Business Wire | Aug 12, 2020 06:30AM EDT

Applied Industrial Technologies Reports Fiscal 2020 Fourth Quarter and Year-End Results

Aug. 12, 2020

CLEVELAND--(BUSINESS WIRE)--Aug. 12, 2020--Applied Industrial Technologies (NYSE: AIT), a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies, today reported results for its fiscal 2020 fourth quarter and full year ended June 30, 2020.

Net sales for the quarter decreased 17.9% to $725.1 million from $882.7 million in the prior year. The change in sales includes a 1.5% increase from acquisitions, partially offset by an approximate 1% negative impact from foreign currency translation. Excluding these factors, sales decreased 18.4% on an organic basis reflecting a 21.1% decline in the Service Center segment and an 11.8% decline in the Fluid Power & Flow Control segment. The Company reported net income of $30.0 million, or $0.77 per share. Results include non-routine costs of $1.5 million pre-tax ($0.03 per share) associated with restructuring and cost actions in response to the demand environment. Excluding these costs, the Company reported non-GAAP adjusted net income of $31.1 million, or $0.80 per share.

For the twelve months ended June 30, 2020, sales were $3.2 billion, a decrease of 6.5% compared with $3.5 billion last year, or down 9.4% on an organic daily basis. Net income was $24.0 million or $0.62 per share on a reported basis. Non-GAAP adjusted net income was $148.7 million, or $3.81 per share.

Neil A. Schrimsher, Applied's President & Chief Executive Officer, commented "I want to thank our associates for their strong effort and support throughout fiscal 2020 including the exceptional response in recent months to the ongoing COVID-19 pandemic. We have adapted well with all of our locations fully operational and playing a vital role in keeping essential industries productive, while understanding our requirements during this slower demand environment. This resiliency was apparent during the quarter with decremental margins on adjusted operating income in the mid-teens despite a high-teen sales decline, as well as strong cash generation further enhancing our balance sheet and flexibility as we enter fiscal 2021."

Mr. Schrimsher added, "As expected, demand was challenging throughout the quarter as customers in many of our core manufacturing end markets idled or reduced production capacity and facility utilization in response to the pandemic. Underlying trends remain subdued but are firming slightly into our fiscal 2021 first quarter with organic sales down mid-teens year-over-year through early August. While we believe the worst is behind us, visibility is limited and we expect a slow pace near term as customers gradually bring facilities back online and conservatively manage operations against a still fluid pandemic and macro outlook."

"Going forward, we will remain prudent and have reinforced recent cost actions, though with an offensive approach in mind as we position for the recovery and execute strategic initiatives aimed at optimizing our growth in coming years. We remain committed to our long-term financial targets of $4.5 billion in sales and 11% EBITDA margins. While the timing of these goals is dependent on the industrial cycle trajectory, I believe Applied's long-term growth and margin potential have never been stronger as our leading technical MRO position, service capabilities, and strategic direction further entrench our value across critical motion, power, and control infrastructure, as well as next generation industrial solutions."

Fiscal 2021 Outlook

Due to ongoing uncertainty from the COVID-19 pandemic, the Company is refraining from providing formal financial guidance for the full-year fiscal 2021 until it further assesses the direction of industrial activity. Near term, assuming underlying demand remains stable with July and early August levels, first quarter sales are expected to decline 17% to 18% year-over-year on an organic basis. In addition, the Company has extended previously announced cost measures into early fiscal 2021. The majority of these actions remain temporary and will be reevaluated as the year progresses alongside growth requirements.

Conference Call InformationApplied will host its quarterly conference call for investors and analysts at 10 a.m. ET on August 12, 2020. Neil A. Schrimsher - President & CEO, and David K. Wells - CFO will discuss the Company's performance. A supplemental investor deck detailing latest quarter results is available for reference on the investor relations portion of the Company's website at www.applied.com. To join the call, dial 877-311-4351 (toll free) or 614-999-9139 (for International callers) using conference ID 6441297. A live audio webcast can be accessed online through the investor relations portion of the Company's website at www.applied.com. A replay of the call will be available for two weeks by dialing 855-859-2056 or 800-585-8367 (both toll free), or 404-537-3406 (International) using conference ID 6441297.

About Applied(r)Applied Industrial Technologies is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO and OEM end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. For more information, visit www.applied.com.

