e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SEPTEMBER 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Ohio
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34-0117420 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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One Applied Plaza, Cleveland, Ohio
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44115 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (216) 426-4000
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Shares of common stock outstanding on October 31, 2010 42,429,677 (No par value)
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
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Page |
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No. |
Part I: FINANCIAL INFORMATION |
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Item 1: Financial Statements |
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Condensed Statements of Consolidated Income
Three Months Ended September 30, 2010 and 2009 |
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2 |
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Condensed Consolidated Balance Sheets
September 30, 2010 and June 30, 2010 |
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3 |
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Condensed Statements of Consolidated Cash Flows
Three Months Ended September 30, 2010 and 2009 |
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4 |
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Notes to Condensed Consolidated Financial Statements |
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5 |
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Report of Independent Registered Public Accounting Firm |
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14 |
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Item 2: Managements Discussion and Analysis of
Financial Condition and Results of Operations |
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15 |
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Item 3: Quantitative and Qualitative Disclosures About Market Risk |
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21 |
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Item 4: Controls and Procedures |
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22 |
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Part II: OTHER INFORMATION |
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Item 1: Legal Proceedings |
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23 |
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Item 1A: Risk Factors |
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23 |
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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds |
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24 |
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Item 6: Exhibits |
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24 |
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Signatures |
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26 |
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Exhibit Index |
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Exhibits |
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PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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September 30, |
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2010 |
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2009 |
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Net Sales |
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$ |
527,501 |
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$ |
437,743 |
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Cost of Sales |
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384,381 |
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322,299 |
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143,120 |
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115,444 |
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Selling, Distribution and Administrative,
including depreciation |
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108,229 |
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97,803 |
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Operating Income |
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34,891 |
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17,641 |
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Interest Expense, net |
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1,124 |
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1,214 |
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Other (Income) Expense, net |
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(343 |
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(303 |
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Income Before Income Taxes |
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34,110 |
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16,730 |
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Income Tax Expense |
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13,355 |
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5,543 |
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Net Income |
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$ |
20,755 |
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$ |
11,187 |
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Net Income Per Share Basic |
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$ |
0.49 |
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$ |
0.26 |
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Net Income Per Share Diluted |
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$ |
0.48 |
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$ |
0.26 |
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Cash dividends per common share |
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$ |
0.17 |
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$ |
0.15 |
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Weighted average common shares
outstanding for basic computation |
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42,370 |
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42,277 |
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Dilutive effect of potential common shares |
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716 |
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510 |
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Weighted average common shares
outstanding for diluted computation |
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43,086 |
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42,787 |
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See notes to condensed consolidated financial statements.
2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
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September 30, |
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June 30, |
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2010 |
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2010 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
94,593 |
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$ |
175,777 |
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Accounts receivable, less allowances of $6,306 and $6,379 |
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261,042 |
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246,402 |
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Inventories |
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190,758 |
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173,253 |
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Other current assets |
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24,822 |
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23,428 |
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Total current assets |
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571,215 |
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618,860 |
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Property, less accumulated depreciation of $141,048 and $138,790 |
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67,044 |
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58,471 |
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Intangibles, net |
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95,671 |
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85,916 |
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Goodwill |
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73,743 |
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63,405 |
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Deferred tax assets |
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48,346 |
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48,493 |
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Other assets |
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16,690 |
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16,375 |
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TOTAL ASSETS |
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$ |
872,709 |
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$ |
891,520 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
109,266 |
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$ |
94,529 |
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Short-term debt |
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25,000 |
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75,000 |
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Compensation and related benefits |
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37,999 |
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50,107 |
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Other current liabilities |
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63,292 |
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51,696 |
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Total current liabilities |
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235,557 |
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271,332 |
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Postemployment benefits |
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48,966 |
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48,560 |
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Other liabilities |
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19,108 |
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16,589 |
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TOTAL LIABILITIES |
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303,631 |
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336,481 |
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Shareholders Equity |
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Preferred stock -no par value; 2,500 shares authorized; none issued
or outstanding |
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Common stock -no par value; 80,000 shares authorized; 54,213
shares issued |
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10,000 |
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10,000 |
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Additional paid-in capital |
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145,366 |
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143,185 |
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Income retained for use in the business |
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614,919 |
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601,370 |
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Treasury shares at cost (11,795 and 11,837 shares) |
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(192,996 |
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(193,468 |
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Accumulated other comprehensive loss |
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(8,211 |
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(6,048 |
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TOTAL SHAREHOLDERS EQUITY |
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569,078 |
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555,039 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
872,709 |
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$ |
891,520 |
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See notes to condensed consolidated financial statements.
