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Text: Both of these documents are available in the Investor Relations section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us and hope you're doing well.
I'll start today with some perspective on our fourth quarter results, current industry conditions and company-specific opportunities.
Dave will follow with more detail on the quarter's performance and our forward outlook including fiscal 2022 guidance.
And then I will close with some final thoughts.
Overall, we ended our fiscal 2021 with strong fourth quarter performance that exceeded our expectations and highlights our favorable competitive position as the industrial recovery and internal initiatives continue to gain traction.
Our associates' teamwork, dedication and invaluable contributions turned these challenges into opportunities.
This includes being a critical partner across essential industries and now supporting the growth requirements customers face as we enter what could be a prolonged period of favorable industrial demand.
Combined with our strong cost discipline and the resilient nature of our model, we persevered and generated record earnings in fiscal 2021, while remaining fully invested in our long-term strategy.
In a year, unlike any other, we appalled and often exceeded our commitments to customers, suppliers and all stakeholders.
And we now look to build on this momentum going forward.
As it relates to the quarter and our views going forward, I want to reemphasize several key points that continue to drive strong performance across our business.
First, we are seeing sustained demand recovery.
Second, our industry position and strategic initiatives are driving growth opportunities beyond the cycle recovery.
Third, we are benefiting from a leaner cost structure and effective channel execution.
And our final key point, we enter fiscal 2022 in a strong financial position with ample liquidity.
In terms of underlying demand, we saw continued improvement across both our segments as the quarter progressed, driving daily sales above normal seasonal patterns and our expectations.
Combined with the lapping of prior year pandemic related weakness, sales increased nearly 20% on an organic basis over prior year levels and we're positive on a two-year stack basis.
Trends were stronger in the second half of the quarter versus the first half as break fix and maintenance activity continued to ramp.
In addition, we saw the release of larger capital spending during the quarter, including across our Fluid Power and Flow Control segment, where shipments accelerated following strong order activity in recent months with backlog remaining at record levels.
This positive sales momentum has continued into early fiscal 2022 with first quarter organic sales through mid August up by a high teens percent over the prior year across both our Service Center segment and Fluid Power and Flow Control segment.
When looking across our customer end markets on a two-year stack basis, the strongest areas include lumber and wood, food and beverage, aggregates, technology, chemicals, transportation, mining and construction.
We're also seeing improved order momentum across other heavy industries including machinery, as well as stronger demand within our longer cycle specialty flow control market verticals after lagging some in recent quarters.
Importantly, we believe our sales improvement goes beyond the current end market recovery and reflects building momentum across our internal growth initiatives.
In our Service Center segment, we are supplementing our technical scale with more robust analytics, digital solutions and customer development initiatives.
We're also benefiting from past and ongoing talent development initiatives centered on our best team wins culture while our consistent strategy and local presence is strengthening relationships across our customer and supplier base, as they look to execute their growth initiatives with more capable channel partners.
In addition, we're leveraging a growing cross-selling opportunity.
Legacy embedded service center customers are increasingly recognizing our full capabilities across fluid power, flow control, automation and consumable solutions.
We believe this drives greater customer penetration and new business wins as customers adhere to new facility protocols and mitigate supply chain risk.
In our Fluid Power and Flow Control segment, we continue to see strong demand tailwinds across the technology sector, including areas tied to 5G infrastructure, cloud computing and semiconductor manufacturing.
Our exposure across this area has been supplemented in recent years through the ongoing build out of our automation platform, focused on advanced facility automation through machine vision, robotics, motion, and industrial networking technologies.
Related organic sales across this automation offering were up over 30% year-over-year in the fourth quarter with order activity remaining strong in recent months.
Our growing automation offering also aligns with the related trends and solutions we offer across our legacy operations.
This includes areas within fluid power where our capabilities in electronic integration, software coding, pneumatic automation and smart technology applications are driving new growth opportunities as customers increasingly focus on machine technology advancements and data analytics.