This press release contains statements that are forward-looking, as that term is defined by the Securities and Exchange Commission in its rules, regulations and releases. Applied intends that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are often identified by qualifiers such as "expect," "believe," "will," "outlook," "guidance" and derivative or similar expressions. All forward-looking statements are based on current expectations regarding important risk factors including trends in the industrial sector of the economy, the effects of the health crisis associated with the COVID-19 pandemic on our business operations, results of operations, and financial condition, and other risk factors identified in Applied's most recent periodic report and other filings made with the Securities and Exchange Commission, many of which risks are amplified by circumstances arising out of the COVID-19 pandemic. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by Applied or any other person that the results expressed therein will be achieved. Applied assumes no obligation to update publicly or revise any forward-looking statements, whether due to new information, or events, or otherwise.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED STATEMENTS OF CONSOLIDATED INCOME(In thousands, except per share data) Three Months Ended Year Ended June 30, June 30, 2020 2019 2020 2019

Net Sales $ 725,076 $ 882,743 $ 3,245,652 $ 3,472,739

Cost of sales 516,786 625,392 2,307,916 2,465,116

Gross Profit 208,290 257,351 937,736 1,007,623

Selling, distributionand administrative expense,including depreciation 161,262 185,376 717,747 742,241

Goodwill & intangible - - 131,000 31,594 impairmentOperating Income 47,028 71,975 88,989 233,788

Interest expense, net 8,088 10,187 36,535 40,188

Other income, net (1,139 ) (332 ) (2,782 ) (881 )

Income Before Income 40,079 62,120 55,236 194,481 TaxesIncome Tax Expense 10,090 22,317 31,194 50,488

Net Income $ 29,989 $ 39,803 $ 24,042 $ 143,993

Net Income Per Share - $ 0.78 $ 1.03 $ 0.62 $ 3.72 BasicNet Income Per Share - $ 0.77 $ 1.02 $ 0.62 $ 3.68 DilutedAverage Shares 38,691 38,579 38,658 38,670 Outstanding - BasicAverage Shares 38,988 38,993 38,999 39,160 Outstanding - Diluted

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1) Applied uses the last-in, first-out (LIFO) method of valuing U.S.inventory. An actual valuation of inventory under the LIFO method can only bemade at the end of each year based on the inventory levels and costs at thattime. Accordingly, interim LIFO calculations are based on management'sestimates of expected year-end inventory levels and costs and are subject tothe final year-end LIFO inventory determination.



2) On July 1, 2019, the Company adopted ASC 842 - accounting for leases.Adoption of the new standard resulted in the recognition of right-of-useassets and lease liabilities of $83.5 million and $89.8 million,respectively, on July 1, 2019. In addition, the adoption resulted in anadjustment to opening retained earnings of approximately $3.3 million, net oftax, on July 1, 2019.



3) In the quarter ending March 31, 2020, the Company recognized a non-cashgoodwill impairment charge of $131.0 million related to the operations of FCXPerformance, Inc. (FCX) within the Company's Fluid Power & Flow Controlsegment.



4) In the year ending June 30, 2020, the Company incurred certain non-routinecharges primarily related to its U.S. Service Center Based Distributionsegment. Total non-routine charges reduced gross profit by $3.9 million,decreased operating income by $9.0 million, and decreased net income by $5.8million.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(In thousands) June 30, 2020 June 30, 2019 AssetsCash and cash equivalents $ 268,551 $ 108,219

Accounts receivable, net 449,998 540,902

Inventories 389,150 447,555

Other current assets 52,070 51,462

Total current assets 1,159,769 1,148,138

Property, net 121,901 124,303

Operating lease assets, net 90,636 -

Intangibles, net 343,215 368,866

Goodwill 540,594 661,991

Other assets 27,436 28,399

Total Assets $ 2,283,551 $ 2,331,697

LiabilitiesAccounts payable $ 186,270 $ 237,289

Current portion of long-term debt 78,646 49,036

Other accrued liabilities 161,167 137,469

Total current liabilities 426,083 423,794

Long-term debt 855,143 908,850

Other liabilities 158,783 102,019

Total Liabilities 1,440,009 1,434,663

Shareholders' Equity 843,542 897,034

Total Liabilities and Shareholders' Equity $ 2,283,551 $ 2,331,697

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS(In thousands) Year Ended June 30, 2020 2019

Cash Flows from Operating ActivitiesNet income $ 24,042 $ 143,993

Adjustments to reconcile net income to net cash providedby operating activities:Depreciation and amortization of property 21,196 20,236

Amortization of intangibles 41,553 41,883

Goodwill & intangible impairment 131,000 31,594

Amortization of stock appreciation rights and options 2,954 2,437

Gain on sale of property (1,157 ) (459 )

Other share-based compensation expense 4,000 4,474

Changes in assets and liabilities, net of 73,720 (70,221 )acquisitionsOther, net (594 ) 6,664

