Exchange: NYSE | Sector: Industrials | Industry: Industrial Distribution
Q3 2024
Published: Apr 26, 2024
Earnings Highlights
Revenue of $1.15B up 1.3% year-over-year
EPS of $2.48 decreased by 0.4% from previous year
Gross margin of 28.4%
Net income of 97.22M
""our priorities remain unchanged with a primary focus on optimizing growth and operating capabilities through both organic investments and inorganic acquisitions."" - Neil Schrimsher
Applied Industrial Technologies (AIT) delivered mixed Q3 2024 results with solid cash generation and a modest year-over-year recovery in organic sales, led by the Company’s Service Center segment. Consolidated revenue rose 1.3% YoY, while organic daily sales were flat to up slightly (0.7% YoY on a daily basis excluding acquisitions and FX). Gross margin was 28.39% and EBITDA margin stood at 11.68%, reflecting ongoing inflation-driven cost dynamics and a transient decline in Engineered Solutions. Management signaled a constructive longer-term outlook anchored by the acceleration of organic growth through internal initiatives and inorganic opportunities. The company updated full-year guidance for fiscal 2024, raising adjusted EPS to $9.55–$9.70 and guiding for 1.5%–2.5% top-line growth with EBITDA margins of 12.0%–12.1%. In the near term, fourth-quarter organic sales are expected to be flat to up 2%, with Engineered Solutions likely to remain soft amid softer fluid power OEM demand and technology-vertical headwinds. A key strategic inflection is the Kopar acquisition (Mexico), slated to add approximately $60 million in annual sales in the first year, expand automation capabilities, and provide cross-border cross-sell opportunities in the U.S. and Mexico. The combination of resilient Service Center momentum, a compelling automation growth trajectory, strong balance sheet metrics, and robust free cash flow positions the company to fund strategic investments and return capital to shareholders while pursuing a longer-term target of $5.5 billion in sales and 13% EBITDA margins in fiscal 2025 and beyond.
Key Performance Indicators
Revenue
1.15B
QoQ: 6.43% | YoY:1.27%
Gross Profit
325.49M
28.39% margin
QoQ: 2.65% | YoY:-2.29%
Operating Income
124.71M
QoQ: 8.82% | YoY:-1.74%
Net Income
97.22M
QoQ: 6.56% | YoY:0.03%
EPS
2.51
QoQ: 6.81% | YoY:-0.40%
Revenue Trend
Margin Analysis
Key Insights
Revenue: $1,146.39 million in Q3 2024 (+1.3% YoY; +0.7% organic daily growth after excluding acquisitions and FX; two-year stack +16%).
Operating profit: $124.71 million; operating margin 10.88% (vs 10.87% prior year; modest delta due to mix and cost absorption).
EBITDA: $133.93 million; EBITDA margin 11.68% (down 56 bps YoY; viewed as transitory and primarily due to Engineered Solutions and mix).
Net income / EPS: $97.22 million; EPS $2.51 (diluted $2.48).
Financial Highlights
Consolidated metrics and trend highlights:
- Revenue: $1,146.39 million in Q3 2024 (+1.3% YoY; +0.7% organic daily growth after excluding acquisitions and FX; two-year stack +16%).
- Gross margin: 28.39% (up 8 bps YoY); LIFO tailwind contributed ~30 bps to gross margin YoY; unfavourable mix ~10 bps.
- Operating profit: $124.71 million; operating margin 10.88% (vs 10.87% prior year; modest delta due to mix and cost absorption).
- EBITDA: $133.93 million; EBITDA margin 11.68% (down 56 bps YoY; viewed as transitory and primarily due to Engineered Solutions and mix).
- Net income / EPS: $97.22 million; EPS $2.51 (diluted $2.48).
- SG&A: $217.07 million, 18.9% of sales; organic SG&A up ~3% YoY; cost controls in place but some inflation-driven costs.
- Cash flow: Operating cash flow $84.2 million; free cash flow $76.7 million (79% of net income); YTD free cash flow ~$235 million, up 64% YoY.
- Balance sheet: Cash ~$457 million; net leverage 0.3x EBITDA; debt total $596.97 million; cash and equivalents supporting capex and acquisitions; repurchased ~100k shares for $18 million in Q3; YTD repurchases $29 million.
