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Text: Both of these documents are available in the Investor Relations section of our website at applied.com.
A replay of today's broadcast will be available for the next two weeks.
These are available at the Investor Relations section of applied.com.
We appreciate you joining us.
I'll begin with some brief thoughts, and then Dave will follow to review our financial results in more detail.
Our second quarter was characterized by cost discipline, margin control and solid cash generation within a persistent soft end market backdrop.
Execution in these areas is providing a path to deliver our earnings and cash commitments for the year and should support accretive growth once demand rebounds as well as capital deployment opportunities going forward.
We also remain highly focused on accelerating our company-specific out growth potential regardless of the industrial cycle.
As highlighted in recent quarters, our leading technical position and service capabilities across motion control, fluid power, flow control and now automation puts us in a unique position to capture greater share organically as our customers outsource their technical MRO and production infrastructure needs.
As well as through M&A, a smaller players look to partner with a leading technical platform, given increasing service, operational and capital requirements.
This trend should supplement a strong cross-selling opportunity here at Applied that remains in the early innings, and is focused on expanding the reach of our fluid power, flow control, consumables and automation solutions across our embedded service center network customer base.
We also entered our second half of fiscal 2020 with a strong balance sheet, having reduced outstanding debt by $115 million over two years, post our acquisition of FCX, with net leverage down to our stated target of 2.5 times.
Combined with our cash generation trajectory, we have notable flexibility for additional deleveraging, acquisitions and pursuing other opportunities to enhance shareholder returns in the back half of our fiscal year.
As it relates to the broader end market backdrop, as discussed in recent quarters and consistent with macroeconomic industrial reports, demand remains weak across our top industry verticals.
After seeing some stabilization during October and November, customer activity was unusually weak during December and remained subdued with organic sales trending down in the mid-single digits year-over-year, so far in January.
While softness remains broad-based declines were most notable within metals, mining, oil and gas, machinery and process-related industries.
We also saw greater weakness across our international operations during the quarter within Canada and Mexico.
Some of the recent softness likely reflects demand abnormalities that occurred this time a year, given seasonality, plant shutdowns and customer budget resets, in turn making it difficult to fully gauge the underlying direction of current demand.
We are also cognizant of potential positive momentum that could arise if a trade resolution can stay on track, which has the potential to positively influence trends for the balance of our fiscal 2020 and into fiscal 2021.
That said, uncertainty remains, and we believe that sensible approach to our outlook remains prudent at this time.
Regardless of the direction of the cycle near term, we know how to operate to it, as our industry and recent results highlight.
At the same time, there is a great understanding and commitment on the opportunity Applied has long-term as the leading technical MRO distribution and solutions provider.
Our strategy is deeply focused on this opportunity and moving the company toward its long-term financial goals, providing the framework for significant earnings growth and value creation in the coming years.
Before I begin, another reminder that a supplemental investor deck recapping key financial and performance talking points is available on our investors site.
To summarize, we are managing effectively in a slow and uncertain end market environment with timely execution of our recent cost initiatives, continued solid gross margin performance and another positive quarter of cash generation.
We expect cash generation momentum to continue into the second half of fiscal 2020 providing ample flexibility to pursue capital deployment opportunities.
Overall, we believe we are well-positioned in the current environment.
Highlighting results for the quarter.
Consolidated sales decreased 0.8% over the prior year quarter, excluding 3.2% growth contribution from acquisitions, sales declined 4% on an organic basis.
Both selling days and foreign currency had a neutral impact this quarter.
As previously highlighted, sustained weak demand across a number of key end markets remains the primary drag on sales.
Looking at our results by segment.
As highlighted on Slide 6 and 7, sales in our Service Center segment declined 2.3% year-over-year or 3.5%, excluding a 1.2% incremental impact from acquisitions.
Results reflect continued weak manufacturing activity and related MRO needs across our service center network as well as softer demand within our international operations in Canada, and Mexico.
Segment sales were unusually weak during the month of December.
As mentioned earlier, we believe part of this reflects seasonal variations that occur around the holidays as customers to take time off and adjust project and production schedules.
Within our Fluid Power and Flow Control segment, sales increased 2.7% over the prior year quarter with acquisitions adding 7.6% growth.
This includes a full quarter of contribution from our August 2019 acquisition of Olympus Controls, and one remaining month of contribution from our November 2018 acquisition of Fluid Power sales.
On an organic basis, segment sales declined 4.9% reflecting weaker flow control sales and slower activity across our industrial OEM customer base, as well as the remaining year-over-year drag from the large project referenced in prior quarters.
Excluding the project related drag, segment sales declined approximately 3% on an organic basis over the prior year.
We note declines in this segment moderated and the daily sales rate was up modestly on a sequential basis, partially reflecting improving technology end market demand during the quarter.
Moving on to margin performance.
As highlighted on Page 8 of the deck, reported gross margin of 28.9% was up 4 basis points year-over-year.