3
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended |
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September 30, |
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2010 |
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2009 |
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Cash Flows from Operating Activities |
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Net income |
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$ |
20,755 |
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$ |
11,187 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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2,713 |
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2,929 |
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Amortization of intangibles |
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2,787 |
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2,476 |
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Amortization of stock options and appreciation rights |
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1,259 |
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1,398 |
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(Gain) loss on sale of property |
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(10 |
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31 |
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Treasury shares contributed to employee benefit, deferred
compensation
and other share-based compensation plans |
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996 |
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322 |
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Changes in operating assets and liabilities, net of acquisitions |
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(24,301 |
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31,779 |
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Other, net |
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317 |
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127 |
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Net Cash provided by Operating Activities |
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4,516 |
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50,249 |
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Cash Flows from Investing Activities |
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Property purchases |
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(873 |
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(1,290 |
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Proceeds from property sales |
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41 |
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40 |
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Net cash paid for acquisition of businesses, net of cash acquired |
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(27,697 |
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Net Cash used in Investing Activities |
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(28,529 |
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(1,250 |
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Cash Flows from Financing Activities |
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Repayments under revolving credit facility |
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(50,000 |
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(5,000 |
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Dividends paid |
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(7,206 |
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(6,351 |
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Excess tax benefits from share-based compensation |
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392 |
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223 |
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Exercise of stock options and appreciation rights |
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143 |
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196 |
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Net Cash used in Financing Activities |
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(56,671 |
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(10,932 |
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Effect of Exchange Rate Changes on Cash |
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(500 |
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(22 |
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(Decrease) increase in cash and cash equivalents |
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(81,184 |
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38,045 |
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Cash and cash equivalents at beginning of period |
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175,777 |
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27,642 |
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Cash and Cash Equivalents at End of Period |
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$ |
94,593 |
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$ |
65,687 |
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Non-cash Investing Activities: |
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Property purchases, unpaid at September 30 |
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$ |
10,000 |
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See notes to condensed consolidated financial statements.
4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial position of
