8-K
Applied Industrial Technologies Inc (AIT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
August 12, 2020
Date of Report (date of earliest event reported)
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Ohio | 1-2299 | 34-0117420 | |
|---|---|---|---|
| (State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) | |
| One Applied Plaza | Cleveland | Ohio | 44115 |
| (Address of Principal Executive Offices) | (Zip Code) |
(216) 426-4000
Registrant's telephone number, including area code
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common Stock, without par value | AIT | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
On August 12, 2020, Applied Industrial Technologies, Inc. (“Applied”) issued a press release related to its earnings for the fiscal year and fourth quarter ended June 30, 2020. The release is attached as Exhibit 99.1 to this Report on Form 8-K.
The information in this Report on Form 8-K, including the Exhibit, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act.
| ITEM 9.01 | FINANCIAL STATEMENTS AND EXHIBITS |
|---|
(d) Exhibits.
Exhibit 99.1 - Press release of Applied Industrial Technologies, Inc. dated August 12, 2020.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| APPLIED INDUSTRIAL TECHNOLOGIES, INC. | |
|---|---|
| (Registrant) | |
| By: /s/ Fred D. Bauer | |
| Fred D. Bauer, Vice President-General Counsel & Secretary | |
| Date: August 12, 2020 |
EXHIBIT INDEX
Exhibit No. Description
| 99.1 | The following exhibit is furnished with this Report on Form 8-K: Earnings release of Applied Industrial Technologies, Inc. dated August 12, 2020. |
|---|
Exhibit
EXHIBIT 99.1
Applied Industrial Technologies Reports
Fiscal 2020 Fourth Quarter and Year-End Results
Fiscal Fourth Quarter 2020 Highlights
| • | Net Sales of $725.1 Million Down 17.9% YoY; Down 18.4% on an Organic Basis |
|---|---|
| • | EPS of $0.77; Non-GAAP Adjusted EPS of $0.80 |
| --- | --- |
| • | Operating Cash Flow of $127.1 Million; Free Cash Flow of $123.2 Million |
| --- | --- |
Fiscal Full-Year 2020 Highlights
| • | Net Sales of $3.2 Billion Down 6.5% YoY; Down 9.4% on an Organic Daily Basis |
|---|---|
| • | EPS of $0.62; Non-GAAP Adjusted EPS of $3.81 |
| --- | --- |
| • | Operating Cash Flow of $296.7 Million; Free Cash Flow of $276.6 Million |
| --- | --- |
CLEVELAND, OHIO (August 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 Information
Applied 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^®^
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.
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CONTACT INFORMATION
Ryan D. Cieslak
Director - Investor Relations & Treasury
216-426-4887 / rcieslak@applied.com
| APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CONDENSED STATEMENTS OF CONSOLIDATED INCOME | ||||||||||||||
| (In thousands, except per share data) | Three Months Ended<br><br>June 30, | Year Ended<br><br>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, distribution and administrative | ||||||||||||||
| expense, including depreciation | 161,262 | 185,376 | 717,747 | 742,241 | ||||||||||
| Goodwill & intangible impairment | — | — | 131,000 | 31,594 | ||||||||||
| Operating 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 Taxes | 40,079 | 62,120 | 55,236 | 194,481 | ||||||||||
| Income Tax Expense | 10,090 | 22,317 | 31,194 | 50,488 | ||||||||||
| Net Income | $ | 29,989 | $ | 39,803 | $ | 24,042 | $ | 143,993 | ||||||
| Net Income Per Share - Basic | $ | 0.78 | $ | 1.03 | $ | 0.62 | $ | 3.72 | ||||||
| Net Income Per Share - Diluted | $ | 0.77 | $ | 1.02 | $ | 0.62 | $ | 3.68 | ||||||
| Average Shares Outstanding - Basic | 38,691 | 38,579 | 38,658 | 38,670 | ||||||||||
| Average Shares Outstanding - Diluted | 38,988 | 38,993 | 38,999 | 39,160 | 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 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) On July 1, 2019, the Company adopted ASC 842 – accounting for leases. Adoption of the new standard resulted in the recognition of right-of-use assets and lease liabilities of $83.5 million and $89.8 million, respectively, on July 1, 2019. In addition, the adoption resulted in an adjustment to opening retained earnings of approximately $3.3 million, net of tax, on July 1, 2019.
