Business context and reporting period
Applied Industrial Technologies, Inc. distributes and provides technical solutions for industrial motion, fluid power, flow control, automation and maintenance products. This Form 10-Q covers fiscal 2022’s second quarter and six months ended December 31, 2021. Amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $876.9, up 16.7% | $1,768.6, up 18.0% |
| Gross margin | 29.4%, versus 27.9% | 29.0%, versus 28.4% |
| Operating income | $78.2, versus a $2.4 loss | $152.8, versus $49.9 |
| Net income | $57.0, versus a $5.3 loss | $110.0, versus $29.5 |
| Diluted EPS | $1.46, versus a $0.14 loss | $2.81, versus $0.75 |
Quarterly sales growth included $12.1 million from acquisitions and $1.9 million from favorable currency translation; organic sales increased 14.8%. Both segments grew: Service Center Based Distribution sales rose 13.9% and Fluid Power & Flow Control sales rose 22.9%. For the six months, organic sales increased 15.7%.
Operating margin was 8.9% in the quarter and 8.6% for the six months. The prior-year quarter and six-month period included $49.5 million of impairment charges, a significant reason for the earnings comparison. Segment operating margins improved year over year. Management attributed gross-margin expansion to stronger demand and margin initiatives, including actions addressing inflation and supply-chain conditions. LIFO expense increased year over year.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $81.3 million, down from $159.4 million. Management cited working-capital changes, including inventory, receivables and other operating assets, partly offset by improved earnings.
- Investing cash use was $28.9 million; financing cash use was $153.4 million. Cash declined $102.9 million to $154.8 million from June 30, 2021.
- Total debt was $721.6 million at December 31, 2021, compared with $829.4 million at June 30, 2021. The company had $457.2 million of unused capacity under its new $900 million unsecured revolving facility, net of letters of credit.
- Working capital was $743.8 million and the current ratio was 2.9-to-1, versus 2.8-to-1 at fiscal year-end. The company reported compliance with its financial covenants; net indebtedness was below 1.65 times the defined EBITDA measure, against a covenant limit of 3.75 times.
- The company refinanced its prior facility in December 2021. It also had $188.3 million outstanding under its receivables securitization facility. A $409 million interest-rate swap hedged variable-rate debt exposure.
Outlook, risks and notable items
Management expects existing cash, operating cash flow and available borrowing capacity to support working capital, dividends, acquisitions, capital spending, debt service and potential share repurchases. The filing provides no sales or earnings guidance; it expects a fiscal 2022 tax rate of 22%–23%.
Management cited ongoing risks from customer demand and economic conditions, COVID-19 effects, inflation, supply availability and transportation disruption, competition, receivable collectability, foreign currency, acquisitions, cybersecurity and information systems, and potential goodwill or intangible-asset impairment. The FCX reporting unit had goodwill of $309.0 million and fair value 14% above carrying value at the January 2021 annual assessment; the filing warns that unfavorable changes in assumptions or results could lead to future impairment. Pending legal proceedings were not expected to have a material adverse effect based on information then available.
The company acquired R.R. Floody in August 2021 for $8.0 million; its results were not material. It repurchased 111,658 shares for $10.1 million during the six months and had authorization for 352,960 additional shares at quarter-end.
Important facts for investors to verify
- Whether strong organic sales and improved margins persist amid inflation and supply-chain constraints.
- Whether working-capital investment continues to weigh on operating cash conversion.
- Debt repayment, availability and terms under the new credit facility, including the $40 million Series C notes due July 2022 and variable-rate exposure.
- Whether the FCX reporting unit’s valuation cushion remains adequate as demand, pricing, costs and forecasts change.
- Any subsequent changes to management’s outlook, tax-rate expectation, share repurchases or legal contingencies.