Business Wire | Jan 28, 2021 06:30AM EST

Applied Industrial Technologies Reports Fiscal 2021 Second Quarter Results

Jan. 28, 2021

CLEVELAND--(BUSINESS WIRE)--Jan. 28, 2021--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 2021 second quarter ended December 31, 2020.

Net sales for the quarter decreased 9.9% to $751.3 million from $833.4 million in the prior year. The change includes a 0.5% increase from acquisitions and a 0.1% increase from foreign currency translation. Excluding these factors, sales decreased 10.5% on an organic basis reflecting a 10.5% decline in the Service Center segment and a 10.1% decline in the Fluid Power & Flow Control segment. The Company reported a net loss of $--5.3 million, or $0.14 per share. Results include a non-cash impairment charge of $49.5 million pre-tax and non-routine costs of $7.8 million pre-tax. Excluding these items, the Company reported non-GAAP adjusted net income of $38.4 million, or $0.98 per share, and adjusted EBITDA of $68.3 million.

Neil A. Schrimsher, Applied's President & Chief Executive Officer, commented "Our fiscal 2021 second quarter reflects solid execution across Applied. We are progressing on our growth initiatives as end-market demand gradually recovers. This drove encouraging order momentum and seasonally strong sequential improvement in daily sales rates during the quarter. Combined with solid cost control and working capital management, decremental margins were better than our expectations and we generated record second quarter cash flow. Overall, the results are a testament to our industry position and operational discipline, as well as the expanding value we are providing as the industrial sector advances through the pandemic and customers address greater technical and growth requirements."

Mr. Schrimsher added, "Looking forward, I am increasingly constructive on our outlook and potential. While general economic uncertainty remains, underlying sales improvement has continued into January with organic sales month to date down by a mid-single digit percent year over year. We have multiple catalysts to expand our market potential and accelerate growth opportunities throughout calendar 2021 and beyond. This activity includes addressing customers' break-fix MRO requirements, supporting greater demand for specialized engineered solutions, and leveraging our multi-channel cross-selling initiatives. In addition, we are making solid progress expanding our next generation automation capabilities following three acquisitions in the past 16 months, putting us in a strong position to address our customers' emerging industrial technology and operational requirements. Our balance sheet provides the means to support these growth opportunities and drive additional stakeholder returns as the economic recovery broadens."

Items Impacting the QuarterFiscal 2021 second quarter results include a $49.5 million pre-tax non-cash charge related to the impairment of certain intangible, lease, and fixed assets, as well as non-routine costs of $7.8 million pre-tax. The items are the result of reduced economic conditions and related business alignment initiatives across a portion of the Service Center segment operations exposed to oil & gas end markets. Total non-routine costs of $7.8 million pre-tax include a $7.4 million inventory reserve charge recorded within cost of sales, and $0.4 million related to severance and facility consolidation recorded in selling, distribution and administrative expense.

OutlookBased on month to date sales in January and assuming normal seasonal patterns, the Company would project fiscal 2021 third quarter sales to decline 3% to 4% year over year on an organic basis. In addition, assuming this sales level, the Company would project selling, administrative and distribution expenses to range between $170 million to $175 million during the fiscal 2021 third quarter, which includes additional expense restoration from temporary cost actions initiated in fiscal 2020 in response to the COVID-19 pandemic.

DividendToday the Company also announced that its Board of Directors approved an increase in the quarterly cash dividend to $0.33 per common share, payable on February 26, 2021, to shareholders of record on February 16, 2021. This represents the 12th dividend increase since 2010.

Conference Call InformationApplied will host its quarterly conference call for investors and analysts at 10 a.m. ET on January 28, 2021. 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 2659264. 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 2659264.

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," "will," "outlook," "project," 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(Unaudited)(In thousands, except per share data) Three Months Ended Six Months Ended December 31, December 31,

2020 2019 2020 2019

Net Sales $ 751,287 $ 833,375 $ 1,499,094 $ 1,689,779

Cost of sales 541,753 592,141 1,073,779 1,197,085

Gross Profit 209,534 241,234 425,315 492,694

Selling, distribution andadministrative expense,including depreciation 162,428 182,489 325,901 372,783

Intangible and other 49,528 - 49,528 - impairmentOperating (Loss) Income (2,422 ) 58,745 49,886 119,911

Interest expense, net 7,658 9,583 15,311 19,642

Other expense (income), 88 (215 ) (89 ) (215 )net(Loss) Income Before (10,168 ) 49,377 34,664 100,484 Income TaxesIncome Tax (Benefit) (4,834 ) 11,346 5,214 23,654 ExpenseNet (Loss) Income $ (5,334 ) $ 38,031 $ 29,450 $ 76,830

