Applied Industrial Technologies, Inc. — Form 10-Q Summary
Period clarification: Although the request identifies “2011 Q3,” this filing reports the fiscal third quarter and nine months ended March 31, 2012, compared with the same periods in 2011. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and results
Applied is an industrial distributor serving MRO, OEM, and government markets, with operations in the United States, Canada, and Mexico. Its reportable segments are Service Center Based Distribution and Fluid Power Businesses.
| Metric | Quarter ended Mar. 31, 2012 | Prior-year quarter | Nine months ended Mar. 31, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $605.5 | $566.0 | $1,755.4 | $1,623.0 |
| Gross profit | $167.6 | $156.6 | $481.8 | $444.0 |
| Operating income | $42.0 | $38.2 | $118.6 | $106.1 |
| Net income | $29.4 | $26.5 | $76.7 | $68.5 |
| Diluted EPS | $0.69 | $0.61 | $1.79 | $1.58 |
Quarterly sales rose 7.0%; management attributed the increase mainly to improved industrial activity. Acquisitions added $3.0 million, while currency translation reduced sales by $2.5 million. Year-to-date sales increased 8.2%, including $11.3 million from acquisitions and a $2.3 million favorable currency effect.
Margins, segments, and material changes
- Quarterly gross margin was 27.7%, unchanged year over year; operating margin increased to 6.9% from 6.7%. For nine months, gross margin was 27.4%, unchanged, and operating margin rose to 6.8% from 6.5%.
- Quarterly Service Center Based Distribution sales increased 7.7%; segment operating margin improved to 7.4% from 7.1%. Fluid Power sales increased 4.1%, but its operating margin fell to 8.8% from 9.9%, reflecting higher expenses, ERP costs, and weaker margin in one vertical market.
- Quarterly SD&A was 20.7% of sales versus 20.9% a year earlier. Year-to-date SD&A included $13.9 million of ERP project expense, a $3.1 million SERP curtailment charge, and $1.4 million of CEO-transition expenses. ERP expense was $5.9 million for the quarter.
- Year-to-date gross margin benefited from higher supplier incentives, offsetting the absence of $2.5 million of LIFO benefits recorded in the prior-year period.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $62.0 million versus $64.0 million; management said the increase in net income was more than offset by working-capital investment. Investing cash outflow was $31.4 million, including $18.3 million of capital expenditures and $14.3 million for acquisitions. Financing cash outflow was $41.3 million, including $24.9 million of dividends and $19.0 million of share repurchases.
- Cash was $79.4 million at March 31, 2012, down from $91.1 million at June 30, 2011. Current assets were $649.0 million and current liabilities $225.7 million; working capital was $423.3 million and the current ratio 2.9 to 1.
- Total liabilities were $282.1 million and shareholders’ equity $672.2 million. No borrowings were outstanding. The $150 million revolving facility, expiring in June 2012, had $143.1 million of unused capacity net of letters of credit; the company was pursuing a five-year renewal. The $100 million private shelf facility also had no outstanding borrowings.
- Accounts receivable increased 5.8% year to date, versus 8.2% sales growth; DSO was 44.3 days. The allowance for doubtful accounts was 2.7% of gross receivables, compared with 2.4% at June 30, 2011.
Outlook, risks, and unusual items
- Management expected a full-year effective tax rate of approximately 35%. It characterized U.S. industrial conditions as performing well, citing moderate growth in industrial production and manufacturing indicators; the filing provides no consolidated sales or EPS guidance.
- Fiscal 2012 ERP spending was expected to total $34–$36 million, including $19–$20 million expensed. Canadian deployments had begun; U.S. deployments were planned for fiscal 2013 and 2014.
- After quarter-end, the company announced an agreement to acquire SKF’s company-owned distribution businesses in Australia and New Zealand, expected to close by July 1, 2012 and to be funded from available cash.
- The SERP was frozen effective December 31, 2011. The curtailment reduced the postemployment liability by $8.9 million and generated a $3.1 million expense from prior service cost recognized in the second quarter.
- Management cited risks including customer demand and economic conditions, supplier incentives and authorizations, receivable collectability, foreign currency and foreign operations, acquisition integration, and timely, cost-effective ERP implementation. Pending product liability, negligence, and other proceedings were not expected by management to have a material adverse effect, though outcomes were uncertain.
- The interim financial statements were reviewed, not audited, by Deloitte & Touche. Management reported effective disclosure controls and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for fiscal Q3 2012, not Q3 2011.
- Track whether sales growth and segment margins persist, particularly the Fluid Power margin decline.
- Assess ERP costs, deployment timing, and whether the project delivers its expected benefits without disrupting controls or operations.
- Monitor working-capital cash use, receivables and credit-loss provisions, and the renewal of the revolving credit facility before its June 2012 expiry.
- Verify the timing, cash funding, and integration impact of the proposed Australia and New Zealand acquisition.