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It has been about a month since the last earnings report for Applied Industrial Technologies (AIT). Shares have added about 2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Applied Industrial Technologies due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Applied Industrial Posts In-Line Q2 Earnings, Cuts View
Applied Industrial has reported mixed results for second-quarter fiscal 2020. The company’s earnings were in line with estimates, while the top line lagged the same by 0.1%.
The company’s earnings in fiscal second quarter were 97 cents per share, in line with the Zacks Consensus Estimate. However, quarterly earnings declined 2% from the year-ago quarter’s figure of 99 cents on weak sales performance and lower operating margin.
Weak Segmental Performance Impacts Revenues
In the reported quarter, Applied Industrial’s net sales amounted to $833.4 million, down 0.8% year over year. The results were adversely impacted by 4% fall in organic sales, partially offset by 3.2% gain from acquired assets. The company’s organic sales suffered from soft customer activities in December. Weakness was witnessed in various end-markets, including machinery, metals, mining and others.
Also, the company’s top line lagged the Zacks Consensus Estimate of $834 million by 0.1%.
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 $575.8 million, which contributed 69.1% to net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues declined 2.3%. Organic sales declined 3.5% and acquisitions had positive impact of 1.2%.
Weakness in manufacturing activities and lower demand in mining, oil & gas, metals and machinery end markets affected the segment’s results. Internationally, business was weak in Mexico and Canada.
The Fluid Power & Flow Control segment generated revenues of $257.6 million, contributing nearly 30.9% to net revenues in the reported quarter. The figure increased 2.8% year over year driven by 7.6% gain in acquisitions. Organic sales in the quarter declined 4.9%.
Organic sales suffered from weak OEM activity in industrial markets and softness in flow control market.
Gross Margin Flat Y/Y
In the reported quarter, Applied Industrial’s cost of sales declined 0.8% year over year to $592.1 million. Cost of sales was 71.1% of the quarter’s net sales. Gross margin remained stable year over year at 28.9%.
Selling, distribution and administrative expenses (including depreciation) rose 0.3% year over year to $182.5 million. It represented 21.9% of net sales in the reported quarter versus 21.7% in the year-ago quarter’s figure. Operating profit declined 3.6% year over year to $58.7 million. Operating margin fell 20 basis points (bps) year over year to 7.1%.
Balance Sheet & Cash Flow
Exiting the second quarter of fiscal 2020, Applied Industrial had cash and cash equivalents of $128.1 million, up 30.5% from $98.2 million recorded in the last reported quarter. Long-term debt inched up 1.8% sequentially to $874.4 million.
During first-half fiscal 2020, long-term debt repaid totaled $34.9 million while borrowings (long-term) were $25 million.
The company generated net cash of $104.9 million from operating activities in the first two quarters of fiscal 2020, up 60% from $65.6 million generated in the year-ago period. Capital spent on property purchase totaled $12 million compared with $7.1 million in the previous year’s first half. Free cash flow was $47.9 million compared with $49.9 million in the year-ago comparable period.
Applied Industrial rewarded shareholders with dividend payout of roughly $24 million in the first two quarters of fiscal 2020. The amount represents growth of 3.1% year over year.
Applied Industrial expects to benefit from cash generation abilities, technical expertise and cost discipline in the near term. However, industry demand is likely to be subdued.
The company revised its projections for fiscal 2020 (ending June 2020). Change in sales is predicted to be (2%)-0% year over year versus the previously mentioned (2%)-2%. Organic sales (on a daily basis) are predicted to decline 3-5% compared with fall of 1-5% expected earlier. Acquisitions are expected to benefit sales by 2% and selling days will likely have a positive impact of 1%.
Earnings per share are anticipated in the range of $4.20-$4.40, revised from $4.20-$4.50 stated earlier. Interest expenses are likely to be $38 million (versus $37-$38 million expected earlier) and tax rate will be 24-25% (versus 25-26% stated previously). Free cash flow is anticipated in the range of $200-$220 million.
How Have Estimates Been Moving Since Then?
Estimates review followed a downward path over the past two months.
Currently, Applied Industrial Technologies has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Applied Industrial Technologies has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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