- Outlook: Fiscal 2024 adjusted EPS guidance raised to $9.55–$9.70; organic sales growth 1.5%–2.5%; EBITDA margins 12.0%–12.1%; Q4 EPS $2.44–$2.59; organic daily sales down 1% to up 2% YoY; gross margins flat to up slightly; ongoing cost control and LIFO tailwinds anticipated. Management also outlined a longer-term aspirations of $5.5 billion in sales and 13% EBITDA margins in fiscal 2025.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
1.15B
1.27%
6.43%
Gross Profit
325.49M
-2.29%
2.65%
Operating Income
124.71M
-1.74%
8.82%
Net Income
97.22M
0.03%
6.56%
EPS
2.51
-0.40%
6.81%
Key Financial Ratios
currentRatio
3.77
grossProfitMargin
28.4%
operatingProfitMargin
10.9%
netProfitMargin
8.48%
returnOnAssets
3.41%
returnOnEquity
5.82%
debtEquityRatio
0.36
operatingCashFlowPerShare
$2.18
freeCashFlowPerShare
$1.98
dividendPayoutRatio
14.8%
priceToBookRatio
4.53
priceEarningsRatio
19.43
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management takeaways from the Q3 2024 earnings call:
- Strategy and growth framework: Neil Schrimsher emphasized ongoing internal growth initiatives and inorganic acquisitions as primary growth levers, noting that the quarter showed a trough in Engineered Solutions and a path to accelerated organic growth linked to automation, cross-selling, and reshoring tailwinds. “Our priorities remain unchanged with a primary focus on optimizing growth and operating capabilities through both organic investments and inorganic acquisitions.”
- Kopar acquisition (Mexico): Neil announced a definitive agreement to acquire Grupo Kopar, adding ~16 locations across Mexico, Costa Rica and Texas, ~200 associates, and expected annual sales >$60 million in year one with accretive gross and EBITDA margins. Cross-border cross-sell opportunities are anticipated with U.S. customers, expanding the automation footprint.
- Demand environment and mix: Dave Wells highlighted a mixed demand backdrop but solid Service Centers growth (2.6% YoY in Service Centers; organic daily growth +2.6% excluding acquisitions), with Engineered Solutions down 3.2% organically (post one fewer selling day). Technological vertical headwinds have stabilized, and backlogs in Engineered Solutions remain elevated, aiding future revenue visibility.
- Margin and costs: EBITDA margin declined YoY (11.8% vs 12.4% in prior year) due to engineered solutions softness and mix effects, but LIFO tailwinds aided gross margins by ~30 bps YoY. Management cited ongoing inflation controls and productivity initiatives as shielding margins.
- Outlook and caution: Management updated full-year guidance to reflect continued macro uncertainty, emphasizing a prudent stance for Q4 and into fiscal 2025. “We believe it remains prudent to take a balanced approach to our near-term outlook pending more definitive and broader signs of a positive inflection in macro and industry conditions.”
- Capital allocation and balance sheet: The company maintained a strong balance sheet with low leverage, ongoing share repurchases, and robust free cash flow generation that supports both organic and inorganic investments.
- 4Q and 2025 trajectory: Expectation of continued service center strength, with Engineered Solutions under more pressure but offset by automation and cross-selling potential; management seeks to progress toward the 5.5B revenue and 13% EBITDA margin target for fiscal 2025.
"our priorities remain unchanged with a primary focus on optimizing growth and operating capabilities through both organic investments and inorganic acquisitions."
— Neil Schrimsher
"the acquisition will add approximately 200 new associates and is expected to generate annual sales over $60 million in the first year with accretive contributions to both gross margins and EBITDA margins"
— Neil Schrimsher
Forward Guidance
Guidance synthesis and assessment:
- FY2024 guidance: Adjusted EPS guided to $9.55–$9.70, based on 1.5%–2.5% total sales growth with 0.5%–1.5% organic growth; EBITDA margins targeted at 12.0%–12.1%. The range excludes a $3 million net tax benefit realized in 2Q 2024. Q4 implied EPS of $2.44–$2.59 and organic daily sales down 1% to up 2% YoY, with gross margins flat to up slightly sequentially and continued deleveraging on expenses.
- Near-term risk factors: Mixed end-market demand, particularly weaker fluid power OEM demand in Engineered Solutions and slower recovery in the technology vertical. April 2024 data suggested a modest sequential progression but with softer cross-market visibility. This supports a cautiously constructive stance for 4Q and early FY2025.
