Applied Industrial Technologies, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended June 30, 2021. Applied is an industrial distributor and technical solutions provider serving maintenance, repair and operations (MRO) and original equipment manufacturing customers. Its two segments are Service Center Based Distribution and Fluid Power & Flow Control.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $3,235.9 million | $3,245.7 million |
| Gross margin | 28.9% | 28.9% |
| Operating income / margin | $205.5 million / 6.3% | $89.0 million / 2.7% |
| Net income | $144.8 million | $24.0 million |
| Diluted EPS | $3.68 | $0.62 |
| Operating cash flow | $241.7 million | $296.7 million |
| Capital expenditures | $15.9 million | $20.1 million |
| Cash and cash equivalents | $257.7 million | $268.6 million |
| Total debt | $829.4 million | $935.3 million |
| Working capital / current ratio | $768.9 million / 2.8 | $733.7 million / 2.7 |
Sales fell 0.3% year over year. Acquisitions added $44.1 million and favorable currency translation added $16.5 million; excluding both, sales declined $70.3 million, or 2.2%. Gross profit was $935.5 million. Selling, distribution and administrative expense declined 5.2% to $680.5 million, and equaled 21.0% of sales versus 22.1%.
Operating cash flow declined $55.0 million, principally reflecting working-capital changes, including increased accounts receivable. Cash used in financing was $213.0 million, including $131.9 million of debt repayments, $50.7 million of dividends and $40.1 million of share repurchases. The company repurchased 400,000 shares at an average $100.22 and paid dividends of $1.30 per share.
Segments and material changes
- Service Center Based Distribution: Sales were $2,199.5 million, down 1.9%. Organic sales declined 2.6%, reflecting weaker industrial demand, although performance improved as the year progressed.
- Fluid Power & Flow Control: Sales were $1,036.4 million, up 3.3%, including $44.1 million from acquisitions. Organic sales declined 1.1%; softer process-related demand was partly offset by stronger technology, off-highway mobile, life sciences, chemical and automation demand.
- Net income and EPS rose sharply from FY2020, but the comparison is affected by the prior year’s $131.0 million non-cash goodwill impairment charge. FY2021 included a $49.5 million non-cash impairment charge and $7.8 million of non-routine costs, partly offset by $2.6 million of other non-routine income. Management said these FY2021 net non-routine items reduced operating income by $54.7 million, net income by $41.7 million and EPS by $1.06.
- The FY2021 impairment related to operations exposed to oil and gas end markets: $45.0 million of intangible assets, $2.0 million of fixed assets and $2.5 million of leased assets. The company reported $560.1 million of goodwill and $279.6 million of net intangible assets at year-end.
Outlook, risks and contingencies
- Management reported strengthening underlying demand in the fourth quarter and said FY2022 began positively: organic sales through early August were up by a “high-teens” percentage over the prior year. It cited customer indications of sustained demand momentum, effective inflation management, cost control and productivity improvements. This is an early-period observation, not full-year sales guidance.
- FY2022 capital expenditures were projected at $18–20 million, primarily for information technology equipment and infrastructure. Management expected a FY2022 income tax rate of 22–23% and inventory turnover slightly better than FY2021.
- Debt included $550.3 million under the term loan and $188.3 million under the receivables securitization facility. The company had $249.8 million available under its revolving facility, was in compliance with covenants, and reported net indebtedness below 2.5 times defined EBITDA against a covenant limit of 3.75 times. The credit facility expires in January 2023; the receivables facility was extended to March 2024.
- Key risks include industrial and customer-demand volatility, COVID-19 and supply-chain disruptions, inflation and the ability to pass through cost increases, supplier availability and incentives, competition, acquisition integration, cybersecurity and systems disruption, foreign currency exposure, variable-rate debt and the LIBOR transition. Continued weakness in oil and gas end markets or missed forecasts could lead to further impairments, including goodwill impairment risk at the FCX reporting unit.
- Pending legal and administrative matters include product liability, commercial, personal injury and employment matters. Management did not expect their resolution to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls; the FCX goodwill valuation was identified as a critical audit matter.
Important facts for investors to verify
- Whether the early FY2022 high-teens organic sales growth and reported demand momentum persisted beyond early August.
- Whether sales and margins recover organically, particularly in Service Center Based Distribution and process-related markets, apart from acquisition and currency effects.
- Whether FCX meets forecast sales and margin assumptions and maintains valuation headroom against its 14% goodwill fair-value cushion.
- How working-capital needs affect operating cash flow as demand and receivables grow, and whether debt continues to decline.
- Whether the company achieves its stated FY2022 capital spending and tax-rate expectations, and how it manages the January 2023 credit-facility maturity and LIBOR transition.