Combined with an accelerating demand recovery in longer and later cycle markets such as industrial OE, process flow and construction segment sales were up 8% organically on a two-year stack basis during the fourth quarter with positive trends continuing in recent months.
Overall, the momentum we see building from our industry position and initiatives leaves us optimistic heading into fiscal 2022.
We remain cognizant of ongoing supply chain constraints across the industrial sector, which has been widely conveyed throughout the industry in recent months.
Lead times remain extended across certain product categories driven by component delays and an increase in fulfillment timing.
However, the backdrop does not appear to be getting materially worse and the direct impact to our operations and performance remains relatively modest to date.
Our technical scale, local presence and supplier relationships have been and will continue to be a competitive advantage in managing through current supply chain dynamics and driving share gain opportunities as the cycle continues to unfold.
Our team is also doing a great job of managing broader inflation through price actions, strong channel execution and benefits from productivity gains.
Combined with a leaner cost structure, our EBITDA increased over 46% year-over-year in the quarter.
SD&A expense as a percent of sales was the lowest in 10 years, and EBITDA margins are at record levels.
While we expect ongoing inflationary headwinds going forward, our cost and margin execution provides strong evidence of the company-specific margin expansion opportunity, we continue to see unfolding in coming years.
Lastly, our balance sheet is in a solid position following strong cash generation in fiscal 2021.
We ended the year with net leverage of 1.8 times, the lowest in four years, an ample liquidity heading into fiscal 2022.
Over the past two years, we deployed nearly $340 million on debt reduction, dividends, share buybacks and acquisitions during an uncertain and challenging operating environment, further highlighting the strength of our team and business model.
We also entered fiscal 2022, with an active M&A pipeline across our focused areas of automation, flow control and fluid power that could present additional value creating growth opportunities going forward.
Overall, I'm encouraged by our ongoing execution and position.
These are exciting times at Applied as our differentiated value proposition and growth strategy are engaging our internal team and driving increased recognition across our legacy and emerging industry verticals.
And just another reminder before I begin.
Now, turning to our results for the quarter.
Consolidated sales increased 3.6% over the prior year quarter.
Acquisitions contributed 2.1 percentage points of growth and foreign currency drove a favorable 1.7% increase.
The number of selling days in the quarter were consistent year-over-year.
Netting these factors, sales increased 19.8% on an organic basis.
While partially benefiting from easier comparisons driven by prior year pandemic related headwinds, we note the two-year stack year-over-year organic change was positive in the quarter.
In addition, average daily sales rates increased 6% sequentially on an organic basis in the third quarter, which was approximately 600 basis points above historical third quarter to fourth quarter sequential trends.
As it relates to pricing, we estimate the overall contribution of product pricing and year-over-year sales growth, was around 80 to 100 basis points in the quarter.
The segment's average daily sales rates improved 4% sequentially from the prior quarter, which likewise was above normal seasonal patterns.
Underlying demand improvement was broad based during the quarter, though end markets such as lumber and forestry, food and beverage, chemicals, aggregates, pulp and paper, and mining reflected the strongest growth on a two-year stack basis.
In addition to the strong sales performance across our U.S. service center operations, we saw favorable growth across our C class consumables and the international operations, which contributed to our top line performance in the quarter.
Within our Fluid Power and Flow Control segment, sales increased 26.1% over the prior year quarter with our acquisitions of ACS and Gibson Engineering contributing 6.4 points of growth.
On an organic basis segment sales increased 19.7% year-over-year and 8% on a two-year stack basis.
Underlying demand across the segment strengthened through the quarter, with segment sales benefiting from ongoing favorable demand within technology end markets, as well as with life sciences and chemical end markets.
We are also seeing strong order activity across off-highway mobile and industrial fluid power applications, while process related end markets have picked up following a slower recovery in recent quarters.
Lastly, demand across our expanding automation platform continues to show strong organic growth trends.
As we have previously indicated, we see sustained favorable growth dynamics across the segment given various secular tailwinds and company-specific opportunities tied to our leading technical industry position.