- Longer-term outlook: Management aspires to reach $5.5 billion in sales and 13% EBITDA margins in fiscal 2025, supported by automation, robotics, and data-centric solutions, as well as reshoring and energy-transition initiatives. Achievability hinges on scale-up of Kopar and automation-led bookings, expansion of service center penetration, and ongoing margin discipline.
- Key factors to monitor: (i) execution and integration of Kopar in Mexico and any cross-border synergies; (ii) trajectory of Engineered Solutions demand, particularly fluid power OEM exposure; (iii) backlog conversion dynamics in automation and flow control; (iv) macroeconomic catalysts (ISM PMI, durable goods, and infrastructure spending) and supply-chain inflation; (v) seasonality effects and selling days that influence Q4 dynamics.
- Bottom line: The combination of resilient cash flow generation, a strong balance sheet, and a strategic automation push provides a framework for moderate near-term upside if OEM and technology vertical headwinds abate, while the Kopar acquisition adds a material growth vector in North America’s automation landscape.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
AIT Focus
28.39%
10.90%
5.82%
19.43%
CNM
27.00%
11.90%
6.33%
11.39%
GWW
39.30%
15.90%
14.10%
18.13%
DXPE
29.90%
8.55%
4.45%
8.92%
SITE
39.60%
5.78%
2.74%
38.45%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
AIT combines a defensible cash-generative core with a clear growth agenda centered on automation, cross-border expansion, and portfolio diversification via Kopar. The Q3 2024 results show a modest organic rebound in the Service Centers and a trough-like performance in Engineered Solutions, setting the stage for a potential rebound in 2025 as automation and flow-control investments mature. The balance sheet strength supports accretive acquisitions and capital return, while the long-term target of $5.5B in sales with 13% EBITDA margins provides a tangible growth framework. Investors should weigh near-term headwinds in Engineered Solutions and technology verticals against the strategic upside from automation, Kopar synergies, and resilient free cash flow. Given the elevated backlog in engineered solutions and the improving order trends in automation, the stock could be viewed as a strategic long-term hold or a selective buy on weakness, with attention to Kopar integration milestones and macro-sensitive segments.
Key Investment Factors
Growth Potential
Catalysts include Kopar integration and cross-border opportunities, expanding automation and robotics offerings, and continued growth in core Service Center MRO and flow-control solutions. The 5.5B revenue and 13% EBITDA margin aspiration for FY2025 provides a clear growth target anchored by secular tailwinds (reshoring, data center/semiconductor infrastructure, and energy efficiency).
Profitability Risk
Near-term segment softness in Engineered Solutions and Technology vertical headwinds; execution risk and integration costs related to Kopar; macro uncertainty impacting capex cycles; inflation persistence impacting input costs and LIFO dynamics; FX exposure and potential supply chain disruptions; reliance on customer mix and national accounts for pricing power.
Financial Position
Sturdy liquidity and deleveraging profile: cash of about $457M, net leverage ~0.3x EBITDA, robust free cash flow ($235M year-to-date, up 64% YoY), and disciplined capital allocation (approx. $29M YTD in share repurchases). These fundamentals support Kopar integration, automation investments, and ongoing shareholder return.
SWOT Analysis
Strengths
Strong free cash flow generation and low net leverage (net debt ~$140.4M; net leverage 0.3x EBITDA).
Resilient Service Center segment with solid organic growth and cross-sell opportunities.
Healthy backlog in Engineered Solutions and growing momentum in Flow Control and automation opportunities.
Strategic automation capabilities and planned Kopar integration to broaden addressable market.
Diversified end-market exposure and resilient cash flow supports capital deployment.
Weaknesses
Engineered Solutions and technology vertical headwinds weighing on near-term profitability.
Margin pressure from mix shift and higher SG&A costs; LIFO tailwinds partially offset by higher input costs.
Dependency on OEM capex cycles and macro strength for some end-markets.
Opportunities
Kopar integration and cross-border cross-sell opportunities in the U.S. and Mexico.
Automation and robotics expansion, including smart vision and mobile robots.
Data center infrastructure and energy-transition projects fueling flow-control and fluid power demand.
Reshoring and U.S. infrastructure investment tailwinds supporting MRO and service-center growth.
Threats
Continued macro volatility and potential slowdown in industrial production.
Inflation persistence and input-cost inflation pressures affecting margins.
Competition from larger distributors with higher margin structures.
Execution risk and integration challenges with Kopar and automation investments.