Net (Loss) Income Per $ (0.14 ) $ 0.98 $ 0.76 $ 1.99 Share - BasicNet (Loss) Income Per $ (0.14 ) $ 0.97 $ 0.75 $ 1.97 Share - DilutedAverage Shares 38,781 38,649 38,751 38,630 Outstanding - BasicAverage Shares 39,233 39,047 39,165 39,000 Outstanding - DilutedNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS1) 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 be made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination.2) In the quarter ended December 31, 2020, the Company recognized a non-cash impairment charge of $49.5 million and $7.8 million of other non-routine costs as a result of reduced economic conditions and business alignment initiatives related to a portion of the Service Center Based Distribution segment exposed to oil and gas end markets. The non-routine costs reduced gross profit by $7.4 million and increased selling, distribution and administrative expense by $0.4 million. Combined, the non-cash impairment charge and non-routine costs unfavorably impacted operating (loss) income by $57.3 million and net (loss) income by $43.7 million.3) Due to the net loss incurred by the Company during the quarter ended December 31, 2020, the calculation of Net Loss Per Share - Diluted utilized the Average Shares Outstanding - Basic, as using the Average Shares Outstanding - Diluted would have been anti-dilutive.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS1) 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) In the quarter ended December 31, 2020, the Company recognized a non-cashimpairment charge of $49.5 million and $7.8 million of other non-routinecosts as a result of reduced economic conditions and business alignmentinitiatives related to a portion of the Service Center Based Distributionsegment exposed to oil and gas end markets. The non-routine costs reducedgross profit by $7.4 million and increased selling, distribution andadministrative expense by $0.4 million. Combined, the non-cash impairmentcharge and non-routine costs unfavorably impacted operating (loss) income by$57.3 million and net (loss) income by $43.7 million.

3) Due to the net loss incurred by the Company during the quarter endedDecember 31, 2020, the calculation of Net Loss Per Share - Diluted utilizedthe Average Shares Outstanding - Basic, as using the Average SharesOutstanding - Diluted would have been anti-dilutive.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(In thousands)December 31,2020June 30,2020AssetsCash and cash equivalents$

288,775

$

268,551

Accounts receivable, net444,200

449,998

Inventories363,757

389,150

Other current assets54,864

52,070

Total current assets1,151,596

1,159,769

Property, net120,530

121,901

Operating lease assets, net86,977

90,636

Intangibles, net294,581

343,215

Goodwill557,257

540,594

Other assets30,076

27,436

Total Assets$

2,241,017

$

2,283,551

LiabilitiesAccounts payable$

196,468

$

186,270

Current portion of long-term debt78,638

78,646

Other accrued liabilities150,761

161,167

Total current liabilities425,867

426,083

Long-term debt783,076

855,143

Other liabilities151,367

158,783

Total Liabilities1,360,310

1,440,009

Shareholders' Equity880,707

843,542

Total Liabilities and Shareholders' Equity$

2,241,017

$

2,283,551

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(In thousands) December 31, June 30, 2020 2020 AssetsCash and cash equivalents $ 288,775 $ 268,551

Accounts receivable, net 444,200 449,998

Inventories 363,757 389,150

Other current assets 54,864 52,070

Total current assets 1,151,596 1,159,769

Property, net 120,530 121,901

Operating lease assets, net 86,977 90,636

Intangibles, net 294,581 343,215

Goodwill 557,257 540,594

Other assets 30,076 27,436

Total Assets $ 2,241,017 $ 2,283,551

LiabilitiesAccounts payable $ 196,468 $ 186,270

Current portion of long-term debt 78,638 78,646

Other accrued liabilities 150,761 161,167

Total current liabilities 425,867 426,083

Long-term debt 783,076 855,143

Other liabilities 151,367 158,783

Total Liabilities 1,360,310 1,440,009

Shareholders' Equity 880,707 843,542

Total Liabilities and Shareholders' Equity $ 2,241,017 $ 2,283,551

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS(Unaudited)(In thousands)Six Months Ended

December 31,

2020

2019

Cash Flows from Operating ActivitiesNet income$

29,450

$

76,830

Adjustments to reconcile net income to net cash providedby operating activities:Depreciation and amortization of property10,561

10,617

Amortization of intangibles18,002

20,569

Intangible and other impairment49,528

-

Amortization of stock appreciation rights and options1,328

1,494

Other share-based compensation expense2,167

1,837

Changes in assets and liabilities, net of acquisitions52,005

(11,660

)