Results include a non-cash LIFO charge during the quarter of approximately $1.9 million, which compared favorably to prior year LIFO expense of $2.7 million, resulting in a roughly 9 point -- basis point positive impact year-over-year.
Excluding LIFO, our gross margin was down a modest 5 basis points year-over-year.
Margins were slightly pressured by an unfavorable mix impact resulting from slower growth within local accounts as compared to large national accounts in our US service center operations.
This modest headwind was partially balanced by ongoing execution on pricing and other margin expansion initiatives.
Over time, we continue to expect mixed benefit margins, reflecting the positive contribution of expansionary products, growth among our technical service oriented solutions and ongoing actions to expand business across our local customer base.
Turning to operating cost.
On a reported basis, selling, distribution and administrative expenses were up 0.3% year-over-year, but down 3.4% on an organic basis, when adjusting out the impact of acquisitions and foreign currency translation.
SD&A was 21.9% of sales during the quarter, down 15 basis points sequentially on an adjusted basis.
Our teams are doing a commendable job of managing expenses in a slower environment including their timely execution of previously announced cost actions.
While, we remain highly focused on managing costs in the second half of our fiscal 2020 given the current environment.
As a reminder, our SD&A expense will increase on an absolute basis sequentially into our third quarter, reflecting seasonality as well as the impact of annual merit increases and two extra selling days versus the second quarter.
That said, we still expect SD&A to decline as a percent of sales into our second half relative to first half levels.
EBITDA in the quarter was $74.5 million compared to $76 million in the prior year quarter, while EBITDA margin was 8.9% or 9.2% excluding non-cash LIFO expense in the quarter.
Reported earnings per share for the quarter was $0.97 per share compared to $0.99 per share in the prior year.
Cash generated from operating activities was $34.9 million, while free cash flow was $47.9 million or approximately 126% of net income.
Year-to-date free cash flow of $93 million represents 119% of adjusted net income and is up nearly 60% from the prior year.
We are continuing to make good progress on our working capital initiatives in a slower demand environment.
This includes ongoing traction from our shared services and other collection initiatives.
We expect additional tailwinds into the second half of fiscal 2020, as inventory levels declined from the second quarter ending position.
We remain confident in our free cash flow potential for the full year, which will support our capital allocation strategy, focused on reducing outstanding debt, funding M&A opportunities, and opportunistically buying back shares.
We paid down $5 million of outstanding debt during the quarter.
Our debt is down nearly $115 million since financing the acquisition of FCX with net leverage at 2.5 times EBITDA at quarter end below the prior year period of 2.8 times.
This represents the 11th dividend increase since 2010 and underscores our strong cash generation and commitment to delivering shareholder value.
Transitioning now to our outlook.
We are narrowing our previous guidance ranges and now expect sales of down 2% to flat year-over-year or down 5% to down 3% on an organic day per day basis as well as earnings per share in the range of $4.20 to $4.40 per share.
Previously, our guidance assumes sales down 5% to down 1% organically and earnings per share of $4.20 to $4.50 per share.
Our updated guidance assumes end market weakness seen during December and January continues in coming months with seasonal Q3 sales step up at the lower end of historical trends.
At the midpoint, this implies mid-single digit organic sales declines will persist in the third quarter, with the declines easing to the low-single digits in the fourth quarter on easier comparisons.
By segment, our guidance assumes mid-to low-single digit organic declines year-over-year in our service center segment during the second half and low-single digit organic declines in our Fluid Power and Flow Control segment.
Our guidance also assumes gross margins are flat to up 10 basis points for the full year, slightly below our prior guidance of up 10 basis points to 20 basis points.
We continue to view 10 basis points to 20 basis points of gross margin expansion as the appropriate annual target over time, given our internal initiatives.
Lastly, we reaffirm our free cash flow outlook of $200 million to $220 million, which represents a 30% increase of our fiscal 2019 at the midpoint.
Overall, while we are executing largely to plan year-to-date, we remain prudent with our outlook, given the backdrop of uncertainty in near term industrial demand.
We remained highly focused on our internal growth and margin initiatives, which in addition to potential benefits from trade resolution and ongoing cost opportunities, we see several levers that should support our earnings momentum in coming quarters if the current environment does not weaken further.
Combined with our cash generation potential, we believe our position is strong and we are eagerly moving forward to realize our full potential.

user
compname reports q2 earnings per share $0.97.
q2 earnings per share $0.97.
fiscal 2020 guidance updated, range narrowed.
applied industrial technologies -2020 guidance now assumes non-gaap adjusted earnings per share of $4.20 to $4.40.
reaffirm our free cash guidance of $200 million to $220 million, up 30% at midpoint for 2020.
sees 2020 non-gaap adjusted earnings per share of $4.20 to $4.40.
sees sales down 2% to 0% in 2020.2020 adjusted earnings per share ranges exclude fiscal q1 restructuring expenses.
applied industrial technologies - recent quarter impacted by an unusually slow december.

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