Moving to gross margin performance.
As highlighted on Page 8 of the deck, gross margin of 29.4% improved 63 basis points year-over-year.
During the quarter, we recognized a net LIFO benefit of $3.7 million compared to LIFO expense of $0.8 million in the prior year quarter.
The net LIFO benefit relates to year end LIFO adjustments for inventory layer liquidations and had a favorable 52 basis points year-over-year impact on gross margins during the quarter.
Excluding the LIFO impact in both periods, gross margins still expanded year-over-year, reflecting strong channel execution and effective management to supplier cost inflation with price cost dynamics neutral during the quarter.
Gross margins declined sequentially reflecting some normalization from record third quarter performance, as well as timing of price adjustments.
Turning to our operating costs.
Selling, distribution and administrative expenses increased 13.9% year-over-year compared to adjusted levels in the prior-year period or approximately 9% on an organic constant currency basis.
Year-over-year comparisons exclude $1.5 million of non-routine expense recorded in the prior year quarter.
SD&A expense was 20.3% of sales during the quarter, down from 22% in the prior year quarter.
Strong operating leverage in the quarter reflects the benefits of a leaner cost structure following business rationalization initiatives executed over the past several years.
In addition, we continue to realize benefits from our operational excellence initiatives, shared services model and technology investments while bad debt and amortization expense were also lower year-over-year.
These dynamics and our culture of cost control and accountability, positive balance, incremental growth related investments, higher incentive expense and the lapping of prior year temporary cost actions.
Our strong cost control combined with improving sales and firm gross margins resulted in EBITDA growing approximately 46% year-over-year when excluding non-routine expense in the prior year period or 39% when excluding the impact of LIFO in both periods.
In addition, EBITDA margin was 10.6% up 165 basis points over the prior year, which includes a favorable 52 basis point year-over-year impact from LIFO.
Combined with the reduced interest expense and a lower effective tax rate, reported earnings per share of $1.51 was up 89% from prior year adjusted earnings per share of $0.80.
Similar to recent quarters, the tax rate during our fourth quarter included discrete benefits related to stock option exercises.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the fourth quarter was $38.3 million, while free cash flow totaled $34.6 million.
For the full year, we have generated free cash up $226 million, which represented 121% of adjusted net income.
We had another strong year of cash generation in fiscal 2021 following our record performance in fiscal 2020.
Over the past few years, we have generated over $500 million of free cash flow.
While partially reflecting the countercyclical nature of our model, our free cash generation is up over prior peak levels, reflecting our increased scale and enhanced margin profile, as well as ongoing benefits from our working capital initiatives, including cross-functional inventory planning, enhanced collection standard work and leverage of our shared services model, all supported with recent investments in technology.
Given the cash performance and confidence in our outlook, we deployed excess cash through share buybacks during the quarter, repurchasing 400,000 shares for approximately $40 million.
In addition, we paid down $106 million of debt during fiscal 2021, including $24 million during the fourth quarter.
We ended June with approximately $258 million of cash on hand and net leverage at 1.8 times adjusted EBITDA, below the prior level of 2.3 times and the fiscal 21 third quarter level of 1.9 times.
Our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option combined with incremental capacity on our AR securitization facility and uncommitted private shelf facility, our liquidity remained strong.
Turning now to our outlook.
For fiscal 2022, we're introducing earnings per share guidance in the range of $5 to $5.40 per share based on sales growth of 8% to 10%, including a 7% to 9% organic growth assumption, as well as EBITDA margins of 9.7% to 9.9%.
Our sales outlook assumes a relatively steady industrial demand environment from current trends.
On a segment basis, the sales outlook assumes high single digit organic growth in our Service Center segment and high single to low double-digit organic growth in our Fluid Power and Flow Control segment.
In addition, based on quarter-to-date sales trends through mid August, we currently project fiscal first quarter organic sales to grow by a mid-teens percentage over the prior year quarter.