Other, net(3,685

)

5,212

Net Cash provided by Operating Activities159,356

104,899

Cash Flows from Investing ActivitiesAcquisition of businesses, net of cash acquired(31,078

)

(36,390

)

Capital expenditures(8,449

)

(11,965

)

Proceeds from property sales292

325

Net Cash used in Investing Activities(39,235

)

(48,030

)

Cash Flows from Financing ActivitiesLong-term debt borrowings-

25,000

Long-term debt repayments(72,260

)

(34,868

)

Interest rate swap settlement payments(549

)

-

Payment of debt issuance costs-

(16

)

Dividends paid(24,899

)

(24,002

)

Acquisition holdback payments(1,138

)

(777

)

Taxes paid for shares withheld for equity awards(5,571

)

(1,988

)

Exercise of stock appreciation rights and options163

330

Net Cash used in Financing Activities(104,254

)

(36,321

)

Effect of Exchange Rate Changes on Cash4,357

(618

)

Increase in cash and cash equivalents20,224

19,930

Cash and Cash Equivalents at Beginning of Period268,551

108,219

Cash and Cash Equivalents at End of Period$

288,775

$

128,149

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS(Unaudited)(In thousands) Six Months Ended

December 31,

2020 2019

Cash Flows from Operating ActivitiesNet income $ 29,450 $ 76,830

Adjustments to reconcile net income to net cashprovidedby operating activities:Depreciation and amortization of property 10,561 10,617

Amortization of intangibles 18,002 20,569

Intangible and other impairment 49,528 -

Amortization of stock appreciation rights and 1,328 1,494 optionsOther share-based compensation expense 2,167 1,837

Changes in assets and liabilities, net of 52,005 (11,660 )acquisitionsOther, net (3,685 ) 5,212

Net Cash provided by Operating Activities 159,356 104,899

Cash Flows from Investing ActivitiesAcquisition of businesses, net of cash acquired (31,078 ) (36,390 )

Capital expenditures (8,449 ) (11,965 )

Proceeds from property sales 292 325

Net Cash used in Investing Activities (39,235 ) (48,030 )

Cash Flows from Financing ActivitiesLong-term debt borrowings - 25,000

Long-term debt repayments (72,260 ) (34,868 )

Interest rate swap settlement payments (549 ) -

Payment of debt issuance costs - (16 )

Dividends paid (24,899 ) (24,002 )

Acquisition holdback payments (1,138 ) (777 )

Taxes paid for shares withheld for equity awards (5,571 ) (1,988 )

Exercise of stock appreciation rights and options 163 330

Net Cash used in Financing Activities (104,254 ) (36,321 )

Effect of Exchange Rate Changes on Cash 4,357 (618 )

Increase in cash and cash equivalents 20,224 19,930

Cash and Cash Equivalents at Beginning of Period 268,551 108,219

Cash and Cash Equivalents at End of Period $ 288,775 $ 128,149

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESSUPPLEMENTAL INFORMATIONRECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES(Unaudited)

(In thousands)The Company supplemented the reporting of financial information determined under U.S. generally accepted accounting principles (GAAP) with reporting of non-GAAP financial measures. The Company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results, assessing prospects for future performance, and provide a better baseline for analyzing trends in our underlying businesses. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These non-GAAP financial measures should not be considered in isolation or as a substitute for reported results. These non-GAAP financial measures reflect an additional way of viewing aspects of operations that, when viewed with GAAP results, provide a more complete understanding of the business. The Company strongly encourages investors and shareholders to review company financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIESSUPPLEMENTAL INFORMATIONRECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES(Unaudited)

(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-GAAPmeasures provide meaningful information to assist shareholders inunderstanding financial results, assessing prospects for future performance,and provide a better baseline for analyzing trends in our underlyingbusinesses. Because non-GAAP financial measures are not standardized, it maynot be possible to compare these financial measures with other companies'non-GAAP financial measures having the same or similar names. These non-GAAPfinancial measures should not be considered in isolation or as a substitutefor reported results. These non-GAAP financial measures reflect an additionalway of viewing aspects of operations that, when viewed with GAAP results,provide a more complete understanding of the business. The Company stronglyencourages investors and shareholders to review company financial statementsand publicly filed reports in their entirety and not to rely on any singlefinancial measure.

