• Revenue: Consolidated sales decreased 2.4% year-over-year.
• EBITDA: Increased 3.3% year-over-year; EBITDA margin expanded 45 basis points to 12.6%.
• Earnings Per Share (EPS): Reported EPS of $2.39, up 6.7% from prior year adjusted EPS of $2.24.
• Gross Margin: Increased 114 basis points to 30.6%.
• Free Cash Flow: Totaled $89.9 million, representing a conversion of 96% relative to net income.
• Organic Sales Decline: Decreased 3.4% on an organic daily basis.
• Service Center Segment EBITDA Margin: Improved nearly 30 basis points to 13.4%.
• Engineered Solutions Segment EBITDA Margin: Expanded 115 basis points to 16.3%.
• Hydradyne Acquisition: Expected to generate $260 million in sales and $30 million in EBITDA in the first year.
• Dividend Increase: Announced a 24% increase in the quarterly dividend.

• Warning! GuruFocus has detected 4 Warning Signs with FRST.

Release Date: January 29, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Applied Industrial Technologies Inc (NYSE:AIT) reported a strong gross margin performance and cost controls, leading to EBITDA and EPS exceeding expectations by approximately 3% and 7% over the prior year, respectively.
• The engineered solutions segment showed significant improvement, with EBITDA margins expanding 115 basis points over the prior year and exceeding 16% for the first time.
• The acquisition of Hydradyne is expected to strengthen AIT's position in fluid power and motion control systems, with anticipated sales of $260 million and EBITDA of $30 million in the first year of ownership.
• AIT announced a 24% increase in its quarterly dividend, reflecting strong earnings and cash generation.
• The company has deployed over $380 million in capital year-to-date, focusing on enhancing growth position and shareholder returns, including $30 million in share repurchases.

Negative Points

• AIT experienced a 3.4% decline in average daily sales over the prior year, in line with guidance, due to a muted market backdrop and conservative customer spending.
• January sales trends were down mid-single digits year-over-year on an organic basis, influenced by macro policy and interest rate uncertainties.
• The service center segment saw a decline in sales due to reduced MRO spending, lower capital maintenance project activity, and extended customer plant idling.
• Sales within the automation operations declined by a high single-digit percentage year-over-year on an organic daily basis, reflecting headwinds from delayed customer spending.
• The acquisition of Hydradyne, while strategic, involves integration costs and initial synergies are expected to be modest in the third quarter, with more meaningful contributions anticipated in fiscal 2026 and 2027.

Q & A Highlights

Q: Can you elaborate on the sources and sustainability of the core gross margin improvement in the second quarter? A: Neil Schrimsher, President and CEO, explained that the improvement was due to good execution, mix benefits, and pricing strategies. Approximately 10 to 20 basis points of the improvement were tied to achieving a higher supplier tier, which is not expected to replicate in the third quarter. David Wells, CFO, added that about 50 basis points of the improvement came from the engineered solutions segment, driven by favorable mix and pricing.

Q: What is the expected impact of the Hydradyne acquisition on depreciation and amortization, and what are the projected synergies? A: David Wells, CFO, stated that the acquisition will add about $3 million of incremental depreciation and amortization per quarter. The projected synergies are a mix of 70% sales and 30% cost synergies, with a target of $5 million to $10 million within the first three years.

Q: Can you provide more detail on the January sales trends and expectations for the rest of the year? A: Neil Schrimsher noted that January sales were down mid-single digits, primarily due to early-month weakness. However, sales picked up in the latter half of the month, which is encouraging. The company expects sales trends to improve gradually, with potential growth in the fourth quarter.

Q: How does the company view the segment mix between engineered solutions and service centers, and what are the future expectations? A: Neil Schrimsher indicated that while the current mix is approaching 40% engineered solutions and 60% service centers, there is potential for engineered solutions to grow to 45% or 50% over time. Both segments have opportunities for growth, and a balanced mix would be beneficial.

Q: What are the expectations for gross margin moderation in the upcoming quarters? A: David Wells explained that gross margins are expected to moderate due to a combination of mix changes and an increase in LIFO expense. The company anticipates gross margins to be around 30% in the third quarter, with some normalization in mix and LIFO expense contributing to the moderation.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.