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Applied Industrial Technologies (AIT) Down 10.6% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Applied Industrial Technologies (AIT - Free Report) . Shares have lost about 10.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Applied Industrial Technologies due for a breakout? 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 Q4 Earnings Top Estimates, Sales Lag

Applied Industrial reported mixed results for fourth-quarter fiscal 2020 (ended Jun 30, 2020), with earnings surpassing estimates by 17.65%. However, sales lagged estimates by 3.48%.

The company’s earnings in the fiscal fourth quarter were 80 cents per share, surpassing the Zacks Consensus Estimate of 68 cents. However, quarterly earnings declined 21.6% from the year-ago quarter’s figure of $1.02 on weak sales performance and a decline in margin.

For fiscal 2020, the company’s adjusted earnings per share were $3.81, lower than the year-ago number of $4.41. However, the bottom line surpassed the Zacks Consensus Estimate of $3.69.

Revenue Details

In the reported quarter, Applied Industrial’s net sales amounted to $725.1 million, down 17.9% year over year. The results were adversely impacted by an 18.4% fall in organic sales and a 1% impact from forex woes, partially offset by a 1.5% gain from acquired assets.

The company noted that it continues to serve many industries in the present uncertain environment. However, industrial demand suffered in the quarter due to the pandemic.

Also, its top line lagged the Zacks Consensus Estimate of $751.3 million.

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 $488.6 million, which contributed 67.4% to net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues declined 22.3%. Organic sales declined 21.1% and unfavorable movements in foreign currencies had an adverse impact of 1.2%.

Weakness in mining, machinery, oil & gas, transportation, and metals end markets affected the segment’s results.

The Fluid Power & Flow Control segment generated revenues of $236.4 million, contributing 32.6% to net revenues in the reported quarter. The figure decreased 6.8% year over year due to an 11.8% decline in organic sales, partially offset by a 5% gain from acquisitions.

The results suffered from weakness in the flow-control end market as well as a soft demand in off-highway mobile and fluid power industrial applications. Project activity too was down in the quarter. The headwinds were partially offset by an improvement in technology end markets.

For fiscal 2020, the company’s net sales were $3,245.7 million, decreasing 6.5% year over year. However, the top line lagged the Zacks Consensus Estimate of $3.27 billion.

Margin Profile

In the reported quarter, Applied Industrial’s cost of sales declined 17.4% year over year to $516.8 million. Cost of sales was 71.3% of the quarter’s net sales. Gross profit in the quarter decreased 19.1% year over year to $208.3 million, while gross margin fell 43 basis points (bps) year over year to 28.7%.

Selling, distribution and administrative expenses (including depreciation) decreased 13.8% year over year to $159.7 million. It represented 22% of net sales in the reported quarter versus 21% in the year-ago quarter. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $64.8 million, reflecting a year-over-year decline of 26%. Margin decreased 98 bps year over year to 8.9%.

Interest expenses declined 20.6% year over year to $8.1 million. Adjusted income tax rate in the quarter was 25.2%.

Balance Sheet & Cash Flow

Exiting the fourth quarter of fiscal 2020, Applied Industrial had cash and cash equivalents of $268.6 million, up 62.3% from $165.5 million recorded in the last reported quarter. Long-term debt decreased 1.1% sequentially to $855.1 million.

During the year, the company repaid long-term debts of $49.6 million, while borrowings (long-term) were $25 million.

The company generated net cash of $296.7 million from operating activities in fiscal 2020, reflecting an increase of 64.3% from the previous year. Capital spent on property purchase totaled $20.1 million compared with $19 million in the previous year. Free cash flow increased 71.1% year over year to $276.6 million.
 
Applied Industrial rewarded shareholders with a dividend payout of $48.9 million in fiscal 2020. The amount represents growth of 3.4% year over year.

Outlook

In the quarters ahead, the company anticipates gaining from its growth initiatives and cost-control measures. For the first quarter of fiscal 2021 (ending September 2020), it expects organic sales to decline 17-18% on a year-over-year basis.

For fiscal 2021 (ending June 2021), the company did not provide financial projections due to the uncertainties related to the pandemic.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.


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