Applied Industrial Technologies, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended September 30, 2019. The filing compares results with the three months ended September 30, 2018; balance-sheet figures are compared with June 30, 2019. The company distributes industrial products and provides engineering, integration, and related services.
Financial results
| Metric | Q1 FY2020 | Prior-year quarter / comparison |
|---|---|---|
| Net sales | $856.4 million | $864.5 million; down 0.9% |
| Gross profit / margin | $251.5 million / 29.4% | $251.9 million / 29.1% |
| Operating income / margin | $61.2 million / 7.1% | $66.3 million / 7.7%; income down 7.8% |
| Net income | $38.8 million | $48.9 million; down 20.7% |
| Diluted EPS | $1.00 | $1.24 |
| Operating cash flow | $50.0 million | $11.8 million |
| Cash and cash equivalents | $98.2 million | $108.2 million at June 30, 2019 |
| Total borrowings | $954.9 million | $959.8 million at June 30, 2019 |
| Working capital / current ratio | $666.2 million / 2.4:1 | $724.3 million / 2.7:1 at June 30, 2019 |
Cash from operations was partly offset by $40.6 million of investing outflows, including $35.7 million for acquisitions, and $18.9 million of financing outflows, including $12.0 million of dividends. Cash decreased by $10.0 million during the quarter. Gross margin improved 0.3 percentage points, partly reflecting lower LIFO expense; SD&A rose to 22.2% of sales from 21.5%, contributing to lower operating margin.
Performance changes and business context
- Acquisitions added $24.2 million, or 2.8%, to sales; unfavorable foreign currency translation reduced sales by $1.3 million. Excluding those effects, sales fell $31.0 million, or 3.6%; the company attributed the underlying decline to a 5.2% decrease in operations, partly offset by one additional selling day.
- Service Center Based Distribution sales were down 0.1% overall; organic sales fell 1.9%. Fluid Power & Flow Control sales declined 2.8% overall; organic sales fell 7.5%, reflecting weaker flow-control demand, slower industrial OEM activity, and technology end-market headwinds in fluid power.
- Management cited weakening industrial conditions: the September 2019 ISM PMI was 47.8, below the 50 expansion threshold, and industrial production and manufacturing capacity-utilization measures had declined.
- The effective tax rate was 24.1%, versus 12.8% a year earlier. The prior-year rate benefited from a $4.1 million favorable Tax Cuts and Jobs Act adjustment.
Outlook, liquidity, risks, and unusual items
- Management expects a fiscal 2020 full-year tax rate of 25%–26%. It gave no specific sales or earnings guidance in the supplied filing text.
- Management said cash, operating cash flow, and available borrowing capacity should be sufficient for normal working-capital needs, dividends, acquisitions, capital investment, debt service, and potential share repurchases. The $250 million revolving facility had no borrowings and approximately $247.5 million of unused capacity, net of letters of credit.
- The company reported compliance with debt covenants. Net indebtedness was less than 3.0 times defined EBITDA, against a covenant limit of 4.0 times. The $175 million receivables securitization facility was fully drawn; availability may be affected by customer credit ratings, concentration, and receivable characteristics.
- A $1.5 million severance expense reduced quarterly operating income by $1.5 million, net income by $1.1 million, and EPS by $0.02. The company acquired Olympus Controls for $34.9 million, funded with cash. It also recorded a $3.3 million opening-retained-earnings adjustment upon adopting the lease standard and recognized operating lease assets of $86.6 million and liabilities of $92.6 million at quarter-end.
- Receivables risk warrants attention: the allowance was 2.2% of gross receivables versus 1.9% at June 30; provision expense was 0.25% of sales versus 0.13% a year earlier. Management linked the increase primarily to customer bankruptcies, and 3.3% of receivables were more than 90 days past due.
- Other disclosed risks include industrial-demand weakness, customer credit and collections, acquisition integration, supplier and competitive pressures, foreign exchange, goodwill impairment, information systems, and trade policy. Management said pending legal proceedings were not expected to have a material adverse effect, based on information then available.
- Subsequent event: on October 30, 2019, the company authorized $25 million of five-year senior notes at a fixed 3.08% rate.
Important facts for investors to verify
- Whether underlying sales trends stabilize, particularly in Fluid Power & Flow Control, and how much reported growth depends on acquisitions and selling days.
- Whether weaker industrial indicators and customer bankruptcies affect revenue, margins, receivables, and the allowance for credit losses.
- How the 25%–26% expected tax rate, severance costs, and acquisition-related expenses affect full-year earnings.
- Debt maturities, interest-rate exposure, access conditions for the fully drawn receivables facility, and continued covenant compliance.
- Whether goodwill valuations remain supported if demand or projected cash flows weaken; management identified Canada and FCX Performance as reporting units with the narrowest stated fair-value cushions.