Applied Industrial Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2013; filed May 7, 2013. The filing covers FY2013 Q3, notwithstanding the request metadata’s “2012 Q3” label. Figures are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. Interim statements were reviewed, not audited.
Business context and results
Applied distributes industrial products and provides related services to MRO, OEM, and government customers. It reported two segments: Service Center Based Distribution and Fluid Power Businesses, operating through 525 facilities in the United States, Canada, Mexico, Puerto Rico, Australia, and New Zealand.
- Quarter: Net sales were $621.7 million, up 2.7%; gross margin was 28.1% versus 27.7%; operating income was $43.5 million, up 3.5%, and operating margin was 7.0% versus 6.9%. Net income was $29.3 million, down 0.4%; diluted EPS was $0.69, unchanged.
- Nine months: Net sales were $1,821.7 million, up 3.8%; gross margin was 27.5% versus 27.4%; operating income was $128.4 million, up 8.2%, and operating margin was 7.0% versus 6.8%. Net income was $85.9 million, up 11.9%; diluted EPS was $2.02 versus $1.79.
- Quarterly sales growth reflected $33.3 million from acquisitions and $1.6 million from favorable currency translation; sales in businesses not acquired during the year declined 3.1%. Year-to-date, acquisitions added $78.1 million while currency translation reduced sales by $1.2 million; legacy-business sales declined 0.6%.
- Service Center Based Distribution sales rose 4.1% for the quarter and 5.4% year to date, primarily from acquisitions. Fluid Power sales fell 3.1% and 2.8%, respectively, with management citing weakness in several larger businesses.
Cash flow, financial position, and capital
- Nine-month operating cash flow was $69.1 million, compared with $62.0 million a year earlier. Investing cash outflow was $76.7 million, including $67.6 million of net acquisition spending; financing cash outflow was $28.8 million. Cash declined $35.4 million to $43.1 million.
- At March 31, cash was $43.1 million, current assets $702.9 million, and current liabilities $240.8 million. Working capital was $462.1 million; the current ratio was 2.9, unchanged from June 30, 2012.
- Total liabilities were $298.0 million and shareholders’ equity was $738.0 million. The company reported no borrowings at period-end. Its $150 million revolving credit facility had $140.9 million of unused capacity, net of letters of credit; a separate $125 million shelf facility also had no borrowings.
- Dividends paid totaled $27.5 million for the nine months; the declared cash dividend per share was $0.23 for the quarter, versus $0.21 a year earlier. No treasury shares were repurchased during the period; 1,142,800 shares remained authorized for repurchase.
Changes, outlook, and risks
- The company acquired five distributors during the nine months, with $67.6 million of net cash paid. Management said acquired businesses’ results were not material for any period presented. Goodwill increased to $108.1 million, and net intangible assets to $95.2 million; acquisition purchase-price allocations remained preliminary.
- Management expects a fiscal 2013 effective tax rate of approximately 34%. It provided no specific sales or earnings forecast, but said available cash, operating cash flow, credit facilities, and operating leases should fund normal working capital, dividends, acquisitions, and capital needs.
- Management cited improving U.S. industrial production and a quarterly average PMI above the 50 expansion threshold, while noting weakness in some Fluid Power operations. It attributed higher quarterly gross margin partly to acquired operations; higher SD&A as a share of quarterly sales also reflected acquisitions.
- The multi-year SAP ERP implementation continued, with further deployments planned in fiscal 2013 and 2014 and implementation expected to continue through calendar 2013. Management identified execution and maintaining adequate internal controls during implementation as risks; it reported disclosure controls were effective.
- Other disclosed risks include customer demand and economic conditions, supplier availability and pricing, competition, receivables collectability, acquisition integration, foreign currency and other international risks, and potential goodwill or intangible impairment. The company said pending legal proceedings were not expected to have a material adverse effect, based on currently known circumstances.
- Unusual comparative item: prior-year nine-month results included about $4.5 million of nonrecurring SD&A, largely a benefit-plan curtailment loss and CEO transition costs. Prior-year comprehensive income also included benefit-plan curtailment-related OCI items.
Important facts for investors to verify
- Whether underlying sales trends improve after separating acquisition contributions, selling-day differences, and currency effects.
- Whether Fluid Power sales and segment margins recover, and whether acquired businesses deliver expected performance and integrate effectively.
- Progress and costs of the SAP rollout, including the effect on internal controls and realization of expected benefits.
- Working-capital trends: receivables rose 9.5% from June 30 versus nine-month sales growth of 3.8%; DSO was 48.3 days versus 45.2 at June 30, which management attributed primarily to March month-end timing. Inventory turnover was 4.1 versus 4.6 at fiscal year-end.
- The approximately 34% full-year tax-rate expectation, acquisition funding needs, and continued availability of credit capacity.