Applied Industrial Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2022, compared with the three months ended September 30, 2021, unless otherwise noted. The company distributes industrial products and provides engineered solutions across North America, Australia, New Zealand, and Singapore.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,062.4 million | $891.7 million | +19.1% |
| Gross profit / margin | $306.8 million / 28.9% | $255.3 million / 28.6% | +20.1%; margin +0.3 percentage points |
| Operating income / margin | $106.5 million / 10.0% | $74.6 million / 8.4% | +42.8%; margin +1.6 points |
| Net income | $76.9 million | $53.0 million | +45.1% |
| Diluted EPS | $1.97 | $1.36 | +44.9% |
| Operating cash flow | $25.9 million | $48.6 million | Down $22.7 million |
Sales growth excluding acquisitions and foreign-exchange effects was 19.4%. Service Center Based Distribution sales grew 19.5%; Engineered Solutions sales grew 18.4% (17.8% excluding acquisition contribution). U.S. sales increased 20.6%.
Cash, debt, and liquidity
- Cash and cash equivalents were $147.6 million at September 30, down from $184.5 million at June 30, 2022. Quarterly cash decreased $36.9 million.
- Working capital was $939.2 million; the current ratio was 3.1, up from 2.7 at June 30.
- Total debt obligations were $649.4 million, versus $689.5 million at June 30. The company repaid $40.1 million of debt during the quarter. It reported $489.2 million of unused revolving-credit capacity.
- Quarter-end rates were 4.04% on revolving-credit borrowings and 4.06% on the receivables facility. An interest-rate swap fixed the rate on $409 million of variable-rate debt at 2.54%.
- The company was in compliance with its financial covenants; net indebtedness was less than 1.3 times defined EBITDA versus a maximum covenant of 3.75 times.
Material changes and management commentary
- Management attributed organic sales growth to firm demand, MRO activity, pricing actions, manufacturing-market tailwinds, and company-specific growth initiatives. Engineered Solutions growth faced supply-chain bottlenecks and extended component lead times.
- Gross margin improved through broad-based execution and responses to inflation and supply-chain conditions, but was reduced by 52 basis points by a $5.5 million year-over-year increase in LIFO expense.
- Selling, distribution, and administrative expense rose 10.8%, slower than sales growth; expense declined to 18.8% of sales from 20.3%. Higher incentive compensation and a $3.2 million increase in bad-debt expense were notable items.
- Operating cash flow fell as working-capital changes used cash, particularly inventory and receivables, partly offset by higher earnings. Capital spending was $5.6 million; dividends paid were $13.1 million.
- Receivables quality indicators weakened: days sales outstanding increased to 57.1 from 55.7 at June 30, and receivables more than 90 days past due rose to 4.6% from 3.4%. The allowance was 3.0% of gross receivables, versus 2.6% at June 30.
Outlook, risks, and contingencies
Management expects the full-year fiscal 2023 effective tax rate to be 22%–24%. It stated that cash, operating cash flow, and available credit are expected to cover normal working-capital needs, dividends, acquisitions, capital investment, debt service, and potential share repurchases. The filing provides no specific sales or earnings guidance.
Risks identified include customer demand and economic conditions, inflation and operating costs, product availability and supply-chain constraints, collectability of receivables, interest rates, foreign-exchange exposure, cybersecurity and information systems, acquisition execution, and potential goodwill or intangible-asset impairment. Pending product-liability, commercial, personal-injury, employment, and other legal proceedings were not expected by management to have a material adverse effect, based on currently known circumstances.
Important facts for investors to verify
- Whether elevated overdue receivables and bad-debt provisions persist or worsen.
- Whether strong organic growth and margin expansion continue as inflation, supply constraints, and demand conditions change.
- How working-capital needs affect operating cash conversion and cash balances.
- Exposure to floating interest rates, including the rates and availability under the revolving-credit and receivables facilities.
- The basis and assumptions for management’s 22%–24% full-year tax-rate expectation; no quantified revenue or earnings outlook was provided.