MRO Magazine

Ongoing industrial market decline causes distributor to predict severe earnings drop

Cleveland, OH -- Dec. 12, 2001 -- A declining U.S. ecomony affecting all of its industrial markets has led to an an...


Industry

December 12, 2001
By MRO Magazine
MRO Magazine

Industries

Cleveland, OH — Dec. 12, 2001 — A declining U.S. ecomony affecting all of its industrial markets has led to an announcement yesterday by industrial distributor Applied Industrial Technologies that its sales and earnings will be less in its second quarter than it predicted in an Oct. 15, 2001, report.

Applied has more than 460 facilities and 4,600 employees across North America and offers over two million MRO and OEM parts to industry. In addition, Applied provides engineering, design, and systems integration for industrial and fluid power applications, as well as customized mechanical fabricated rubber and fluid power shop services. For its fiscal year ended June 30, 2001, the company posted sales of $1.63 billion.

In its October announcement, Applied said it expected sales in the second quarter, ending December 31, 2001, to decline by at least 10% from the previous year, with full-year sales in a range of $1.5 billion to $1.6 billion for fiscal 2002. Per-share earnings guidance provided at that time was between $1.00 to $1.25 for fiscal 2002, subject to any change resulting from a goodwill impairment assessment related to adoption of Statement of Financial Accounting Standards No. 142.

The company revised its guidance for second quarter sales between $345 million and $355 million, with earnings per share between $0.14 and $0.17.

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“Market activity, as reflected by numerous economic indices and as forecast by most of our key accounts, has continued to decline for the fourth consecutive quarter,” said Applied chairman and chief executive officer David Pugh. “The broad recession is affecting all of the markets we serve and is more severe than we originally thought.

“While we maintain a strong balance sheet and cash flow position, the macro-economics we are facing preclude us from attaining the sales and profit levels we had previously expected,” Pugh said. “The fundamentals of our business are sound, and we are still profitable, but just not as much as we would like,” he added.

In a conference call this week, Pugh commented that in a recent tour he made of branches across the U.S., managers told him the rate of decline in sales has lessened. “But there’s been no uptick, and I doubt we’ve reached bottom yet,” he said. The company’s forecast model shows the U.S. economy has more room to decline before it reaches the bottom, he said.

“We are praying for a market recovery, but one is not expected till mid-year 2002,” Pugh said.

“We’ve also just started to see Canada decline,” said president and chief operation officer Bill Purser. “They have been holding up but … the west has started to decline.” He added that sales in Canada haven’t backed off to the same degree as in the U.S., “but since we’re their largest market, it’s inevitable.”

Vice-president and chief financial officer John Whitten commented that the company’s margins are now lower as it has not been able to reduce expenses at the same rate as the decline in sales volume that the distributor has experienced. He also noted that volume incentives from suppliers are lower as Applied’s orders are being reduced, putting further pressure on margins.

Although Allied introduced a new fluid power catalogue two months ago, Purser said it is “too early to tell” what its impact will be on the company’s revenues. “The response has been very good and we’re expecting good results from it,” he said.

Future growth for Applied is expected to come from acquisitions, said Pugh. “Customers who are in bed with an incumbent supplier are reluctant to change to another supplier.” That means the main way for Applied to gain new customers is through the acquisition of competitors. There will be a “weeding out of less viable competitors” during this market trough, he predicted. “The larger, more capitalized guys should come out of this better than they went in.”

In March 2000, Applied acquired distribution businesses operating in western Canada as Bearing & Transmission (B&T), HyPower and All Agro Parts from Dynavest Corporation of Saskatoon, Sask. The acquisition gave Applied its first physical presence outside the United States.

The facilities, located in five provinces, included 24 bearing and power transmission systems service centres under the B&T identity, 15 fluid power service centres under the HyPower name, one central warehouse and three All Agro distribution centres serving specialized agricultural markets. The operations serve markets stretching from Vancouver Island in British Columbia to Thunder Bay in Ontario. Dynavest was privately held by brothers Earl and Brian Eidem.

Further sales and earnings guidance for the second half and full-year 2002 will be provided in the company’s second quarter earnings news release, which will be issued the week of January 14, 2002.

Fluid power catalogue introduced

In October 2001, Applied introduced Fluid Power Connection, a free 450-page catalogue featuring more than 14,000 hydraulic and pneumatic products from 45 manufacturers. The products in the catalogue represent the fluid power offering at Applied’s 470 service centres in the United States. Included are air preparation components, pneumatic cylinders and valves, fluid connectors, and hydraulic power units, pumps, motors, brakes, gearboxes, filtration components and cylinders.

It differs from standard product catalogues in that it contains detailed visuals of how a component fits the context of an entire system. The technical schematics assist customers in not only selecting a single component, but also in identifying complementary parts needed to put together a complete system.

By Bill Roebuck, Editor