From a margin and cost perspective, we assume ongoing inflationary headwinds, including greater LIFO expense in fiscal 2022, as well as normalizing personnel expense, including the impact of our annual merit pay increase effective January 1.
We expect higher LIFO expense will result in gross margins declining sequentially in our first fiscal first quarter following the LIFO benefit we recognized during our fourth quarter.
Based on these dynamics, as well as the lapping of prior year temporary cost actions and the impact of ongoing internal growth investment, we currently project incremental margins and operating income in the low double-digit range for fiscal 2022.
We continue to take a balanced approach to managing our operating cost, while our expense and margin execution in recent quarters, provides strong indication of our potential going forward, including our target of mid-to-high teen incremental margins on average over an up cycle.
In addition, while the macro backdrop has improved over the past several quarters, there remains lingering uncertainty related to COVID-19 transmission rates, labor constraints and supply chain headwinds, which could influence the cadence and trajectory of industrial activity as the year progresses.
We have attempted to capture these variables within our initial guidance, which we believe is prudent as we continue to recover from an unprecedented downturn.
Lastly from a cash flow perspective, we expect free cash flow to be lower year-over-year in fiscal '22 compared to fiscal 2021 as AR levels continue to cyclically build and we replenish inventory at a greater pace in support of our growth opportunities and the recovery.
Over the past several years, we've deployed strategic investments and initiatives that have positioned Applied for stronger growth relative to our legacy trends and improved returns on capital in the coming years.
While near term macro trends continue to face a number of variables as we transition away from an unprecedented downturn, I believe we remain early in a potentially prolonged industrial cycle considering the breadth of tailwinds we see developing today.
These include emerging capex spending following multiple years of under investment, as well as greater industrial production across North America, as customers reduce reliance on long distance global supply chains.
In addition, increasing signs of investment in U.S. infrastructure are promising, which could represent a notable tailwind given our participation in industrial machinery, metals, aggregates, chemicals, mining and construction.
We also enter fiscal 2022 with a record backlog and strong order growth across some of our longer cycle businesses, which have expanded in recent years including Fluid Power, Flow Control and now automation that focus on engineered solutions and tied to our customers core growth initiatives and capital investments.
While supply chain tightness across the industry is partially influencing backlog right now, we see ongoing demand creation as Applied's technical position is called upon to address customers' greater operational and supply chain requirements.
This includes improving demand across our higher margin specialty flow control operations, which should benefit further into fiscal 2022 from pent-up maintenance and service activity, as well as a greater focus on higher environmental and safety standards.
We're also expanding our flow control focus across attractive industry verticals such as life sciences and hygienics.
Further, we'll continue to expand into new and emerging areas of growth across the industrial supply chain.
Of note, following the initial investment and build out of our next generation automation offering, we are now a leading distributor and solutions provider across several product focus areas including advanced machine vision, as well as collaborative and mobile robotic technologies.
We're also investing in digital capabilities that complement our local presence and continue to evaluate and develop new commercial solutions that fully leverage our technical capabilities and application expertise as legacy Industrial Infrastructure converges with new emerging technologies.
Lastly, our cross-selling initiative is gaining momentum, with related business wins increasing and broader teams engaged.
Considering our embedded customer base across our core service center network, an addressable market exceeding $70 billion and growing, we believe this initiative represents a significant opportunity that should expand our share across both legacy and emerging market verticals into fiscal 2022 and beyond.
Overall, these growth initiatives combined with value creating M&A potential, a leaner cost structure, operational excellence initiatives and expansion of our shared services model, provide a strong runway to drive above market growth and EBITDA margin expansion in coming years.
In the interim, we're focused on achieving our financial targets of $4.5 billion in sales and 11% EBITDA margins.
While the timing of these goals remains dependent on the industrial cycle trajectory, I believe they're within Applied's reach and provide the framework for significant value creation as we execute our strategy going forward.

user
compname reports q4 earnings per share $1.51.
q4 earnings per share $1.51.
sees fy earnings per share $5.00 to $5.40 including items.
sees fy sales up 8 to 10 percent.

assistant