Applied Industrial Technologies, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended March 31, 2021 (fiscal 2021 Q3). The request metadata says “2020 Q3,” but the filing itself reports fiscal 2021 Q3.
Business context and results
Applied is a value-added distributor and technical solutions provider serving industrial MRO and OEM customers. It reported results for its Service Center Based Distribution and Fluid Power & Flow Control segments.
| Metric | Three months ended Mar. 31, 2021 | Nine months ended Mar. 31, 2021 |
|---|---|---|
| Net sales | $840.9 million; up 1.2% | $2,340.0 million; down 7.2% |
| Gross margin | 29.4%, versus 28.5% | 28.7%, versus 28.9% |
| Operating income | $74.5 million, versus prior-year operating loss of $78.0 million | $124.4 million, versus $42.0 million |
| Net income (loss) | $56.1 million, versus loss of $82.8 million | $85.5 million, versus loss of $5.9 million |
| Diluted EPS | $1.42, versus loss per share of $2.14 | $2.18, versus loss per share of $0.15 |
Quarterly sales included $15.2 million from acquisitions and $5.3 million from favorable currency translation; excluding these effects, sales declined 1.2%, with organic operations up 0.4% offset by one fewer selling day. Nine-month sales excluding acquisitions and currency declined 8.5%. Segment operating income for Q3 was $65.6 million in Service Center Based Distribution and $30.8 million in Fluid Power & Flow Control, before corporate and other adjustments.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $203.4 million, compared with $169.6 million a year earlier. Capital expenditures were $12.2 million; operating cash flow less capital expenditures was approximately $191.2 million.
- Cash increased to $304.0 million at March 31, 2021, from $268.6 million at June 30, 2020. Investing cash outflow was $41.5 million and financing cash outflow was $130.5 million.
- Total debt was $853.2 million, down from $935.3 million at June 30, 2020. The company repaid $82.1 million of debt during the nine-month period. It had no revolver borrowings and reported $249.8 million of unused revolver availability.
- Working capital was $760.6 million; the current ratio was 2.6:1. Total shareholders’ equity was $934.9 million.
- Dividends paid were $37.8 million. No open-market share repurchases were made in the nine-month period; 864,618 shares remained authorized for repurchase.
Material changes and unusual items
- The prior-year quarter included a $131.0 million non-cash goodwill impairment charge related to FCX, making the year-over-year operating and net income improvement an unusually large comparison. The charge reduced prior-year quarterly net income by $118.8 million, according to management.
- In the current nine-month period, the company recorded $49.5 million of impairment expense: $45.0 million for intangible assets and approximately $4.5 million for fixed and leased assets, tied to prolonged weakness in oil and gas end markets.
- Q3 gross margin benefited from improving demand and margin initiatives. Prior-year gross margin included $3.9 million of inventory-reserve expense; current-quarter LIFO expense was $1.2 million lower year over year.
- Current-period selling, distribution and administrative expense declined, reflecting lower compensation, travel, fleet and bad-debt costs, partly offset by acquired-business costs and currency effects. Management said temporary COVID-related pay and benefit reductions had been restored.
Outlook, risks and contingencies
Management cited recovering industrial demand, while noting continued general economic uncertainty, supplier constraints and inflation. Organic sales in April through the filing’s reporting date were up approximately 10% year over year. Management expected the fiscal 2021 full-year effective tax rate to be 20%–22% and said available cash, operating cash flow and credit availability should support normal operating needs, dividends, acquisitions, capital spending and debt service. No full-year sales or earnings guidance is provided in the supplied filing text.
Risks include COVID-19 effects, customer demand and receivable collectability, supplier availability and cost inflation, competition, acquisition integration, foreign currency exposure, and potential further goodwill or intangible impairment. FCX’s reporting unit fair value exceeded carrying value by 14% at the January 2021 annual test; its goodwill balance was $309.0 million. The company reported compliance with debt covenants. It is party to various legal proceedings but does not expect their resolution to materially adversely affect its financial position, results or cash flows.
Important facts for investors to verify
- Whether the reported April organic sales growth continued, and whether demand recovery overcame supplier constraints and inflation.
- The sustainability of margin gains and cost savings after temporary pandemic-related actions were restored.
- Further deterioration, if any, in oil and gas markets or FCX performance that could trigger additional impairment.
- Debt repayment needs, especially the Series C note installments due in July 2021 and 2022, and the availability conditions on the receivables facility.
- Actual fiscal 2021 tax rate versus the stated 20%–22% expectation; the filing notes interim results are not necessarily indicative of full-year results.