Exchange: NYSE | Sector: Industrials | Industry: Industrial Distribution
Q4 2024
Published: Sep 10, 2024
Earnings Highlights
Revenue of $1.16B up 0.2% year-over-year
EPS of $2.64 increased by 12.1% from previous year
Gross margin of 29.6%
Net income of 103.49M
"“gross margins close to 31% and EBITDA margins exceeding 13% for the first time … LIFO expense is normalizing from record levels”" - Neil Schrimsher
Applied Industrial Technologies Inc (AIT) QQ4 2024 Earnings Review: Margin Momentum Amid Mixed End Markets, Strategic Acquisitions, and Path to 2025 Reacceleration
Executive Summary
AIT delivered a low-, yet positive, revenue trajectory in Q4 2024, underscored by meaningful margin expansion and strong cash generation amid a choppy end-market backdrop. Consolidated revenue rose 0.2% year-over-year to $1.1607 billion, with gross margins improving to 29.56% and EBITDA margins surpassing 13% for the first time in the period. The company benefited from a normalization of LIFO expense, favorable mix from Engineered Solutions, and disciplined cost management that supported double-digit earnings growth for the year. Management highlighted ongoing margin expansion versus prior cycles and reinforced the durability of the company’s operating model through a period of end-market softness, driven in part by higher interest rate uncertainty and industry defensives like MRO spend in the Service Center channel. Free cash flow (FCF) was robust at $111.7 million for the quarter and $346.5 million for the full year, with cash position strong at ~$461 million and net leverage at ~0.2x EBITDA, providing substantial firepower for acquisitions and buybacks.
Looking ahead to fiscal 2025, management issued guidance of $9.20–$9.95 per share with organic sales down 4% to up 1% and EBITDA margins of 12.1%–12.3%. The midpoint implies a softer first half followed by stabilization and a return to growth in the fourth quarter, reflecting continued macro uncertainty and a plan to reaccelerate as demand normalizes. The outlook explicitly contemplates near-term margin headwinds from expense deleveraging on lower volumes and ongoing inflationary pressures, while expecting improving contribution from Engineered Solutions and durable cash generation to support capital allocation (Capex $28–$30 million in 2025). The long‑term growth thesis remains anchored by strategic M&A, an expanding solution portfolio, and secular megatrends in North American manufacturing and decarbonization.
Key Performance Indicators
Revenue
1.16B
QoQ: 1.25% | YoY:0.22%
Gross Profit
343.05M
29.56% margin
QoQ: 5.39% | YoY:1.33%
Operating Income
144.54M
QoQ: 15.91% | YoY:13.98%
Net Income
103.49M
QoQ: 6.45% | YoY:12.23%
EPS
2.68
QoQ: 6.77% | YoY:12.13%
Revenue Trend
Margin Analysis
Key Insights
Revenue: $1.160675 billion in Q4 2024; YoY +0.22%; QoQ +1.25% (per 4Q metrics). Organic daily sales were down 2% YoY, with acquisitions contributing +150 bp and selling days +80 bp; foreign exchange -10 bp.
Gross margin: 29.56% in Q4 2024; gross profit $343.0 million; LIFO expense favorable tailwind of ~67 bp YoY due to normalization (LIFO $0.3m vs $8.1m prior year).
EBITDA: $152.5 million; EBITDA margin 13.13% (up ~113 bp YoY and ~140 bp QoQ). Excluding LIFO, gross and EBITDA margins still expanded vs year-ago levels.
Net income: $103.5 million; net margin 8.92%; Diluted EPS: $2.64; GAAP EPS: $2.68; weighted avg shares outstanding (diluted) ~39.15 million.
Financial Highlights
- Revenue: $1.160675 billion in Q4 2024; YoY +0.22%; QoQ +1.25% (per 4Q metrics). Organic daily sales were down 2% YoY, with acquisitions contributing +150 bp and selling days +80 bp; foreign exchange -10 bp.
- Gross margin: 29.56% in Q4 2024; gross profit $343.0 million; LIFO expense favorable tailwind of ~67 bp YoY due to normalization (LIFO $0.3m vs $8.1m prior year).
- EBITDA: $152.5 million; EBITDA margin 13.13% (up ~113 bp YoY and ~140 bp QoQ). Excluding LIFO, gross and EBITDA margins still expanded vs year-ago levels.
- Operating income: $144.5 million; operating margin 12.45%.
- Net income: $103.5 million; net margin 8.92%; Diluted EPS: $2.64; GAAP EPS: $2.68; weighted avg shares outstanding (diluted) ~39.15 million.
- Cash flow: Operating cash flow $119.2 million; free cash flow $111.7 million (FCF = 108% of net income) for the quarter; full-year FCF $346.5 million (+9% YoY).
- Balance sheet: Cash and cash equivalents $460.6 million; total debt $734.9 million; net debt $274.3 million; total assets $2.952 billion; total shareholders’ equity $1.689 billion; current ratio 3.53; debt to capital ~30.3%; net leverage ~0.2x EBITDA.