Applied Industrial Technologies, Inc. (the Company, or Applied) as of September 30,
2010, and the results of its operations for the three month periods ended September 30, 2010
and 2009 and its cash flows for the three months ended September 30, 2010 and 2009, have
been included. The condensed consolidated balance sheet as of June 30, 2010 has been
derived from the audited consolidated financial statements at that date. This Quarterly
Report on Form 10-Q should be read in conjunction with the Companys Annual Report on Form
10-K for the year ended June 30, 2010. |
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Operating results for the three month period ended September 30, 2010 are not necessarily
indicative of the results that may be expected for the remainder of the fiscal year ending
June 30, 2011. |
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Inventory |
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The Company uses the last-in, first-out (LIFO) method of valuing U.S. inventories. An
actual valuation of inventory under the LIFO method can be made only at the end of each year
based on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations are based on managements estimates of expected year-end inventory levels and
costs and are subject to the final year-end LIFO inventory determination. |
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There were no LIFO layer liquidation benefits recognized in the three months ended September
30, 2010 nor are any expected to be realized for the year ending June 30, 2011. During the
three months ended September 30, 2009, the Company recorded a LIFO benefit connected to LIFO
layer liquidations that reduced cost of goods sold by $710 and reduced the LIFO reserve by
the same amount. If inventory levels had remained constant with the June 30, 2009 levels,
the Company would have recorded LIFO expense of $3,640 in the three-months ended September
30, 2009. Thus, the combined overall effect of LIFO layer liquidations during the three
months ended September 30, 2009 increased gross profit by $4,350. |
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Property |
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Cost incurred for software developed or obtained for internal use are capitalized in
accordance with Accounting Standard Codification 350-40, are classified as property in the
condensed consolidated balance sheets and are depreciated once placed in service over the
estimated useful life of the software, generally three to ten years. The net book value of
software is $13,300 and $3,800 at September 30, 2010 and June 30, 2010, respectively. |
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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Antidilutive Common Stock Equivalents |
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In the three month period ended September 30, 2010 and 2009, respectively, stock options and
stock appreciation rights related to the acquisition of 451 and 1,202 shares of common stock
in the three month period were not included in the computation of diluted earnings per share
for the periods then ended as they were anti-dilutive. |
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In July and August 2010, the Company completed two acquisitions for an aggregate cash
purchase price of $32,000. UZ Engineered Products (UZ) is a distributor of industrial
supply products for maintenance, repair, and operational needs, in the government and
commercial sectors, throughout the U.S. and Canada. SCS Supply Group (SCS) is a distributor
of bearings, power transmission components, electrical components, fluid power products and
industrial supplies in Canada. |
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The projected annual sales run rate for these businesses is approximately $45,000. Results
of operations for the acquired businesses are included in the Companys Service Center Based
Distribution segment results of operations from the date of closing. |
3. |
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GOODWILL AND INTANGIBLES |
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The changes in the carrying amount of goodwill by reportable segment for the period ended
September 30, 2010 are as follows: |
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Service Center Based |
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Fluid Power |
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Distribution |
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Businesses |
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Total |
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Balance at July 1, 2010 |
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$ |
63,405 |
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$ |
0 |
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$ |
63,405 |
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Goodwill acquired during
the period |
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10,595 |
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10,595 |
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Other, including currency
translation |
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(257 |
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(257 |
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Balance at September 30, 2010 |
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$ |
73,743 |
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$ |
0 |
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$ |
73,743 |
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At September 30, 2010, accumulated goodwill impairment losses, subsequent to fiscal year
