Applied Industrial Closes FCX Performance Deal, Lowers View

Applied Industrial Technologies, Inc. (NYSE:AIT) , on Feb 1, announced that it has completed the acquisition of FCX Performance, Inc. Concurrently, the company lowered its earnings projection for fiscal 2018.

Since the announcement of the buyout deal on Jan 9, the company’s share price has increased 5.1% while has slipped 1.2% from the date when the closure news surfaced.

Columbus, OH-based FCX Performance primarily engages in the distribution of products related to process flow control — like engineered valves, pumps and instruments — and also provides related services. Operating in 68 locations, the company caters to the needs of Original Equipment Manufacturer and Maintenance, Repair and Operation customers in process and industrial end-markets. It employs more than 1,000 people.

Details of the Buyout

As noted, the buyout consideration, after adjusting for contractual working capital, was approximately $784 million. It was financed with $250 million revolving credit and $780 million of Term Loan A.

The deal buyout is expected to strengthen Applied Industrial’s foothold in the industrial market. The combined business will have enhanced resources and technological expertise to leverage benefits from future growth opportunities.

In the first 12 months, the acquired assets are anticipated to boost Applied Industrial’s sales by $555-$560 million and earnings before interest, taxes, depreciation and amortization (EBITDA) by $67-$69 million. These predicted increments do not include the impact of one-time charges related to the buyout. Gross margins are estimates to be roughly 34-35%. Free cash flow will be 0.95 to one times of EBITDA.

For fiscal 2018 (ending June 2018), the buyout is expected to generate revenues of $235-$245 million while will dilute earnings by 11-21 cents per share. The bottom-line projection includes impact of 12-13 cents of one-time charges.

For fiscal 2019, revenues of $575-$595 million and earnings accretion of 10-20 cents per share are anticipated from the buyout. The bottom-line projection includes non-cash charge of 68-77 cents related to intangible amortization expenses.

Fiscal 2018 Guidance Revised

Including the impact of earnings dilution from the buyout, Applied Industrial lowered its earnings per share projection for fiscal 2018 to $3.19-$3.39 from the earlier estimate of $3.40-$3.50. Sales are now projected to grow 15-16% year over year, higher than 6-7% predicted earlier.

Inorganic Growth Initiatives

Over time, Applied Industrial has acquired meaningful businesses to improve its business portfolio and for easy penetration into explored markets. In March 2017, the company acquired Sentinel Fluid Controls — a specialist in distribution of lubrication and hydraulic solutions, systems and components. This buyout has strengthened the company’s Fluid Power business.

In the last three months, Applied Industrial’s shares have yielded 18.9% return, outperforming 8% gain of the industry it belongs to.



Zacks Rank & Other Stocks to Consider

With a market capitalization of nearly $2.9 billion, Applied Industrial sports a Zacks Rank #1 (Strong Buy). The stock’s earnings estimates both for fiscal 2018 and fiscal 2019 were revised upward by three brokerage firms in the last 30 days. Currently, the Zacks Consensus Estimate is pegged at $3.45 for fiscal 2018 and $4.13 for fiscal 2019, representing growth of 7.8% and 19.7% from their respective tallies 30 days ago.

Applied Industrial Technologies, Inc. Price and Consensus