- Capital allocation: Share repurchases 235k shares for $44.5 million in Q4; full-year 2024 buybacks ~398k shares for $73 million; cash balance supports ongoing buybacks and acquisitions.
- Segments: Service Center organically flat to down 0.7% YoY (ex-acquisitions up 1.2% from acquisitions, +0.8% from selling days, -0.). EBITDA margin 14.6% (up 190 bp YoY); Engineered Solutions down 1.8% in sales (organic daily down 4.6%); EBITDA margin 15.7% (up 95 bp). Flow control margin strength contributed to better gross margins as mix shifted toward higher‑margin Engineered Solutions.
- Guidance (2025): EPS $9.20–$9.95; Revenue down 2.5% to up 2.5% (organic daily -4% to +1%); EBITDA margin 12.1%–12.3%; Capex $28–$30 million; first quarter organic sales expected to decline mid-single digits; LIFO expense trending toward normalization.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
1.16B
0.22%
1.25%
Gross Profit
343.05M
1.33%
5.39%
Operating Income
144.54M
13.98%
15.91%
Net Income
103.49M
12.23%
6.45%
EPS
2.68
12.13%
6.77%
Key Financial Ratios
currentRatio
3.53
grossProfitMargin
29.6%
operatingProfitMargin
12.5%
netProfitMargin
8.92%
returnOnAssets
3.51%
returnOnEquity
6.13%
debtEquityRatio
0.44
operatingCashFlowPerShare
$3.09
freeCashFlowPerShare
$2.9
dividendPayoutRatio
13.9%
priceToBookRatio
4.34
priceEarningsRatio
17.73
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Themes and quotes from the Q4 earnings call:
- Strategy and margin expansion: Neil Schrimsher noted, “gross margins close to 31% and EBITDA margins exceeding 13% for the first time,” underscoring the margin progression achieved through channel execution, mix shift toward Engineered Solutions, and cost discipline.
- LIFO normalization and value creation: Management emphasized LIFO expense normalization from record levels, with CFO Dave Wells highlighting that the LIFO tailwind contributed ~67 bp to gross margins year-over-year and that the company is benefiting from ongoing pricing and margin initiatives.
- End-market mix and MRO resiliency: Neil acknowledged a choppy demand backdrop with MRO-related sales “represent[ing] approximately 70% of our overall business,” and management highlighted stronger performance in national accounts and fluid power aftermarket, helping offset softer engine fluid power demand.
- Acquisitions and growth strategy: Neil highlighted Five acquisitions in the last year, including Total Machine Solutions (TMS) and Stanley Proctor, with the Grupo Kopar integration contributing to margins; management reiterated M&A as a top capital allocation priority for fiscal 2025.
- Outlook and catalysts: Neil projected a path for growth in the back half of fiscal 2025, citing potential reacceleration in US industrial production, Fed easing expectations, and demand recovery in technology/automation verticals. Dave outlined guidance built on mid-year normalization and improving end-market demand in H2 2025, contingent on macro clarity.
- Margin resilience in Engineered Solutions: Neil emphasized that Engineered Solutions margins could remain resilient, with ongoing mix benefits and pricing/margin initiatives; Dave added optimism about the segment’s contribution as it expands its value-added mix.
“gross margins close to 31% and EBITDA margins exceeding 13% for the first time … LIFO expense is normalizing from record levels”
— Neil Schrimsher
“ongoing evolution towards more value add, which continues to improve that margin profile as we move forward”
— Dave Wells
Forward Guidance
Assessment of the 2025 outlook shows a pragmatic, low-to-moderate growth trajectory in the near term with a reacceleration catalyst set for H2 2025. Key drivers and risks include:
- Revenue and margins: The midpoint revenue guidance implies a macro backdrop of mid-single-digit market declines to modest growth, with EBITDA margins expected to trend slightly lower y/y due to expense deleveraging on sales declines. The company remains confident in Engineered Solutions’ margin expansion and in leveraging mix benefits from higher-value offerings.
- Demand environment: Management expects first-half softness (organic daily down mid-single digits in Q1 2025) with stabilization in the second half; the back-half rebound depends on macro clarity post-election and stabilization in industrial activity.
- Capital allocation: Capex targeted at $28–$30 million in 2025 supports technology, automation, and distribution capabilities. M&A remains a core growth lever, with ongoing bolt-ons expected to broaden service capabilities and geographic reach.
- Monitoring factors for investors: 1) macro indicators on US industrial production and capacity utilization; 2) the trajectory of interest rates and inflationary pressure; 3) attainment of 2025 guidance midpoint and the pace of end-market reacceleration; 4) execution of Kopar/TMS/STANLEY Proctor integrations and resultant margin/volumes; 5) success of digital channel initiatives and service center network optimization.
