APPLIED INDUSTRIAL TECHNOLOGIES, INC. (10-Q)

Applied Industrial Technologies Navigates Challenging Economic Conditions

Applied Industrial Technologies, a leading value-added distributor and technical solutions provider, has reported its financial results for the third quarter and first nine months of fiscal year 2025. Despite facing headwinds from subdued demand and economic uncertainty, the company demonstrated resilience, delivering solid financial performance and strategic progress.

Financial Performance Overview

For the third quarter ended March 31, 2025, Applied reported consolidated sales of $1,166.7 million, an increase of 1.8% compared to the prior year quarter. Acquisitions contributed $75.7 million or 6.6% to sales growth, while unfavorable foreign currency translation reduced sales by 0.9%. Excluding the impact of acquisitions and foreign currency, sales declined 3.9%, primarily due to lower demand.

Operating income for the quarter increased 6.8% to $129.4 million, with operating margin expanding to 11.1% of sales from 10.6% in the prior year quarter. This improvement was driven by expanded gross profit, including contributions from recent acquisitions, despite the softer demand environment.

Net income for the quarter increased 2.7% to $99.8 million, with diluted earnings per share rising 3.6% to $2.57. The effective tax rate for the quarter was 21.6%, up from 20.7% in the prior year period, primarily due to a decrease in certain compensation-related deductions.

For the first nine months of fiscal 2025, Applied reported sales of $3,338.7 million, a 0.6% increase compared to the same period last year. Acquisitions contributed $117.6 million or 3.5% to sales, while unfavorable foreign currency translation reduced sales by 0.6%. Excluding the impact of acquisitions and foreign currency, sales declined 2.3%.

Operating income for the nine-month period increased 2.0% to $363.4 million, with operating margin expanding to 10.9% of sales from 10.7% in the prior year period. Net income for the nine months increased 1.0% to $283.9 million, and diluted earnings per share rose 2.1% to $7.33.

Segment Performance

Applied’s business is organized into two reportable segments: Service Center Based Distribution and Engineered Solutions.

The Service Center Based Distribution segment, which primarily serves MRO (Maintenance, Repair, and Operations) markets, reported a 3.5% decrease in sales for the third quarter and a 1.3% decrease for the first nine months. Excluding the impact of acquisitions and foreign currency, sales in this segment declined 2.4% in the quarter and 0.9% in the nine-month period, driven by softer MRO spending and capital maintenance projects.

The Engineered Solutions segment, which serves OEM (Original Equipment Manufacturer) customers, reported a 13.5% increase in sales for the third quarter and a 4.7% increase for the first nine months. Acquisitions contributed 20.8% to sales growth in the quarter and 10.3% in the nine-month period. Excluding the impact of acquisitions, sales in this segment declined 7.3% in the quarter and 5.6% in the nine-month period, reflecting ongoing weakness across mobile fluid power OEM customers and softer flow control and automation sales.

Operational Highlights and Strategic Initiatives

During the third quarter, Applied completed the acquisition of Hydradyne, LLC, a Dallas-based provider of fluid power solutions and value-added services. The $282.1 million purchase price was funded primarily with available cash. Hydradyne is included in the Engineered Solutions segment and is expected to contribute to the company’s growth and profitability going forward.

The company continues to focus on margin expansion initiatives, which contributed to the improved gross profit margin of 30.5% in the third quarter, up from 29.5% in the prior year quarter. Additionally, the company’s ongoing cost control efforts and efficiency gains helped drive a 4.1% increase in selling, distribution, and administrative (SD&A) expenses, which were lower as a percentage of sales compared to the prior year quarter.

Applied’s balance sheet remains strong, with total debt of $572.3 million at the end of the third quarter, down from $597.4 million at the end of fiscal 2024. The company’s working capital position was $1,217.2 million, with a current ratio of 3.6 to 1. Management believes the company’s liquidity and financial flexibility provide ample resources to fund future growth initiatives, including acquisitions and capital investments.

Outlook and Key Trends

The company monitors several economic indicators that provide insights into industrial activity in the United States, including the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices, as well as the Purchasing Managers Index (PMI). These indices have shown mixed signals in recent months, with the MCU increasing slightly to 77.8 in March 2025 from 77.6 in December 2024, but the PMI declining to 49.0, indicating continued contraction in the manufacturing sector.

Despite the challenging economic environment, Applied remains focused on executing its strategic priorities, which include driving organic growth, expanding its product and service offerings through targeted acquisitions, and optimizing its operational efficiency. The company’s diversified customer base, multi-channel capabilities, and strong brand recognition position it well to navigate the current conditions and capitalize on future growth opportunities.

Looking ahead, management expects the company’s full-year fiscal 2025 tax rate to be in the range of 22.0% to 23.0%. The company remains committed to returning capital to shareholders, having repurchased 331,876 shares of its common stock for $79.3 million during the first nine months of fiscal 2025.

Conclusion

Despite the headwinds faced in the current economic environment, Applied Industrial Technologies has demonstrated its resilience and ability to adapt. The company’s strategic acquisitions, margin expansion initiatives, and cost control measures have enabled it to deliver solid financial performance and position the business for continued success. As the company navigates the challenges ahead, it remains focused on leveraging its strengths to drive organic growth, expand its capabilities, and create long-term value for its shareholders.