Applied Industrial Technologies, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended March 31, 2022. The filing is for fiscal 2022 Q3, notwithstanding the request metadata’s “2021 Q3.” Amounts below are in millions unless otherwise stated.
Business context
Applied distributes industrial motion, fluid power, flow control, automation technologies and related maintenance supplies through two reportable segments: Service Center Based Distribution and Fluid Power & Flow Control. It operated 566 facilities across North America, Australia, New Zealand and Singapore during the quarter.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $980.7 | $840.9 | $2,749.2 | $2,340.0 |
| Gross profit | $287.3 | $247.2 | $800.3 | $672.5 |
| Operating income | $95.8 | $74.5 | $248.6 | $124.4 |
| Net income | $68.3 | $56.1 | $178.3 | $85.5 |
| Diluted EPS | $1.75 | $1.42 | $4.56 | $2.18 |
| Operating cash flow | — | — | $133.8 | $203.4 |
- Quarterly sales grew 16.6%; management attributed 14.7% to operating growth and 1.6% to one additional selling day. Acquisitions added 0.4%, while currency reduced sales 0.1%.
- Quarterly gross margin was 29.3% versus 29.4%; operating margin improved to 9.8% from 8.9%. SD&A was 19.5% of sales versus 20.5%.
- Nine-month sales increased 17.5%, with organic growth of 15.9%. Gross margin rose to 29.1% from 28.7%; operating margin rose to 9.0% from 5.3%, partly because the prior-year period included $49.5 million of impairment expense.
- Both segments grew: quarterly Service Center Based Distribution sales increased 15.0% and Fluid Power & Flow Control sales increased 20.0% (including acquisition contribution). Their quarterly segment operating margins were 12.4% and 12.6%, respectively.
- Nine-month operating cash flow fell to $133.8 million from $203.4 million, primarily because of working-capital investment as the business expanded. Cash used in investing was $29.8 million; cash used in financing was $173.4 million. Cash declined $69.7 million to $188.1 million.
Financial position and capital
At March 31, 2022, cash was $188.1 million, current assets $1,295.0 million and current liabilities $464.4 million. Working capital was $830.7 million and the current ratio was 2.8:1. Total debt was $721.6 million, down from $829.4 million at June 30, 2021. The company had $457.2 million of unused capacity under its $900 million revolving credit facility, net of facility letters of credit, and was in compliance with its financial covenants. Nine-month financing included $107.8 million of net debt repayments, $13.6 million of share repurchases and $38.6 million of dividends.
Changes, outlook and risks
- In December 2021, the company replaced its prior credit facility with a five-year, $900 million unsecured revolver, with an uncommitted accordion of up to $500 million. Revolver borrowings were $442.6 million at quarter-end.
- Inflation and supply-chain dynamics increased LIFO expense by $6.6 million versus the prior-year quarter and $12.9 million for the nine-month period. Management cited pricing, channel execution, freight management and other initiatives as offsets.
- Management expects the full-year fiscal 2022 effective tax rate to be 22.0%–23.0%. It said inventory turnover at fiscal year-end should be similar to or slightly better than the March 31 rate of 4.7. The filing provides no specific full-year sales or earnings guidance.
- Risks identified include customer demand and economic conditions, inflation and product availability, supply-chain and transportation disruption, receivable collectability, personnel retention, acquisitions, foreign currency, information systems and potential goodwill or intangible-asset impairment. Goodwill testing as of January 1, 2022 found reporting-unit fair values at least 25% above carrying values, but future results or assumptions could change that assessment.
- Accounts receivable days sales outstanding increased to 56.7 from 51.9 at June 30, 2021; 4.3% of receivables were more than 90 days past due, versus 3.0%. Management considered receivables and the allowance reasonable.
- The company is party to product-liability, commercial, personal-injury, employment and other legal proceedings; it did not expect their resolution to have a material adverse effect based on currently known circumstances. Management reported effective disclosure controls and no material quarter-period change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales momentum and margin performance persist as inflation, LIFO costs and supply-chain constraints evolve.
- Working-capital needs and cash conversion, particularly receivables aging and inventory growth.
- Debt repayment and refinancing plans, including the Series C notes due July 2022 and floating-rate exposure; the company hedged a portion of variable-rate debt through an interest-rate swap.
- Whether the stated tax-rate and inventory-turnover expectations hold; no full-year sales or earnings forecast is provided in this filing.
- Potential changes in customer demand, acquisition performance, and goodwill or intangible-asset impairment assumptions.