Business Context and Reporting Period
Applied Industrial Technologies, Inc. is a value-added distributor of industrial products and provider of engineering, system-integration, repair, and inventory-management services. Its two reportable segments are Service Center Based Distribution and Fluid Power & Flow Control. This Form 10-K covers the fiscal year ended June 30, 2019; fourth-quarter figures are also reported below. The “2018 Q4” metadata does not match the filing’s fiscal 2019 reporting period.
Key Financial Results
- Fiscal 2019 revenue: $3.473 billion, up 13.0% from $3.073 billion. Acquisitions added $360.0 million; unfavorable currency translation reduced sales by $19.2 million. Organic sales rose 1.9%.
- Profitability: Gross margin increased to 29.0% from 28.8%; operating income rose 3.5% to $233.8 million, while operating margin fell to 6.7% from 7.3%. Net income was $144.0 million, up 1.7%; diluted EPS was $3.68 versus $3.61. Net margin was 4.1%, down from 4.6%.
- Cash flow: Operating cash flow was $180.6 million, compared with $147.3 million. Capital expenditures were $19.0 million. Cash and cash equivalents increased to $108.2 million from $54.2 million.
- Liquidity and debt: Working capital was $724.3 million versus $625.5 million; the current ratio was 2.7 versus 2.4. Total debt obligations were $959.8 million, down from $966.1 million. The company had $246.8 million available under its revolving facility, net of letters of credit, and was in compliance with debt covenants.
- Returns and balance sheet: Dividends paid were $47.3 million, or $1.22 per share. Shareholders’ equity was $897.0 million, up from $815.0 million.
- Fourth quarter: Net sales were $882.7 million, down from $897.7 million in 2018 Q4. Operating income was $72.0 million versus $70.8 million; net income was $39.8 million versus $40.4 million; diluted EPS was $1.02 versus $1.03.
Changes Versus the Prior Year
- Acquisitions, led by FCX Performance (acquired January 2018), drove most of the reported sales increase. Service Center Based Distribution organic sales grew 4.6%; Fluid Power & Flow Control organic sales declined 6.8%, amid weaker demand and project delays in technology-related fluid power markets and slower flow-control demand.
- Gross margin benefited from acquisitions by 48 basis points, partly offset by a 26-basis-point unfavorable LIFO expense change. Selling, distribution and administrative expense remained 21.4% of sales.
- Interest expense rose to $40.8 million from $24.1 million, reflecting acquisition-related leverage. The effective tax rate declined to 26.0% from 30.8%, primarily following U.S. tax reform.
- Operating cash flow increased, while investing cash outflow fell sharply as fiscal 2018 included the FCX acquisition. Fiscal 2019 investing outflows included $37.5 million for acquisitions and $19.0 million for capital expenditures.
Outlook, Commentary, and Risks
- Management expected a 25%–27% effective tax rate and fiscal 2020 capital expenditures of $20–$25 million; depreciation was expected at $21–$22 million. Inventory turnover was expected to be slightly better than fiscal 2019.
- Management cited weaker industrial indicators in the second half of fiscal 2019. It expects existing cash, operating cash flow, and available borrowing capacity to cover normal working capital, dividends, debt service, capital investment, and acquisitions.
- A $31.6 million non-cash impairment charge was recorded on intangible assets tied to upstream oil and gas operations in western Canada, alongside restructuring charges of $2.3 million. The filing gives differing EPS impact figures for the impairment: $0.59 in MD&A and $0.69 in selected-data commentary that also references a Canadian deferred-tax valuation allowance.
- Debt, including LIBOR-linked borrowings, exposes the company to interest-rate and refinancing risk; a $463 million swap converted a portion of variable-rate debt to a fixed rate. Other key risks include industrial downturns, price and margin pressure, supplier disruptions, tariffs, foreign exchange, cybersecurity and systems implementation, acquisition integration, and further asset impairment.
- Management reported pending legal matters but considered a material adverse outcome remote. The auditor issued unqualified opinions on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective.
- After year-end, the company reached a definitive agreement to acquire Olympus Controls Corp., to be funded through its revolving facility.
Most Important Facts for Investors to Verify
- How much future growth is organic versus acquisition-driven, particularly given the Fluid Power & Flow Control segment’s organic decline.
- Whether margins and earnings recover after the Canadian oil-and-gas impairment and restructuring, and how much of reported EPS reflects tax effects or unusual items.
- Debt reduction, interest costs, covenant headroom, and access to the receivables securitization and revolving facilities.
- Whether softer industrial indicators, trade actions, or customer-sector weakness affect sales, pricing, receivables, and inventory.
- Purchase terms and financing for Olympus Controls, and the company’s ability to integrate acquisitions while maintaining cash available for debt service and shareholder returns.