Applied Industrial Technologies Shares Reasons for MRO Optimism as Q4 Sales Fall 18% YoY

The company expects current quarter organic sales to remain considerably subdued, but sees MRO demand picking up after.

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Applied Industrial Technologies shared its 2020 fourth quarter and full-year financial results on Wednesday, and like the majority of publicly-traded industrial distributors and suppliers, they showed considerable year-over-year sales declines amid impacts from COVID-19.

Nevertheless, Cleveland, OH-based Applied shared an optimistic outlook for the MRO market and potential demand for industrial products as the greater manufacturing economy continues to ramp back up toward pre-pandemic levels.

The distributor and technical solutions provider of industrial motion, fluid power, fluid control and automation technologies reported total Q4 sales of $725 million, down 17.9 percent year-over-year (YoY) and down 12.8 percent from Q3.

Q4 organic sales fell 18.4 percent YoY, including a 21.1 percent organic decline in the company's Service Center segment (69 percent of total sales) and an 11.8 percent decline in its Fluid Power & Flow Control segment (31 percent of total sales).

Applied had a total Q4 net profit of $30 million, compared to $40 million a year earlier and an $83 million loss in Q3. Q4 operating profit was $47 million, compared to $72 million a year earlier and a $78 million loss in Q3, while Q4 gross margin of 28.7 percent was down from 29.2 percent a year earlier.

"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," commented Neil Schrimsher, Applied president and CEO. "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."

In its Q4 earnings presentation, Applied shared a list of reasons why its MRO and other industrial products should be increasingly critical to the industrial supply chain following the pandemic. Those reasons include:

  • A higher demand following a period of plant shutdowns, idled equipment and deferred maintenance.
  • A higher focus on addressing skilled labor constraints as the economy reopens.
  • A greater focus on plant floor optimization/automoation and equipment maintenance amid supply chain de-risking intiatives.
  • Implementation of more stringent facility and equipment standards.
  • A move toward manufacturing restoring that could lead to a greater customer push to diversity production concentration and shift risk management.
  • Evolving production strategies and investments in automation and IIoT.
  • Acceleration of industry consolidation that will result in increased market share toward leading distribution platforms such as Applied's.

For the full year, Applied had fiscal 2020 sales of $3.25 billion, down 6.5 percent from 2019, with organic sales down 9.4 percent. The company's 2020 net profit of $24 million was a fraction of the $144 million it had in 2019.

Looking forward, Applied is expecting its Q1 2021 organic sales to be down 17 to 18 percent YoY. The company said it has extended its previously-announced cost savings measures into early fiscal 2021, with the majority of those actions set as temporary and to be reevaluated as the year progresses.


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