns from recent acquisitions.
- Whether the projected 22.0%–23.0% tax rate and inventory-turnover expectations remain on track.