2002, totaled $36,605 and related to the Fluid Power Businesses segment. |
6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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The Companys intangible assets resulting from business combinations are amortized over
their estimated period of benefit and consist of the following: |
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Accumulated |
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Net |
September 30, 2010 |
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Amount |
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Amortization |
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Book Value |
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Amortized Intangibles: |
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Customer relationships |
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$ |
75,942 |
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$ |
16,964 |
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$ |
58,978 |
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Trade names |
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25,542 |
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4,104 |
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21,438 |
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Vendor relationships |
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13,798 |
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2,757 |
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11,041 |
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Non-competition agreements |
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4,818 |
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1,894 |
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2,924 |
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Total Amortized Intangibles |
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120,100 |
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25,719 |
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94,381 |
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Non-amortized trade name |
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1,290 |
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1,290 |
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Total Intangibles |
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$ |
121,390 |
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$ |
25,719 |
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$ |
95,671 |
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Accumulated |
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Net |
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June 30, 2010 |
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Amount |
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Amortization |
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Book Value |
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Customer relationships |
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$ |
65,324 |
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$ |
15,328 |
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$ |
49,996 |
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Trade names |
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|
25,648 |
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|
|
3,777 |
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|
21,871 |
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Vendor relationships |
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13,842 |
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2,511 |
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|
11,331 |
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Non-competition agreements |
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4,394 |
|
|
|
1,676 |
|
|
|
2,718 |
|
|
Total Intangibles |
|
$ |
109,208 |
|
|
$ |
23,292 |
|
|
$ |
85,916 |
|
|
|
|
Amounts include the impact of foreign currency translation. Fully amortized amounts are
written off. |
|
|
Amortization expense based on the Companys intangible assets as of September 30, 2010 is
estimated to be $11,400 for 2011, $10,800 for 2012, $10,000 for 2013, $8,700 for 2014,
$8,000 for 2015 and $7,300 for 2016. |
|
|
At September 30, 2010, debt outstanding under a private placement borrowing due in November
2010, totaled $25,000. The Companys outstanding debt approximates fair value as of
September 30, 2010. |
|
|
As of September 30, 2010, the Company has no amounts outstanding on its committed revolving
credit facility. |
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
5. |
|
RISK MANAGEMENT ACTIVITIES |
|
|
The Company is exposed to market risks, primarily resulting from changes in currency
exchange rates. To manage this risk, the Company may enter into derivative transactions
pursuant to the Companys written policy. Derivative instruments are recorded on the
condensed consolidated balance sheet at their fair value and changes in fair value are
recorded each period in current earnings or comprehensive income. The Company does not hold
or issue derivative financial instruments for trading purposes. The criteria for
designating a derivative as a hedge include the assessment of the instruments effectiveness
in risk reduction, matching of the derivative instrument to its underlying transaction, and
the probability that the underlying transaction will occur. |
|
|
|
Foreign Currency Exchange Rate Risk |
|
|
|
In November 2000, the Company entered into two 10-year cross-currency swap agreements to
