Applied Industrial Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2024. Unless otherwise noted, dollar amounts below are in millions. Comparisons are with the corresponding 2023 periods.
Business context and results
Applied is a value-added distributor and technical solutions provider serving industrial MRO and OEM customers. Its reportable segments are Service Center Based Distribution and Engineered Solutions.
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Net sales | $1,146.4 | $1,132.0 | $3,318.7 | $3,254.7 |
| Gross profit | $338.2 | $333.1 | $980.4 | $948.4 |
| Gross margin | 29.5% | 29.4% | 29.5% | 29.1% |
| Operating income | $121.2 | $126.9 | $356.5 | $346.3 |
| Operating margin | 10.6% | 11.2% | 10.7% | 10.6% |
| Net income | $97.2 | $97.2 | $282.3 | $254.5 |
| Diluted EPS | $2.48 | $2.47 | $7.18 | $6.49 |
Financial position and cash flow
- Cash and liquidity: Cash was $456.5 at March 31, 2024, versus $344.0 at June 30, 2023. Working capital was $1,299.3; the current ratio was 3.8, up from 3.0 at fiscal year-end.
- Debt: Total debt obligations were $597.1, down from $622.2 at June 30, 2023. Unused revolving-credit availability was $516.2. Net indebtedness was less than 0.4 times covenant-defined EBITDA; the company reported compliance with financial covenants.
- Cash flow, nine months: Operating activities provided $252.2, investing activities used $38.3, and financing activities used $101.2. Cash increased $112.5. Capital expenditures were $17.4; dividends paid were $41.5.
- Returns and receivables: The company repurchased 163,000 shares for $28.9 during the nine months and paid dividends of $0.35 per share in the first two fiscal quarters and $0.37 in the third. Days sales outstanding were 55.8; 1.8% of receivables were more than 90 days past due.
Material changes and management commentary
- Q3 sales rose 1.3%, including $13.1 from acquisitions and $2.5 from favorable currency translation. Excluding acquisitions and currency, sales declined $1.2, or 0.1%, with operating growth offset by fewer selling days.
- Service Center Based Distribution sales increased 3.6% in Q3; organic sales growth was $13.6. Engineered Solutions sales fell 3.6%, with organic sales down $14.8, reflecting ongoing weakness in automation and lower fluid-power sales; process flow control grew.
- Q3 operating income decreased 4.5% as SD&A rose 5.3% and increased to 18.9% of sales from 18.2%. Management cited higher bad-debt expense versus the prior-year quarter, partly reflecting prior-year collections of past-due receivables. Lower interest expense and higher other income helped keep quarterly net income essentially unchanged.
- For the nine months, sales increased 2.0%, while operating income rose 2.9% and net income rose 10.9%. Gross margin benefited 40 basis points from $13.4 lower LIFO expense. Interest expense declined $13.9, mainly due to lower debt and higher interest income. The effective tax rate was 21.0% versus 22.2%, partly due to reversal of a Mexico tax valuation allowance and compensation-related deductions.
Outlook, risks, and unusual items
- Management expects the full-year fiscal 2024 tax rate to be 22.0%–23.0%. It said cash, operating cash flow, and available credit should be sufficient for normal working capital, dividends, acquisitions, capital investment, debt service, and repurchases. No specific sales or earnings guidance is provided in the filing text.
- In April 2024, the company reached a definitive agreement to acquire substantially all net assets of Grupo Kopar, an automation and engineered-solutions provider in Mexico; it expects to use available cash. The filing does not provide purchase price or closing timing.
- Interest-rate exposure remains relevant: revolving-credit and receivables-facility borrowings are variable-rate, while swaps convert approximately $384.0 of variable-rate debt to a fixed rate. The revolving-credit rate was 6.23% at March 31. Series E notes of $25.0 mature in October 2024, and a small Ohio note matures in November 2024.
- Management identifies risks including industrial demand and customer operating levels, inflation/deflation, supply availability and disruption, competition, receivable collectability, foreign exchange, acquisitions and integration, information-system and cybersecurity risks, and potential goodwill or intangible impairment. The annual goodwill review found no impairment. Pending legal matters include product liability, commercial, personal injury, and employment claims; management does not expect a material adverse effect, but outcomes and reasonably possible losses are not quantified.
- Other notable items include Q3 unrealized investment gains of $1.6 in other income and a $3.4 year-over-year reduction in quarterly LIFO expense, which supported gross margin. The filing states interim LIFO estimates remain subject to the year-end determination.
Important facts for investors to verify
- Whether Engineered Solutions’ automation and fluid-power weakness persists, and whether Service Center growth offsets it.
- How much of reported growth and margin improvement reflects acquisitions, currency, and lower LIFO expense rather than underlying demand and operating performance.
- Variable-rate debt exposure, facility availability and conditions, covenant headroom, and repayment or refinancing of the October and November 2024 maturities.
- Grupo Kopar’s final purchase terms, closing, funding, integration, and contribution to results.
- Receivables quality, elevated quarterly bad-debt expense versus the prior-year comparison, and the company’s full-year tax-rate outlook.