Net Cash provided by Operating Activities 296,714 180,601

Cash Flows from Investing ActivitiesAcquisition of businesses, net of cash acquired (37,237 ) (37,526 )

Property purchases (20,115 ) (18,970 )

Proceeds from property sales 1,948 1,003

Other - 391

Net Cash used in Investing Activities (55,404 ) (55,102 )

Cash Flows from Financing ActivitiesNet repayments under revolving credit facility - (19,500 )

Long-term debt borrowings 25,000 175,000

Long-term debt repayments (49,553 ) (161,738 )

Payment of debt issuance costs (95 ) (775 )

Purchases of treasury shares - (11,158 )

Dividends paid (48,873 ) (47,266 )

Acquisition holdback payments (2,440 ) (2,610 )

Taxes paid for shares withheld for equity awards (2,607 ) (3,492 )

Exercise of stock appreciation rights and options 330 -

Net Cash used in Financing Activities (78,238 ) (71,539 )

Effect of Exchange Rate Changes on Cash (2,740 ) 109

Increase in cash and cash equivalents 160,332 54,069

Cash and cash equivalents at beginning of Period 108,219 54,150

Cash and Cash Equivalents at End of Period $ 268,551 $ 108,219

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESSUPPLEMENTAL INFORMATIONRECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES(In thousands) The Company supplemented the reporting of financial information determinedunder U.S. generally accepted accounting principles (GAAP) with reporting ofnon-GAAP financial measures. The Company believes that these non-GAAP measuresprovide meaningful information to assist shareholders in understandingfinancial results, assessing prospects for future performance, and provide abetter baseline for analyzing trends in our underlying businesses. Becausenon-GAAP financial measures are not standardized, it may not be possible tocompare these financial measures with other companies' non-GAAP financialmeasures having the same or similar names. These non-GAAP financial measuresshould not be considered in isolation or as a substitute for reported results.These non-GAAP financial measures reflect an additional way of viewing aspectsof operations that, when viewed with GAAP results, provide a more completeunderstanding of the business. The Company strongly encourages investors andshareholders to review company financial statements and publicly filed reportsin their entirety and not to rely on any single financial measure. Reconciliation of Net income and Net income per share, GAAP financial measures,with Adjusted Net income and Adjusted Net income per share, non-GAAP financialmeasures: Three Months Ended June 30, 2020 Per Share Tax Pre-tax Tax Effect Net of Tax Diluted Rate ImpactNet income and net $ 40,079 $ 10,090 $ 29,989 $ 0.77 25.2 %income per shareNon-routine costs 1,540 388 1,152 0.03 25.2 %

Adjusted net income $ 41,619 $ 10,478 $ 31,141 $ 0.80 25.2 %and net income pershare Year Ended June 30, 2020 Per Share Tax Pre-tax Tax Effect Net of Tax Diluted Rate ImpactNet income and net $ 55,236 $ 31,194 $ 24,042 $ 0.62 56.5 %income per shareGoodwill impairment 131,000 12,200 118,800 3.04 9.3 %

Non-routine costs 8,992 2,135 6,857 0.18 23.7 %

Non-routine tax - 1,010 (1,010 ) (0.03 ) N/M benefitAdjusted net income $ 195,228 $ 46,539 $ 148,689 $ 3.81 23.8 %and net income pershare Year Ended June 30, 2019 Per Share Tax Pre-tax Tax Effect Net of Tax Diluted Rate ImpactNet income and net $ 194,481 $ 50,488 $ 143,993 $ 3.68 26.0 %income per shareCanadian intangible 31,594 8,485 23,109 0.59 26.9 %impairmentCanadian tax - (3,785 ) 3,785 0.10 N/M valuation allowanceNon-routine costs 2,300 598 1,702 0.04 26.0 %

Adjusted net income $ 228,375 $ 55,786 $ 172,589 $ 4.41 24.4 %and net income pershare Reconciliation of Net Cash provided by Operating activities, a GAAP financialmeasure, to Free Cash Flow, a non-GAAP financial measure: Three Months Ended Year Ended June 30, June 30, 2020 2019 2020 2019

Net Cash provided $ 127,090 $ 103,435 $ 296,714 $ 180,601 by OperatingActivitiesProperty purchases (3,892 ) (7,259 ) (20,115 ) (18,970 )

Free Cash Flow $ 123,198 $ 96,176 $ 276,599 $ 161,631

Free cash flow is defined as net cash provided by operating activities lessproperty purchases.

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CONTACT: Ryan D. Cieslak Director - Investor Relations & Treasury 216-426-4887 / rcieslak@applied.com