Applied Industrial Technologies, Inc. — Q1 FY2013 10-Q
Business context and period. The filing covers the three months ended September 30, 2012, the first quarter of the fiscal year ending June 30, 2013. Applied distributes industrial products and provides related services through 517 facilities. Its reportable segments are Service Center Based Distribution and Fluid Power Businesses. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $610.5 million | $579.6 million | +5.3% |
| Gross profit | $164.5 million | $158.7 million | +3.7% |
| Operating income | $44.3 million | $43.3 million | +2.4% |
| Net income | $29.5 million | $26.4 million | +11.9% |
| Diluted EPS | $0.70 | $0.61 | Up $0.09 |
| Operating cash flow | $23.9 million | $16.4 million | Up $7.5 million |
- Gross margin was 26.9%, down from 27.4%; operating margin was 7.3%, down from 7.5%. SD&A was 19.7% of sales versus 19.9%.
- Effective tax rate declined to 34.0% from 36.1%. Net income benefited from higher sales and lower other expense: other income was $0.5 million versus $1.9 million of other expense a year earlier, principally reflecting deferred-compensation trust investment gains and foreign exchange gains.
- Service Center Based Distribution sales rose 7.3% to $497.8 million and segment operating income increased to $33.7 million from $29.4 million. Fluid Power sales fell 2.6% to $112.7 million and segment operating income declined to $10.5 million from $11.2 million.
- Acquisitions added $19.5 million, or 3.4%, to consolidated sales; unfavorable currency translation reduced sales by $5.8 million, or 1.0%. The quarter had 63 selling days versus 64 in the prior-year quarter.
Cash, liquidity, and capital
- Cash was $56.7 million at September 30, 2012, down $21.8 million from June 30. Operating cash flow of $23.9 million was more than offset by $39.1 million of investing outflows and $8.4 million of financing outflows; exchange-rate effects added $1.8 million.
- Investing outflows included $35.4 million for acquisitions and $3.9 million for property and equipment. Financing outflows included $8.9 million in dividends and $0.8 million in acquisition holdback payments. No treasury shares were repurchased during the quarter.
- Working capital was $445.1 million and the current ratio was 2.8:1, compared with $435.6 million and 2.9:1 at June 30, 2012. Total assets were $1.002 billion and shareholders’ equity was $703.1 million.
- No borrowings were outstanding. The $150 million revolving credit facility, expiring May 2017, had $140.9 million of unused capacity net of letters of credit. The separate uncommitted shelf facility permitted borrowing up to $100 million and had no outstanding balance.
- Receivables increased 6.1%; DSO rose to 47.3 from 45.2 at June 30. Inventory increased to $269.0 million from $228.5 million, while annualized inventory turnover was 4.4 versus 4.6 at June 30.
Material developments, outlook, and risks
- On August 1, Applied acquired 100% of SKF’s company-owned distribution business in Australia and New Zealand for cash. The business joined the Service Center Based Distribution segment; its reported results were not material for the periods shown. Goodwill increased by $10.2 million from the acquisition, with other changes primarily from currency translation.
- Management attributed Service Center sales growth mainly to expansion in the industrial economy; Fluid Power sales weakness was primarily associated with one business. Management cited competitive pressure and small gross-margin declines in both segments.
- Management expected the full-year tax rate to be 34.0%–34.5% and fiscal 2013 inventory turnover to remain similar to fiscal 2012. It expected ERP spending of $19–$21 million in fiscal 2013, including $4–$5 million capital and $15–$16 million expense. No specific consolidated revenue or earnings guidance was provided.
- The SAP ERP deployment was underway in parts of Canada, with U.S. deployments beginning in the second quarter and further rollouts planned through fiscal 2013 and 2014. Management said controls are being designed and evaluated as implementation proceeds; disclosure controls were assessed as effective.
- Management said available cash, operating cash flow, and credit capacity should cover normal working capital, dividends, acquisitions, and capital needs. Risks identified include customer industrial activity, competition and pricing, supplier relationships and product availability, receivable collectability, foreign currency and operating risks, acquisitions and integration, ERP execution and controls, and potential goodwill or intangible impairment.
- Pending product-liability, commercial, and other legal matters were not expected by management to have a material adverse effect, based on currently known circumstances. Actual outcomes remain uncertain.
Important facts for investors to verify
- Whether sales growth persists after separating acquisition contributions, foreign exchange effects, and the shorter selling-day count.
- Whether gross-margin pressure stabilizes and Fluid Power sales and operating performance recover.
- Whether the Australia/New Zealand acquisition delivers expected benefits and how acquisition spending affects cash and working capital.
- Whether ERP spending and rollout stay within management’s estimates and maintain effective internal controls.
- Whether higher receivables and inventory, including the increase in DSO, convert into cash without elevated credit or obsolescence losses.
- Whether management’s tax-rate, inventory-turnover, liquidity, and capital-spending expectations are achieved; these are forward-looking and results may differ.