Applied Industrial Technologies, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the three months ended September 30, 2020. Applied is a value-added distributor and technical solutions provider serving industrial MRO and OEM customers across North America and selected international markets.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $747.8 million | $856.4 million |
| Gross profit / margin | $215.8 million / 28.9% | $251.5 million / 29.4% |
| Operating income / margin | $52.3 million / 7.0% | $61.2 million / 7.1% |
| Net income | $34.8 million | $38.8 million |
| Diluted EPS | $0.89 | $1.00 |
| Operating cash flow | $81.8 million | $50.0 million |
| Capital expenditures | $3.6 million | $4.9 million |
Sales declined 12.7% year over year; excluding acquisitions and currency effects, sales fell 13.4%. Gross margin declined 0.5 percentage point, reflecting lower local-account business mix, weaker organic sales, subdued pricing opportunities, and a 10-basis-point impact from higher LIFO expense. SD&A fell 14.1%, largely due to cost actions and lower travel expense, but operating income still declined 14.5%. The effective tax rate was 22.4%, versus 24.1%.
Service Center Based Distribution sales declined 14.9%; Fluid Power & Flow Control sales declined 7.4%, with the prior-year acquisition contributing $9.7 million of current-quarter sales. Segment operating margins were 9.7% and 11.0%, respectively.
Liquidity, debt and balance sheet
At September 30, 2020, cash was $271.1 million and total debt was $872.8 million, down from $935.3 million at June 30, 2020. The company repaid $62.5 million of debt during the quarter. Working capital was $722.3 million and the current ratio was 2.7 to 1. The $250 million revolving facility had no borrowings; approximately $249.3 million remained available, net of letters of credit. Management said cash, operating cash flow and available credit should be sufficient for normal operating needs, dividends, acquisitions, capital spending and debt service. The company reported compliance with its debt covenants.
Cash increased $2.5 million to $271.1 million. Operating cash flow benefited from working-capital improvements; financing cash use primarily reflected debt repayments and $12.4 million of dividends.
Material changes, outlook and risks
- Management cited continuing COVID-19 effects and weak demand across key end markets, although sales improved as the quarter progressed. Heavy industries remained particularly weak; some food and beverage, pulp and paper, aggregates, forestry, technology and life-sciences markets showed strength.
- Management reported mid-teen organic sales percentage declines month-to-date in October 2020 and continued cost actions, including reduced discretionary spending, staffing changes, temporary furloughs and pay reductions, and suspension of the 401(k) company match.
- Fiscal 2021 full-year tax-rate expectation was 23%–25%. Management expected year-end inventory turnover to be similar to or slightly better than the September quarter. The filing provides no broader earnings or sales guidance.
- Accounts-receivable loss provision rose to $5.1 million, or 0.68% of sales, from $2.2 million, or 0.25%, primarily due to customer credit deterioration and bankruptcies, especially in U.S. and Mexican operations. The allowance was 3.6% of gross receivables, versus 2.9% at June 30.
- A $131 million noncash goodwill impairment was recorded in fiscal 2020 for the FCX reporting unit, reflecting weaker end-market demand. FCX had $309.0 million of goodwill remaining at September 30; further adverse demand or cash-flow changes could result in additional impairment.
- On October 5, 2020, after quarter-end, the company acquired substantially all net assets of Advanced Control Solutions for its Fluid Power & Flow Control segment. The filing does not provide the purchase price.
- The company identified risks including pandemic-related disruption, industrial demand and customer credit, pricing and supplier conditions, foreign currency, acquisitions, and potential goodwill or intangible-asset impairment. Pending legal proceedings were not expected by management to have a material adverse effect.
Investor verification points
- Track whether the October sales declines and weakness in industrial end markets persist, and whether the cost measures offset lower revenue.
- Monitor receivable quality, customer bankruptcies and credit-loss provisions, particularly in U.S. and Mexican operations.
- Review FCX reporting-unit performance and impairment assumptions for any further goodwill or intangible-asset charges.
- Verify debt reduction, covenant headroom, access to the receivables securitization facility, and refinancing needs, including the facility’s August 2021 termination date.
- Assess the Advanced Control Solutions acquisition’s purchase price, integration and contribution when subsequently reported.