manage its foreign currency risk exposure on private placement borrowings related to its
wholly-owned Canadian subsidiary. The cross-currency swaps effectively convert $25,000 of
debt, and the associated interest payments, from 7.98% fixed rate U.S. dollar denominated
debt to 7.75% fixed rate Canadian dollar denominated debt. The terms of the two
cross-currency swaps mirror the terms of the private placement borrowings. One of the
cross-currency swaps with a notional amount of $20,000 is designated as a cash flow hedge.
For the three months ended September 30, 2010, there was no ineffectiveness of this
cross-currency swap. The unrealized losses on this swap are included in accumulated other
comprehensive loss and the corresponding fair value is included in other current liabilities
in the condensed consolidated balance sheets. |
|
|
|
The other cross-currency swap with a notional amount of $5,000 is not designated as a
hedging instrument under hedge accounting provisions. The balance sheet classification for
the fair value of this contract is other current liabilities in the condensed consolidated
balance sheets. The income statement classification for the fair value of this swap is to
other (income) expense, net for both unrealized gains and losses. |
|
|
|
These cross-currency swaps are expected to be settled in November 2010 when the associated
private placement borrowings are repaid. |
|
|
|
Interest Rate Risk |
|
|
|
The interest rate swap entered into in September 2008 was settled this quarter, thus there
was no unrealized gain or loss recognized in accumulated other comprehensive loss during the
quarter. At June 30, 2010, this liability was included in other current liabilities in the
condensed consolidated balance sheets. |
8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
|
|
The following table summarizes the fair value of derivative instruments as recorded in other
current liabilities in the condensed consolidated balance sheets: |
|
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|
|
|
|
|
September 30, |
|
|
Fair Value at |
|
|
|
2010 |
|
|
June 30, 2010 |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
Cross-currency swap |
|
$ |
9,555 |
|
|
$ |
8,728 |
|
Interest rate swap |
|
|
0 |
|
|
|
316 |
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments |
|
|
9,555 |
|
|
|
9,044 |
|
|
|
|
|
|
|
|
Derivative not designated as a hedging instrument
cross-currency swap: |
|
|
2,389 |
|
|
|
2,182 |
|
|
|
|
|
|
|
|
Total Derivatives |
|
$ |
11,944 |
|
|
$ |
11,226 |
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effects of derivative instruments on income and other
comprehensive income (OCI) for the three months ended September 30, 2010 and 2009 (amounts
presented exclude income tax effects): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Reclassified from |
|
|
|
|
|
|
|
|
|
|
|
Accumulated OCI into Income |
|
Derivatives in Cash Flow |
|
Amount of Gain (Loss) Recognized in |
|
|
(Effective Portion), Included in |
|
Hedging Relationships |
|
OCI on Derivatives (Effective Portion) |
|
|
Interest Expense, net |
|
Three Months Ended September 30, |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Cross-currency swap |
|
$ |
(827 |
) |
|
$ |
(2,304 |
) |
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
0 |
|
|
|
132 |
|
|
$ |
(316 |
) |
|
$ |
(350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(827 |
) |
|
$ |
(2,172 |
) |
|
$ |
(316 |
) |
|
$ |
(350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss (Gain) Recognized in |
|
Derivative Not Designated as |
|
Income on Derivative, Included in Other |
|
Hedging Instrument |
|
(Income) Expense, net |
|
Three Months Ended September 30, |
|
2010 |
|
|
2009 |
|
Cross-currency swap |
|
$ |
207 |
|
|
$ |
576 |
|
|
|
|
|
|
|
|
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
6. |
|
FAIR VALUE MEASUREMENTS |
|
|
Assets and liabilities measured at fair value are as follows at September 30, 2010 and June
30, 2010 (there are currently no items categorized as Level 3 within the fair value
hierarchy): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active |
|
|
|
|
|
|
|
|
|
|
|
|
Markets for Identical |
|
Significant Other |
|
|
|
|
|
|
|
|
|
|
Instruments |
|
Observable Inputs |
|
|
Recorded Value |
|
Level 1 |
|
Level 2 |
|
|
September |
|
June 30, |
|
September |
|
June 30, |
|
September |
|
June 30, |
|
|
30, 2010 |
|
2010 |
|
30, 2010 |
|
2010 |
|
30, 2010 |
|
2010 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
$ |
9,541 |
|
|
$ |
8,592 |
|
|
$ |
9,541 |
|
|
$ |
8,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps |
|
$ |
11,944 |
|
|
$ |
10,910 |
|
|
|
|
|
|
|
|
|
|
$ |
11,944 |
|
|
$ |
10,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
0 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
316 |
|
|
Total Liabilities |
|
$ |
11,944 |
|
|
$ |
11,226 |
|
|
|
|
|
|
|
|
|
|
$ |
11,944 |
|
|
$ |
11,226 |
|
|
|
|
Marketable securities in the previous table are held in a rabbi trust for a
non-qualified deferred compensation plan. The marketable securities are included in other
assets on the condensed consolidated balance sheets. The fair values were derived using
quoted market prices. |
|
|
Fair values for cross-currency and interest rate swaps in the previous table are derived
based on valuation models using foreign currency exchange rates and inputs readily available
in the public swap markets for similar instruments adjusted for terms specific to these
instruments. Since the inputs used to value these instruments are observable and the
counterparties are creditworthy, the Company has classified them as Level 2 inputs. The
liabilities are included in other current liabilities on the condensed consolidated balance
