Applied Industrial Technologies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2020 (the third quarter of fiscal 2020), not 2019 Q3. Unless noted otherwise, amounts below are in millions of dollars.
Business context and reporting period
Applied is a value-added distributor of industrial products and provider of engineering, integration, and related services. It reports two segments: Service Center Based Distribution and Fluid Power & Flow Control. The filing covers the three- and nine-month periods ended March 31, 2020, compared with the same periods in 2019.
Key financial metrics
| Metric | Quarter ended Mar. 31, 2020 | Prior-year quarter | Nine months ended Mar. 31, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $830.8 | $885.4 | $2,520.6 | $2,590.0 |
| Gross profit | $236.8 | $255.6 | $729.4 | $750.3 |
| Gross margin | 28.5% | 28.9% | 28.9% | 29.0% |
| Operating income (loss) | $(78.0) | $34.5 | $42.0 | $161.8 |
| Net income (loss) | $(82.8) | $16.5 | $(5.9) | $104.2 |
| Diluted earnings (loss) per share | $(2.14) | $0.42 | $(0.15) | $2.66 |
- Cash flow: Nine-month operating cash flow was $169.6, versus $77.2 a year earlier, primarily reflecting working-capital improvements. Investing cash outflow was $51.7 and financing cash outflow was $56.0. Cash rose $57.2 to $165.5.
- Liquidity: Working capital was $714.7, compared with $724.3 at June 30, 2019; the current ratio was 2.6, versus 2.7. Cash plus $248.2 of unused revolving-credit availability supported liquidity.
- Debt: Outstanding borrowings totaled approximately $945.0 at March 31, 2020, down from $959.8 at June 30, 2019. This included $599.0 on the term loan and $175.0 under the receivables securitization facility; the revolver was undrawn. The company reported compliance with financial covenants.
- Segment results: Quarterly segment sales were $574.4 for Service Center Based Distribution and $256.4 for Fluid Power & Flow Control. Segment operating income was $53.0 and $26.4, respectively, before corporate items and specified intangible amortization and impairment adjustments.
Material changes versus comparable periods
- Quarterly sales fell 6.2%; excluding acquisitions and currency effects, sales declined $69.7, or 7.9%. For the nine months, sales fell 2.7%; excluding those effects, they declined $133.4, or 5.2%.
- Management attributed underlying sales weakness to slower manufacturing activity, customer spending discipline, softer flow-control demand, and weaker industrial OEM activity. Acquisitions added $17.1 of quarterly sales and $67.9 for the nine-month period.
- A $131.0 non-cash goodwill impairment related to FCX operations in Fluid Power & Flow Control drove the quarterly operating loss. Management linked the charge to weaker industrial conditions and slower demand in FCX end markets. The reporting unit had $309.0 of goodwill remaining, and further adverse cash-flow changes could cause additional impairment.
- The prior-year quarter included a $31.6 non-cash impairment of Canadian long-lived intangible assets. The current quarter also included $6.0 of non-routine consolidation and workforce-reduction costs: $3.9 in cost of sales and $2.1 in selling, distribution and administrative expense.
- Receivables risk increased: the allowance was 2.5% of gross receivables, up from 1.9% at June 30, 2019; 4.2% of receivables were more than 90 days past due, versus 3.0%. Management cited customer credit deterioration and bankruptcies, principally in U.S. Service Center Based Distribution.
Outlook, commentary, risks, and unusual items
- No quantified sales or earnings guidance is provided in the supplied filing text. Management said existing cash, revolver capacity, and operating cash flow were expected to fund normal working capital, dividends, acquisitions, capital spending, and debt service.
- Management reported that COVID-19 was significantly affecting the business. Facilities remained open as critical infrastructure, but organic sales declined in the mid-teens year over year on a days-adjusted basis in March and in the high teens month-to-date in April 2020.
- Cost actions included reduced discretionary spending, staff realignments, temporary furloughs and pay reductions, suspension of the 401(k) company match, and other expense reductions. The filing emphasizes uncertainty around pandemic duration, customer demand and payment, suppliers and supply chains, operations, and the broader economy.
- The company recorded a $1.0 CARES Act-related tax benefit. The nine-month effective tax rate was 139.2%, which management said was elevated primarily by the goodwill impairment’s tax effect.
- Interest-rate exposure is partly hedged: a swap converted $431.0 of variable-rate debt to a 4.36% rate at March 31, 2020. Its fair-value liability was $26.1.
- Pending product-liability, commercial, and other proceedings were described as unlikely, based on currently known circumstances, to have a material adverse effect. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether COVID-19 sales declines, customer credit deterioration, and collection trends persisted or worsened after the reporting date.
- FCX’s operating performance, the assumptions underpinning its valuation, and the potential for additional goodwill impairment.
- Cash-flow sustainability and availability under the receivables securitization and revolving facilities, including covenant headroom and upcoming debt maturities.
- Whether cost reductions and restructuring offset lower sales without materially impairing service levels or future growth.
- Subsequent-period results and any formal outlook: this filing provides no quantified forward guidance.