3) In the quarter ending March 31, 2020, the Company recognized a non-cash goodwill impairment charge of $131.0 million related to the operations of FCX Performance, Inc. (FCX) within the Company's Fluid Power & Flow Control segment.
4) In the year ending June 30, 2020, the Company incurred certain non-routine charges primarily related to its U.S. Service Center Based Distribution segment. Total non-routine charges reduced gross profit by $3.9 million, decreased operating income by $9.0 million, and decreased net income by $5.8 million.
| APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES | ||||||
|---|---|---|---|---|---|---|
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||
| (In thousands) | June 30, | June 30, | ||||
| --- | --- | --- | --- | --- | ||
| 2020 | 2019 | |||||
| Assets | ||||||
| Cash 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 | ||
| Liabilities | ||||||
| Accounts 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 SUBSIDIARIES | ||||||||
|---|---|---|---|---|---|---|---|---|
| CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS | ||||||||
| (In thousands) | Year Ended<br><br>June 30, | |||||||
| --- | --- | --- | --- | --- | --- | --- | ||
| 2020 | 2019 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income | $ | 24,042 | $ | 143,993 | ||||
| Adjustments to reconcile net income to net cash provided | ||||||||
| by 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 acquisitions | 73,720 | (70,221 | ) | |||||
| Other, net | (594 | ) | 6,664 | |||||
| Net Cash provided by Operating Activities | 296,714 | 180,601 | ||||||
| Cash Flows from Investing Activities | ||||||||
| Acquisition 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 Activities | ||||||||
| Net 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 SUBSIDIARIES |
|---|
| SUPPLEMENTAL INFORMATION<br><br>RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES |
| (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.
| Reconciliation of Net income and Net income per share, GAAP financial measures, with Adjusted Net income and<br><br>Adjusted Net income per share, non-GAAP financial measures: | | --- || | Three Months Ended June 30, 2020 | | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Pre-tax | | Tax Effect | | | Net of Tax | | | Per Share<br><br>Diluted Impact | | | Tax Rate | | | Net income and net income per share | 40,079 | | 10,090 | | | 29,989 | | | 0.77 | | | 25.2 | % | | Non-routine costs | 1,540 | | 388 | | | 1,152 | | | 0.03 | | | 25.2 | % | | Adjusted net income and net income per share | 41,619 | | 10,478 | | | 31,141 | | | 0.80 | | | 25.2 | % | | | Year Ended June 30, 2020 | | | | | | | | | | | | | | | Pre-tax | | Tax Effect | | | Net of Tax | | | Per Share<br><br>Diluted Impact | | | Tax Rate | | | Net income and net income per share | $ | 55,236 | $ | 31,194 | | $ | 24,042 | | $ | 0.62 | | 56.5 | % | | Goodwill 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 benefit | — | | 1,010 | | | (1,010 | | ) | (0.03 | | ) | N/M | | | Adjusted net income and net income per share | $ | 195,228 | $ | 46,539 | | $ | 148,689 | | $ | 3.81 | | 23.8 | % | | | Year Ended June 30, 2019 | | | | | | | | | | | | | | | Pre-tax | | Tax Effect | | | Net of Tax | | | Per Share<br><br>Diluted Impact | | | Tax Rate | | | Net income and net income per share | $ | 194,481 | $ | 50,488 | | $ | 143,993 | | $ | 3.68 | | 26.0 | % | | Canadian intangible impairment | 31,594 | | 8,485 | | | 23,109 | | | 0.59 | | | 26.9 | % | | Canadian tax valuation allowance | — | | (3,785 | | ) | 3,785 | | | 0.10 | | | N/M | | | Non-routine costs | 2,300 | | 598 | | | 1,702 | | | 0.04 | | | 26.0 | % | | Adjusted net income and net income per share | $ | 228,375 | $ | 55,786 | | $ | 172,589 | | $ | 4.41 | | 24.4 | % |
| Continued from previous page | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Reconciliation of Net Cash provided by Operating activities, a GAAP financial measure, to Free Cash Flow, a non-GAAP financial measure: | ||||||||||||
| Three Months Ended<br><br>June 30, | Year Ended<br><br>June 30, | |||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||
| Net Cash provided by Operating Activities | $ | 127,090 | $ | 103,435 | $ | 296,714 | $ | 180,601 | ||||
| Property 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 less property purchases. |