Applied Industrial Technologies, Inc. (NYSE:AIT) Q3 2018 Earnings Conference Call - Final Transcript

Apr 26, 2018 • 10:00 am ET

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Applied Industrial Technologies, Inc. (NYSE:AIT) Q3 2018 Earnings Conference Call - Final Transcript

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Presentation
Executive
David K. Wells

when compared to the same quarter in the prior year. Acquired businesses accounted for $32.7 million, or 22.5% of the year-over-year growth, including $5.7 million in one-time acquisition cost and $4.2 million of intangibles amortization related to the FCX acquisition.

Changes in foreign currency rates increased SG&A in the quarter by $1.3 million or 0.9% compared to the prior year quarter. Excluding the impact of acquisitions and currency translation, SG&A increased only $4 million or 2.7% year-over-year for the quarter, driven primarily by the impact of annual merit increases and higher performance based incentives. Excluding the impact of acquisitions, average head count in the quarter was down 15 positions year-over-year, reflecting continued leverage of systems investments and productivity initiatives.

Resulting EBITDA for the quarter was $72.3 million or 8.7% of sales. This included the adverse impact of $5.7 million of the total $6.7 million in one-time transaction cost, associated with the FCX acquisition, which were recorded in SG&A. The effective income tax rate was 26.1% for the quarter, which was lower than we guided, primarily as a result of 120 basis points or $1.3 million benefit recognized from discrete tax adjustments.

We now expect our fourth quarter effective tax rate to be in the range of 33% to 34% of pre-tax earnings, as we complete the final re-measurements of certain deferred taxes from the blended 28% fiscal year 2018 rate to the go forward 21% US statutory rate. Our consolidated balance sheet remains strong with shareholders' equity of $806 million. Following the culmination of the FCX Performance transaction and borrowing to fund the acquisition, our capital allocation priorities remain focused on delevering and continuing to deliver shareholder value by maintaining our track record of consistent dividend payments. As such, there was no share repurchase activity in the quarter.

Additionally, we extinguished $25 million of the initial $112.5 million revolver draw, taken as we executed our new credit facility January 31, to fund the FCX Performance acquisition. Cash generated from operating activities was $26.7 million for the quarter, $6.1 million lower than the prior year quarter. Year-over-year build of accounts receivable within the quarter reflected improved collections performance and past due reduction, but was still a $7.5 million headwind as a result of incremental volumes. As we look forward to our June fiscal year-end, we expect operational inventory levels to decrease by $20 million.

Additionally, we expect to recognize further benefits from our collections and payables working capital management initiatives currently ongoing to maximize our fourth quarter cash flow. Regarding our full year outlook, as referenced in today's earnings release, we raised our fiscal year 2018 earnings guidance to a range of $3.51 to $3.61 per share and a sales increase of 17.5% to 18.5%.

Excluding the benefit of the FCX Performance acquisition, this assumes a sales increase of between 8.1% to 8.6% for the year, based on continued positive near-term industrial market outlook and further traction from our strategic growth initiatives. Additionally, our full-year EPS guidance includes $0.12 in one-time