Reconciliation of Net (loss) income and Net (loss) income per share, GAAP financial measures, with Adjusted Net income andAdjusted Net income per share, non-GAAP financial measures:Three Months Ended December 31, 2020Pre-taxTax EffectNet of TaxPer ShareDiluted ImpactTax RateNet loss and net loss per share$

(10,168

)

$

(4,834

)

$

(5,334

)

$

(0.14

)

47.5

%

Intangible and other impairment49,528

11,769

37,759

0.96

23.8

%

Non-routine costs7,772

1,847

5,925

0.15

23.8

%

Adjusted net income and net income per share$

47,132

$

8,782

$

38,350

$

0.98

18.6

%

Reconciliation of Net (loss) income and Net (loss) income per share, GAAPfinancial measures, with Adjusted Net income andAdjusted Net income per share, non-GAAP financial measures: Three Months Ended December 31, 2020 Per Share Tax Pre-tax Tax Effect Net of Tax Diluted Rate ImpactNet loss and net loss per $ (10,168 ) $ (4,834 ) $ (5,334 ) $ (0.14 ) 47.5 %shareIntangible and other 49,528 11,769 37,759 0.96 23.8 %impairmentNon-routine costs 7,772 1,847 5,925 0.15 23.8 %

Adjusted net income and net $ 47,132 $ 8,782 $ 38,350 $ 0.98 18.6 %income per shareReconciliation of Net Income, a GAAP financial measure, to EBITDA, a non-GAAP financial measure:Three Months Ended December 31,

Six Months Ended December 31,

2020

2019

2020

2019

Net (Loss) Income$

(5,334

)

$

38,031

$

29,450

$

76,830

Interest expense, net7,658

9,583

15,311

19,642

Income tax (benefit) expense(4,834

)

11,346

5,214

23,654

Depreciation and amortization of property5,209

5,394

10,561

10,617

Amortization of intangibles8,276

10,195

18,002

20,569

EBITDA$

10,975

$

74,549

$

78,538

$

151,312

Intangible and other impairment49,528

-

49,528

-

Non-routine costs7,772

-

7,772

1,455

Adjusted EBITDA$

68,275

$

74,549

$

135,838

$

152,767

Reconciliation of Net Income, a GAAP financial measure, to EBITDA, a non-GAAPfinancial measure: Three Months Ended Six Months Ended December 31, December 31,

2020 2019 2020 2019

Net (Loss) Income $ (5,334 ) $ 38,031 $ 29,450 $ 76,830

Interest expense, net 7,658 9,583 15,311 19,642

Income tax (benefit) expense (4,834 ) 11,346 5,214 23,654

Depreciation and amortization of 5,209 5,394 10,561 10,617propertyAmortization of intangibles 8,276 10,195 18,002 20,569

EBITDA $ 10,975 $ 74,549 $ 78,538 $ 151,312

Intangible and other impairment 49,528 - 49,528 -

Non-routine costs 7,772 - 7,772 1,455

Adjusted EBITDA $ 68,275 $ 74,549 $ 135,838 $ 152,767

The Company defines EBITDA as Earnings from operations before Interest, Taxes, Depreciation, and Amortization, a non-GAAP financial measure. Adjusted EBITDA excludes items that may not be indicative of core operating results, a non-GAAP financial measure.The Company defines EBITDA as Earnings from operations before Interest,Taxes, Depreciation, and Amortization, a non-GAAP financial measure.Adjusted EBITDA excludes items that may not be indicative of core operatingresults, a non-GAAP financial measure.Reconciliation of Net Cash provided by Operating activities, a GAAP financial measure, to Free Cash Flow, a non-GAAP financial measure:Three Months Ended December 31,

Six Months Ended December 31,

2020

2019

2020

2019

Net Cash provided by Operating Activities$

77,514

$

54,881

$

159,356

$

104,899

Capital expenditures(4,852

)

(7,019

)

(8,449

)

(11,965

)

Free Cash Flow$

72,662

$

47,862

$

150,907

$

92,934

Reconciliation of Net Cash provided by Operating activities, a GAAP financialmeasure, to Free Cash Flow, a non-GAAP financial measure: Three Months Ended Six Months Ended December 31, December 31,

2020 2019 2020 2019

Net Cash provided by Operating $ 77,514 $ 54,881 $ 159,356 $ 104,899 ActivitiesCapital expenditures (4,852 ) (7,019 ) (8,449 ) (11,965 )

Free Cash Flow $ 72,662 $ 47,862 $ 150,907 $ 92,934

Free cash flow is defined as net cash provided by operating activities less property purchases, a non-GAAP financial measure. View source version on businesswire.com: https://www.businesswire.com/news/home/20210128005245/en/

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