Applied Industrial Technologies, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended June 30, 2023 (not a standalone 2022 fourth-quarter report). Applied distributes industrial motion, power, control, flow-control and automation products and provides related technical services. Its two segments are Service Center Based Distribution and Engineered Solutions.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $4.413 billion | $3.811 billion |
| Gross margin | 29.2% | 29.0% |
| Operating income / margin | $473.2 million / 10.7% | $357.9 million / 9.4% |
| Net income | $346.7 million | $257.4 million |
| Diluted EPS | $8.84 | $6.58 |
| Cash provided by operations | $344.0 million | $187.6 million |
- Sales increased 15.8%; excluding acquisitions and currency effects, sales rose 15.7%. Gross profit margin increased 0.2 percentage points, while SD&A fell to 18.4% of sales from 19.7%.
- Service Center Based Distribution sales grew 15.6% to $2.967 billion; Engineered Solutions sales grew 16.1% to $1.446 billion. Segment operating margins rose to 12.6% from 11.8% and 14.1% from 12.6%, respectively.
- Operating cash flow increased by $156.4 million. Investing activities used $60.8 million, including $35.8 million for acquisitions and $26.5 million for capital expenditures. Financing activities used $126.9 million. Cash and equivalents ended at $344.0 million.
- Working capital was $1.106 billion, up from $859.9 million; the current ratio improved to 3.0 from 2.7. Total debt declined to $622.2 million from $689.5 million. Available revolving-credit capacity was $516.2 million; the company reported covenant compliance and net indebtedness below 0.7 times defined EBITDA.
Changes, outlook and risks
- Growth reflected higher sales across both segments, broad-based demand and company growth initiatives. Engineered Solutions benefited from acquisitions and cross-selling, but faced slower technology-sector orders and continuing supply constraints. Acquisitions contributed $20.0 million, or 0.5%, to consolidated sales; unfavorable currency translation reduced sales by $16.3 million.
- Management forecast fiscal 2024 capital expenditures of $27–$29 million, primarily for information-technology equipment and infrastructure. The filing gives no specific sales or earnings guidance.
- Management cited economic and industrial activity, inflation or deflation, customer demand, labor and supply-chain disruptions, competition, supplier relationships, acquisition integration, cybersecurity and foreign-exchange movements as risks. The June 2023 ISM PMI was 46.0, below the 50 expansion threshold.
- Variable-rate borrowing costs increased: the revolving facility rate was 6.11% at year-end versus 2.81% a year earlier. An interest-rate swap mitigates some exposure. A 1 percentage-point rate increase was estimated to raise annual interest expense by $2.0 million after the swap.
- Unusual items: no impairment charge was recorded in FY2023; the annual goodwill test found reporting-unit fair values at least 20% above carrying values. The year included a $1.2 million loss associated with terminating a pension plan. Higher LIFO expense reduced gross margin by 18 basis points.
- Pending legal proceedings were not expected by management to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls, while identifying goodwill valuation in Engineered Solutions as a critical audit matter.
Important facts for investors to verify
- Whether sales growth and margin improvement persist if industrial activity weakens; also monitor technology-sector demand and supply constraints.
- Cash conversion and working-capital trends: receivables and inventory increased with sales, inventory turnover declined to 4.4 from 4.7, and the doubtful-account allowance rose to 3.1% of gross receivables from 2.6%.
- Debt maturities, refinancing needs and interest costs, including the $25 million Series D notes due October 2023 and the large scheduled maturity shown for fiscal 2027.
- Acquisition integration and goodwill assumptions, especially the Engineered Solutions reporting unit highlighted by the auditor.
- Execution of the fiscal 2024 capital-spending plan and whether future filings provide sales or earnings guidance not included here.