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Applied Industrial (AIT) Q1 Earnings Beat, Macro Woes Persist

Published 10/30/2019, 10:41 PM
Updated 07/09/2023, 06:31 AM

Applied Industrial Technologies, Inc. (NYSE:AIT) has reported better-than-expected results for first-quarter fiscal 2020 (ended Sep 30, 2019). Its earnings surpassed estimates by 0.99%, marking this the first quarter of earnings beat after three consecutive quarters of negative surprises.

The company’s earnings in the fiscal first quarter were $1.02 per share, surpassing the Zacks Consensus Estimate of $1.01. However, quarterly earnings declined 17.7% from the year-ago quarter number of $1.24 on weak sales performance and lower operating margin.

Weak Segmental Performance Lowers Revenues

In the reported quarter, Applied Industrial’s net sales were $856.4 million, reflecting a year-over-year decline of 0.9%. The results were adversely impacted by a 5.2% fall in organic sales (adjusted for days) and 0.1% from forex woes, partially offset by 2.8% gain from acquired assets and 1.6% benefit from selling days. The company’s top-line results suffered from end-market challenges, especially in fluid power technology.

However, Applied Industrial’s top line surpassed the Zacks Consensus Estimate of $848 million by 1%.

The company reports revenues under two market segments. A brief discussion of the quarterly results is provided below:

Service Center-Based Distribution’s revenues totaled $603.2 million, representing 71% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues declined 0.1%. Organic sales (adjusted for selling days) declined 3.5% and forex woes had a 0.2% adverse impact. However, acquisitions and selling days had positive impacts of 2% and 1.6%, respectively.

Weakness in manufacturing activities and lower demand in chemicals, metals, oil & gas, mining, and transportation end markets affected the segment’s results.

The Fluid Power & Flow Control segment generated revenues of $253.2 million, accounting for roughly 29% of net revenues in the reported quarter. Its sales dipped 2.9% year over year due to a 9% decline in organic sales, partially offset by 1.6% gain from selling days and 4.6% benefit from acquisitions.

The results suffered from weak OEM activity in industrial markets, headwinds in the technology end market and soft Flow Control sales.

Operating Margin Falls Y/Y

In the reported quarter, Applied Industrial’s cost of sales declined 1.3% year over year to $604.9 million. Cost of sales was 70.6% of the quarter’s net sales. Gross margin grew 30 basis points (bps) year over year to 29.4%. Inflation was mainly behind the fall in margins while internal initiatives and pricing were reliefs.

Selling, general and administrative expenses (including depreciation) rose 2.6% year over year to $190.3 million. It represented 22.2% of net sales in the reported quarter versus 21.5% in the year-ago quarter. Operating profit declined 7.8% year over year to $61.2 million. Operating margin was down 60 bps year over year to 7.1%.

Balance Sheet & Cash Flow

Exiting the first quarter of fiscal 2020, Applied Industrial had cash and cash equivalents of $98.2 million, down 9.2% from $108.2 million recorded in the last reported quarter. Long-term debt was down 5.5% sequentially to $859.2 million. Debt repaid in the quarter was $4.9 million.

In the fiscal first quarter, the company generated net cash of $50 million from operating activities, reflecting significant gain from $11.8 million generated in the comparable quarter a year ago. Capital spent on property purchase totaled $4.9 million versus $3.2 million in the previous year. Free cash flow was $45.1 million versus $8.6 million in the year-ago quarter.

Applied Industrial rewarded shareholders with dividend payments, amounting to roughly $12 million, in the first quarter of fiscal 2020. The amount represents growth of 5.7% from the previous fiscal year’s first quarter.

Concurrently, the company’s board of directors approved the payment of a quarterly dividend of 31 cents per share to shareholders of record as of Nov 15, 2019. The dividend will be paid out on Nov 29.


Applied Industrial anticipates benefiting from cash generation abilities and cost discipline in the near term. However, uncertainties related to the broader industrial cycle remains.

The company maintained its projections for fiscal 2020 (ending June 2020). Sales growth is predicted to be (2%)-2%, including organic sales (adjusted for days) decline of 1-5%. Acquisitions are expected to benefit sales by 2% and selling days will likely have a positive impact of 1%.

Earnings per share for the company are anticipated to be $4.20-$4.50. Interest expenses will likely be $37-$38 million and tax rate will be 25-26%. Free cash flow is anticipated to be $200-$220 million.

Applied Industrial Technologies, Inc. Price, Consensus and EPS Surprise

Applied Industrial Technologies, Inc. Price, Consensus and EPS Surprise

Applied Industrial Technologies, Inc. price-consensus-eps-surprise-chart | Applied Industrial Technologies, Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $2.2 billion, Applied Industrial currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the industry are Brady Corporation (NYSE:BRC) , Dover Corporation (NYSE:DOV) and Graham Corporation (NYSE:GHM) . All these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, earnings estimates for Brady and Dover improved for the current year, while have been unchanged for Graham. Further, positive earnings surprise for the last reported quarter was 11.48% for Brady, 4.58% for Dover and 100% for Graham.

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