- Investment thesis: The company enters 2025 with a robust balance sheet (cash ~$461m; net leverage ~0.2x EBITDA) and strong FCF generation, enabling continued buybacks and potential further accretive acquisitions, which should support margin expansion and ROIC improvements over the medium term.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
AIT Focus
29.56%
12.50%
6.13%
17.73%
CNM
24.00%
8.19%
4.34%
30.22%
GWW
39.10%
13.90%
11.50%
25.96%
DXPE
30.20%
7.51%
4.20%
8.52%
SITE
33.80%
-0.64%
-0.23%
-539.63%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
AIT’s QQ4 2024 results underscore a resilient business model with meaningful margin expansion, robust FCF generation, and a disciplined capital-allocation framework. The near-term guidance acknowledges margin headwinds tied to revenue normalization, yet the company remains well-positioned to capture long-term growth through its Engineered Solutions mix, automation and data-center exposure, and a measured M&A program. Investors should monitor (i) the pace of macro-driven demand reacceleration in H2 2025, (ii) integration progress and margin contributions from Kopar, TMS, and Stanley Proctor, (iii) ongoing LIFO normalization effects on gross margins, and (iv) the trajectory of free cash flow to sustain buybacks and deleveraging. Relative to peers, AIT trades at a lower multiple on some multiples (P/E ~17.7x, P/S ~6.3x, EV/EBITDA ~49.9x) versus large distributors like FAST and GWW, suggesting a potential value vs. growth recalibration as the market reassesses the pace of end-market reacceleration. Overall, the investment thesis combines a solid balance sheet, a scalable services platform, and a pipeline of accretive acquisitions with a path to earnings growth as macro conditions normalize and the mix shift toward higher-margin solutions compounds over time.
Key Investment Factors
Growth Potential
Growth hinges on (i) Engineered Solutions’ margin expansion through mix shift to higher-value offerings and pricing discipline; (ii) acceleration of automation, data-center infrastructure, and flow-control demand driven by decarbonization and energy-transition initiatives; (iii) M&A-driven scale and capability enhancements (e.g., TMS, Stanley Proctor, Kopar onboarding) to expand service capabilities and geographic reach; (iv) ongoing digitization of the service-center network and higher cross-sell into national accounts.
Profitability Risk
Key risks include: (i) macro weakness in key end-markets (machinery, energy, pulp and paper, utilities) leading to lower organic volumes; (ii) LIFO normalization volatility impacting gross margin in shorter cycles; (iii) competition from larger distributors affecting pricing power; (iv) execution risk from integrating acquisitions and realizing anticipated synergies; (v) potential delays in fiscal 2025 demand reacceleration due to geopolitical or macroeconomic shocks.
Financial Position
Strong balance sheet with ~$461m cash, total debt $734.9m, and net debt $274.3m; net leverage near 0.2x EBITDA; robust free cash flow generation ($346.5m in 2024) supports ongoing buybacks, dividends, and M&A; current ratio ~3.53 and quick ratio ~2.56 indicate solid short-term liquidity; capital allocation focused on buybacks, dividends, and strategic acquisitions to accelerate long-term growth.
SWOT Analysis
Strengths
Strong cash generation and conservative balance sheet (FCF of $346.5m in FY2024; net leverage ~0.2x), enabling continued share repurchases and strategic investments.
Diversified, service-centered business model with two segments (Service Center and Engineered Solutions) providing breadth across MRO, fluid power, and automation.
Leading market position in North America with a scalable service-center network and strong cross-selling potential into national accounts.
Proactive cost management and margin expansion driven by mix, channel execution, and pricing initiatives.
Accretive acquisitions (e.g., Kopar, TMS, Stanley Proctor) expanding capabilities in fluid power and automation and reinforcing long-term growth trajectory.
Weaknesses
End-market exposure to cyclically sensitive industries (machinery, energy, pulp & paper) and a choppy demand backdrop in 2024–2025.
Significant reliance on MRO channels (~70% of sales) which can be sensitive to maintenance spend fluctuations.
Near-term margin headwinds from expense deleveraging if revenue declines persist; LIFO normalization risk in gross margins if inventory dynamics shift.
Integration risks from recent and planned acquisitions and execution risk in achieving desired synergies.
Opportunities
Growth in Engineered Solutions and automation aligned with data-center, server cooling, and decarbonization megatrends; rising demand for flow-control and automation solutions.
Expansion of digital channel capabilities (EDI, applied.com) to accelerate sales growth and margin accretion.
Ongoing M&A pipeline to broaden geographic coverage and service capabilities, sustaining margin expansion and ROIC.
North American localization and reshoring trends supporting service-center growth and capex-influenced demand (industrial modernization, maintenance spend).
Threats
Macroeconomic uncertainty, higher interest rates, and potential industrial slowdown post-election could weigh on near-term demand.
Competitive pressure from larger distributors (e.g., scale effects, pricing) that could constrain margin expansion.
Supply chain variability and commodity cost pressures impacting input costs and pricing power.
Regulatory and technology cycles that could alter demand in fluid power, automation, and data-center infrastructure.