Applied Industrial Technologies, Inc. — Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2011, ended March 31, 2011; filed May 4, 2011. The statements are unaudited and were reviewed by the independent registered accounting firm. The filing describes Applied as an industrial distributor serving MRO and OEM customers, with 474 facilities in the U.S., Canada, Mexico and Puerto Rico.
Financial results
| Metric | Quarter ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $566.0 million, up 16.4% from $486.1 million | $1,623.0 million, up 18.5% from $1,370.1 million |
| Gross margin | 27.7%, versus 26.8% | 27.4%, versus 26.5% |
| Operating income / margin | $38.2 million / 6.7%; up 41.3% | $106.1 million / 6.5%; up 66.9% |
| Net income | $26.5 million, up 60.6% | $68.5 million, up 79.3% |
| Diluted EPS | $0.61, versus $0.39 | $1.58, versus $0.89 |
| Operating cash flow | Not separately presented | $64.0 million, versus $156.0 million |
Quarterly sales growth included $10.9 million from acquisitions, $3.8 million from favorable currency translation and $8.8 million from one additional selling day. For the nine-month period, acquisitions contributed $27.8 million and favorable currency translation $11.1 million. Management attributed broader growth primarily to improving industrial activity. Both reportable segments grew: quarterly sales rose 15.8% in Service Center Based Distribution and 19.2% in Fluid Power Businesses.
Liquidity, debt and capital
- Cash and cash equivalents were $88.6 million at March 31, 2011, down from $175.8 million at June 30, 2010. Total assets were $891.9 million and shareholders’ equity was $613.2 million.
- No borrowings were outstanding under the credit facilities at quarter-end. The company had repaid $50 million on its revolver and $25 million of private-placement debt; $143.1 million remained available under its $150 million revolver, net of letters of credit. The reported current ratio was 2.8, versus 2.3 at June 30, 2010.
- Nine-month operating cash flow was $64.0 million; investing cash outflow was $41.4 million, including $27.7 million for acquisitions and $16.4 million of capital expenditures; financing cash outflow was $112.2 million, including debt and swap repayments, $21.6 million of dividends and $4.5 million of share repurchases.
- Cash dividends per share were $0.17 for the quarter and $0.51 year to date, versus $0.15 and $0.45 in the comparable prior-year periods.
Changes, outlook and notable items
- Year-to-date operating cash flow declined $92.0 million year over year. Management said the main reason was the prior-year comparison, when inventory fell substantially under a reduction program; inventory increased in the current period with acquisitions, higher business levels and longer manufacturer lead times.
- Management saw moderate industrial-economy growth and expected further growth in sales per day in the fourth quarter. It did not provide specific sales or earnings guidance. Expected fiscal 2011 capital expenditures were $20–$22 million, including about $13.4 million for the SAP ERP project. ERP-related fiscal-year SD&A expense was estimated at about $8 million, with about $4 million expected in the fourth quarter.
- Gross margin benefited from improved point-of-sale margins and acquisitions. LIFO benefits were $2.5 million for the first nine months; management also reported a $0.35 million overall LIFO benefit for the quarter, including $2.0 million of layer-liquidation benefits. Interim LIFO amounts are estimates subject to year-end determination.
- Other income included a $1.7 million gain from life-insurance death benefits received in January 2011. Year-to-date other income also included gains on investments held in deferred-compensation trusts. These items, as well as LIFO effects, affect comparability.
- UZ Engineered Products and SCS Supply Group were acquired in July and August 2010 for an aggregate cash purchase price of $32 million. Management cited risks including economic and customer demand conditions, supply availability and costs, competition, ERP implementation, acquisitions, foreign exchange, and possible impairment of goodwill and intangibles. Pending legal matters were described as unlikely to have a material adverse effect, based on currently known circumstances.
Most important facts for investors to verify
- Whether sales and margin gains persist after accounting for acquisitions, the additional selling day, currency effects and LIFO benefits.
- Whether operating cash generation recovers as inventory and working-capital needs evolve.
- Whether the SAP implementation stays within expected cost and schedule and delivers planned benefits.
- Whether management’s expected fourth-quarter sales growth and fiscal-year capital spending estimates are achieved.
- The effect of insurance proceeds, deferred-compensation investment gains and other non-recurring or variable items on reported earnings.