Applied Industrial Technologies, Inc. — Fiscal 2024 First Quarter
The unaudited Form 10-Q covers the three months ended September 30, 2023; comparisons are with the three months ended September 30, 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.
Key financial results
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $1,095.2 million | $1,062.4 million | +3.1% |
| Gross profit | $325.1 million | $306.8 million | +6.0% |
| Operating income | $120.7 million | $106.5 million | +13.3% |
| Net income | $93.8 million | $76.9 million | +22.0% |
| Diluted earnings per share | $2.39 | $1.97 | +21.3% |
| Cash from operating activities | $66.2 million | $25.9 million | +$40.3 million |
- Gross margin increased to 29.7% from 28.9%; operating margin rose to 11.0% from 10.0%; net margin was 8.6% versus 7.2%.
- Cash and cash equivalents were $360.4 million at September 30, 2023, compared with $344.0 million at June 30, 2023. Operating cash flow less capital expenditures was approximately $61.9 million.
- Total debt was approximately $622.1 million, essentially unchanged from June 30; cash exceeded current debt. The current ratio was 3.5:1, versus 3.0:1 at fiscal year-end, and working capital was $1,177.7 million.
- Net cash used in investing was $25.7 million, including $21.4 million for acquisitions. Net cash used in financing was $22.5 million, including $13.6 million of dividends and $11.9 million of taxes on shares withheld for equity awards.
Performance and material changes
- Sales growth included $11.6 million from acquisitions and $2.5 million from favorable currency translation. Management reported organic sales growth of 1.8%; underlying operations increased 3.4%, partly offset by 1.6% from one fewer selling day.
- Service Center Based Distribution sales rose 4.0% to $746.5 million; organic sales increased 3.1%. Engineered Solutions sales rose 1.2% to $348.7 million, including acquisition contributions; excluding acquisitions, sales declined 1.0%.
- Management attributed gross-margin expansion to broad-based execution and responses to inflation and supply-chain conditions. Lower LIFO expense contributed 41 basis points to the quarter’s gross margin.
- Interest expense fell to $1.3 million from $6.5 million, contributing to higher pretax income. The effective tax rate declined to 21.1% from 22.4%, primarily due to compensation-related deductions.
- Cash from operations increased year over year, reflecting higher earnings and working-capital changes. Accounts payable movements were a significant working-capital cash use in the current quarter.
- Applied acquired Cangro Industries and Bearing Distributors during the quarter for a combined purchase price of approximately $24.2 million, funded with available cash. The acquisitions were reported as not material to consolidated results.
Outlook, liquidity, and risks
- Management expects a 23.0%–24.0% effective tax rate for fiscal 2024. The filing provides no specific sales or earnings guidance.
- Management expects cash, operating cash flow, and available borrowing capacity to fund normal working capital, dividends, acquisitions, capital investment, debt service, and potential share repurchases. The revolving credit facility had $516.2 million of unused availability.
- The company had $622.1 million of debt, including $383.6 million drawn on its revolving facility and $188.3 million under its receivables securitization facility. The revolving facility rate was 6.33%; the securitization facility rate was 6.32%. An interest-rate swap converted $384.0 million of variable-rate debt to a 2.59% rate as of quarter-end.
- Series D notes of $25.0 million were due October 31, 2023, shortly after quarter-end; Series E notes of $25.0 million are due in October 2024. The company reported compliance with its financial covenants and net indebtedness below 0.6 times covenant-defined EBITDA, against a maximum of 3.75 times.
- Management cited risks including changes in industrial demand, inflation and operating costs, supply availability, customer credit, competition, cybersecurity and information systems, foreign currency and international operations, acquisition integration, and goodwill or intangible-asset impairment. Pending legal proceedings cover several types of claims; the company does not expect their resolution to have a material adverse effect based on currently known circumstances.
Important facts for investors to verify
- Whether reported sales growth and margin gains persist, particularly as customer production normalizes and comparisons become more difficult.
- How the recent acquisitions perform and whether their integration, preliminary purchase-price allocations, and expected benefits develop as anticipated.
- Cash conversion and working-capital trends, including the increase in days sales outstanding to 57.1 from 55.1 at June 30 and the 2.9% of receivables more than 90 days past due.
- Debt costs and refinancing or repayment of the Series D notes due October 31, 2023; the filing reports the maturity but does not state how it was subsequently settled.
- Exposure to variable interest rates, the availability limits of the receivables facility, and the company’s continued compliance with debt covenants.
- The filing states that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.