Applied Industrial Technologies, Inc. (NYSE:AIT) is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. With a strong presence across North America, Australia, New Zealand, and Singapore, the company serves a diverse range of end markets, including general industry, food, industrial machinery, metals, forest products, chemicals/petrochemicals, cement & aggregate, oil & gas, and transportation.

Financials

In the fiscal year ended June 30, 2023, Applied Industrial generated annual revenue of $4,412,794,000 and net income of $346,739,000. The company's strong financial performance was driven by its diversified business model and focus on providing value-added services to its customers. Applied Industrial's annual operating cash flow was $343,966,000, while its free cash flow reached $317,490,000, showcasing the company's ability to generate substantial cash flow to support its growth initiatives and shareholder returns.

During the third quarter of fiscal 2024, which ended on March 31, 2024, Applied Industrial reported consolidated sales of $1,146,390,000, a 1.3% increase compared to the prior-year quarter. This growth was primarily driven by acquisitions, which contributed 1.2%, and favorable foreign currency translation, which added 0.2%. Organic sales, excluding the impact of acquisitions and foreign currency, increased 0.7% on a daily basis.

The company's Service Center Based Distribution segment, which operates primarily in the MRO (Maintenance, Repair, and Operations) market, saw sales increase 3.6% year-over-year. Acquisitions within this segment added 1.5%, and favorable foreign currency translation contributed 0.3%. Excluding the impact of acquisitions and foreign currency, organic sales in the Service Center Based Distribution segment grew 1.8%, driven by increased demand for technical MRO support across the U.S. manufacturing sector.

In contrast, the Engineered Solutions segment experienced a 3.6% decline in sales compared to the prior-year quarter. Acquisitions within this segment added 0.4%, but organic sales decreased 4.0%, primarily due to ongoing declines within the automation operations and lower fluid power sales, partially offset by stronger growth in process flow control markets.

Geographically, sales in the company's U.S. operations increased 2.5%, with acquisitions contributing 1.3%. Excluding the impact of acquisitions, U.S. sales grew 1.2%. Sales from the company's Canadian operations decreased 8.4%, while sales from other countries, including Mexico, Australia, New Zealand, and Singapore, declined 5.6%.

Gross profit margin for the third quarter of fiscal 2024 was 29.5%, up from 29.4% in the prior-year quarter. This improvement was primarily due to a decrease in LIFO expense, which had a favorable 30-basis-point impact on gross margins. Selling, distribution, and administrative (SD&A) expenses increased 5.3% compared to the prior-year quarter, primarily due to higher employee costs, professional fees, and investments in growth initiatives.

Operating income for the third quarter of fiscal 2024 was $121,206,000, or 10.6% of sales, compared to $126,911,000, or 11.2% of sales, in the prior-year quarter. The decrease in operating margin was largely attributable to the sales decline in the Engineered Solutions segment, as well as higher SD&A expenses.

For the full fiscal year 2024, Applied Industrial has updated its guidance. The company now expects adjusted earnings per share (EPS) in the range of $9.55 to $9.70, up from the previous guidance of $9.35 to $9.70. The updated guidance assumes sales growth of 1.5% to 2.5%, including organic growth of 0.5% to 1.5%, and EBITDA margins of 12.0% to 12.1%.

Financial Flexibility

The company's balance sheet remains strong, with $456,533,000 in cash and cash equivalents as of March 31, 2024, and net leverage of 0.3x EBITDA. This financial flexibility allows Applied Industrial to pursue strategic acquisitions, invest in organic growth initiatives, and return capital to shareholders through dividends and share repurchases.

Recent Developments

In April 2024, Applied Industrial announced the acquisition of Grupo Kopar, a leading provider of automation technologies and engineered solutions primarily across Mexico. This acquisition is expected to expand the company's automation platform and extend its footprint in Mexico, a market with significant growth potential driven by increased foreign direct investment.

Outlook

Looking ahead, Applied Industrial remains well-positioned to capitalize on various secular and structural tailwinds in the industrial sector, including the ongoing trend of reshoring, increased focus on energy efficiency, and the need for technical MRO support due to an aging skilled labor force. The company's diversified business model, strong market position, and strategic investments in areas such as automation, fluid power, and flow control solutions position it for continued growth and value creation.

Conclusion

Overall, Applied Industrial's solid financial performance, diversified business model, and strategic initiatives make it an attractive investment opportunity in the industrial distribution space. The company's focus on providing value-added services, expanding its automation and engineered solutions capabilities, and prudent capital allocation should continue to drive shareholder value in the years to come.