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Applied Industrial (AIT) Lags on Q2 Earnings, Cuts FY19 View

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Applied Industrial Technologies, Inc. (AIT - Free Report) reported weaker-than-expected results for the second quarter of fiscal 2019 (ended Dec 31, 2018), with a negative earnings surprise of 6.6%.

Earnings were 99 cents per share, lagging the Zacks Consensus Estimate of $1.06. However, quarterly earnings increased 25.3% from the year-ago tally of 79 cents on the back of solid revenue growth and improved margin profile.

It is worth noting that the FCX buyout added 6 cents per share to the bottom line and 5 cents per share of adverse impact related to LIFO inventory charge.

Acquired Assets and Higher Selling Days Drive Revenues

Applied Industrial’s net sales were $840 million in the fiscal second quarter, reflecting 25.9% growth over the year-ago quarter. This improvement was primarily driven by 3.7% organic growth (adjusted for days), 21.3% gain from acquired assets and 1.6% increase from higher selling days. These were partially offset by 0.7% adverse impact of unfavorable movements in foreign currencies.

However, the top line lagged the Zacks Consensus Estimate of $855.4 million by 1.8%.

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 $589 million, representing 70.1% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues grew 6.1% on the back of 5.3% gain from organic sales and 1.6% benefit from higher selling days. This was partially offset by 0.8% adverse impact of unfavorable movements in foreign currencies.

Fluid Power & Flow Control’s segment generated revenues of $251 million, accounting for roughly 29.9% of net revenues in the reported quarter. Sales grew 124.7% year over year, primarily driven by 127.4% gain from acquired assets and 1.7% benefit from higher selling days. This was offset by 4.4% impact of decline in organic sales.

Margin Increases Year over Year

In the reported quarter, Applied Industrial’s cost of sales increased 24.7% year over year to $597.2 million. Cost of sales was 71.1% of the quarter’s net sales versus 71.8% in the year-ago quarter. Gross margin increased 70 basis points (bps) to 28.9%.

Selling, general and administrative expenses (including depreciation) increased 28.4% year over year to $181.9 million. It represented 21.7% of net sales in the reported quarter versus 21.2% in the year-ago quarter. Operating profit grew 30.5% year over year to $61 million, with year-over-year growth of 30 bps in the margin to 7.3%.

Balance Sheet & Cash Flow

Exiting the fiscal second quarter, Applied Industrial had cash and cash equivalents of $79.8 million, up 41.5% from $56.4 million recorded in the last reported quarter. Long-term debt was down 3.1%, sequentially, to $923.4 million.

In the first half of fiscal 2019, the company generated net cash of $65.6 million from operating activities, roughly 209.6% higher than $21.2 million generated in the comparable period a year ago. Capital spent on property purchase totaled $7.1 million versus $11.5 million in the year-ago period.

Shareholder-Friendly Initiatives

In the first half of fiscal 2019, Applied Industrial rewarded shareholders by paying approximately $23.3 million as dividends. This amount represents growth of 3.1% from the previous year.

Concurrent with the earnings release, the company announced that its board of directors approved the payment of a quarterly dividend of 31 cents per share. This dividend rate reflects roughly 3.3% increase over the previous rate of 30 cents. The annual dividend rate now stands at $1.24 versus $1.20 mentioned earlier.

The revised rate will be paid on Feb 28, 2019, to shareholders of record as of Feb 15, 2019.

Outlook

For fiscal 2019 (ending June 2019), Applied Industrial predicts sales growth of 12.5-15%, lower than 16-18% mentioned previously. The forecast has been lowered mainly due to weak demand expected in the technology-based markets in the Fluid Power segment. Organic sales in the year are projected to grow 2-3%.

Earnings per share are anticipated to be $4.45-$4.65, down from $4.65-$4.85 stated earlier. The revision accounts for lower volume and the impact of LIFO charge recorded in the fiscal second quarter. SD&A countermeasures will bring in some relief.

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

 

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

Zacks Rank & Stocks to Consider

With a market capitalization of $2.3 billion, Applied Industrial currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the industry are DXP Enterprises, Inc. (DXPE - Free Report) , Twin Disc, Incorporated (TWIN - Free Report) and Colfax Corporation (CFX - Free Report) . While DXP Enterprises currently sports a Zacks Rank #1 (Strong Buy), Twin Disc and Colfax carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings estimates for DXP Enterprises and Colfax for 2019, and that for Twin Disc for fiscal 2019 (ending June 2019) improved over the past 60 days. Positive earnings surprise for the last four quarters was 112.62% for DXP Enterprises, 220.64% for Twin Disc and 8.88% for Colfax.

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