sheets. |
10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
7. |
|
COMPREHENSIVE INCOME (LOSS) |
|
|
The components of comprehensive income (loss) are as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
20,755 |
|
|
$ |
11,187 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedges, net of
income tax of $(426) and $(812) |
|
|
(1,030 |
) |
|
|
(1,801 |
) |
Reclassification of interest expense into
income, net of income tax of $116 and $133 |
|
|
200 |
|
|
|
217 |
|
Reclassification of pension and postemployment
expense into income, net of income tax of $135
and $169 |
|
|
419 |
|
|
|
276 |
|
Foreign currency translation adjustment, net of
income tax of $(20) and $(13) |
|
|
(1,797 |
) |
|
|
(1,194 |
) |
Unrealized gain on investment securities
available for sale, net of income tax of $25
and $8 |
|
|
45 |
|
|
|
18 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
18,592 |
|
|
$ |
8,703 |
|
|
|
|
|
|
|
|
|
|
The following table provides summary disclosures of the net periodic postemployment costs
recognized for the Companys postemployment benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health Care |
|
|
|
Pension Benefits |
|
|
Benefits |
|
Three Months Ended September 30, |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
115 |
|
|
$ |
144 |
|
|
$ |
10 |
|
|
$ |
13 |
|
Interest cost |
|
|
565 |
|
|
|
673 |
|
|
|
59 |
|
|
|
65 |
|
Expected return on plan assets |
|
|
(96 |
) |
|
|
(88 |
) |
|
|
|
|
|
|
|
|
Recognized net actuarial loss (gain) |
|
|
362 |
|
|
|
231 |
|
|
|
(21 |
) |
|
|
(22 |
) |
Amortization of prior service cost |
|
|
177 |
|
|
|
199 |
|
|
|
35 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,123 |
|
|
$ |
1,159 |
|
|
$ |
83 |
|
|
$ |
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company contributed $1,129 to its pension benefit plans and $42 to its retiree
health care plans in the three months ended September 30, 2010. Expected contributions for
all of fiscal 2011 are $1,700 for the pension benefit plans and $250 for retiree health care
plans. |
11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
|
|
The accounting policies of the Companys reportable segments are the same as those used to
prepare the condensed consolidated financial statements. Sales between the Service Center
Based Distribution segment and the Fluid Power Businesses segment have been eliminated in
the table below. |
|
|
|
Segment Financial Information for the three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Center |
|
Fluid |
|
|
|
|
Based |
|
Power |
|
|
|
|
Distribution |
|
Businesses |
|
Total |
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
423,953 |
|
|
$ |
103,548 |
|
|
$ |
527,501 |
|
Operating income for reportable segments |
|
|
26,068 |
|
|
|
9,434 |
|
|
|
35,502 |
|
Assets used in the business |
|
|
666,871 |
|
|
|
205,838 |
|
|
|
872,709 |
|
Depreciation |
|
|
2,177 |
|
|
|
536 |
|
|
|
2,713 |
|
Capital expenditures |
|
|
717 |
|
|
|
156 |
|
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
363,310 |
|
|
$ |
74,433 |
|
|
$ |
437,743 |
|
Operating income for reportable segments |
|
|
17,262 |
|
|
|
3,298 |
|
|
|
20,560 |
|
Assets used in the business |
|
|
619,891 |
|
|
|
190,614 |
|
|
|
810,505 |
|
Depreciation |
|
|
2,417 |
|
|
|
512 |
|
|
|
2,929 |
|
Capital expenditures |
|
|
1,071 |
|
|
|
219 |
|
|
|
1,290 |
|
|
|
|
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
|
|
A reconciliation of operating income for reportable segments to the condensed
consolidated income before income taxes is as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Operating income for reportable segments |
|
$ |
35,502 |
|
|
$ |
20,560 |
|
Adjustment for: |
|
|
|
|
|
|
|
|
Amortization of intangibles: |
|
|
|
|
|
|
|
|
Service Center Based Distribution |
|
|
781 |
|
|
|
413 |
|
Fluid Power Businesses |
|
|
2,006 |
|
|
|
2,063 |
|
Corporate and other (income) expense, net |
|
|
(2,176 |
) |
|
|
443 |
|
|
|
|
|
|
|
|
Total operating income |
|
|
34,891 |
|
|
|
17,641 |
|
Interest expense, net |
|
|
1,124 |
|
|
|
1,214 |
|
Other (income) expense, net |
|
|
(343 |
) |
|
|
(303 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
34,110 |
|
|
$ |
16,730 |
|
|
|
|
|
|
|
|
|
|
The change in corporate and other (income) expense, net is due to changes in the levels
and amounts of expenses being allocated to the segments. The expenses being allocated
include corporate charges for working capital, logistics support and other items. |
|
|
|
Net sales are presented in geographic areas based on the location of the company
making the sale and are as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
Geographic Location: |
|
2010 |
|
|
2009 |
|
United States |
|
$ |
459,053 |
|
|
$ |
378,698 |
|
Canada |
|
|
54,321 |
|
|
|
47,838 |
|
Mexico |
|
|
14,127 |
|
|
|
11,207 |
|
|
|
|
|
|
|
|
Total |
|
$ |
527,501 |
|
|
$ |
437,743 |
|
|
|
|
|
|
|
|
13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The accompanying condensed consolidated financial statements of the Company have been reviewed
by the Companys independent registered public accounting firm, Deloitte & Touche LLP, whose report
covering their reviews of the condensed consolidated financial statements follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio
We have reviewed the accompanying condensed consolidated balance sheet of Applied Industrial
Technologies, Inc. and subsidiaries (the Company) as of September 30, 2010, and the related
condensed statements of consolidated income and cash flows for the three-month periods ended
September 30, 2010 and 2009. These interim financial statements are the responsibility of the
Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of the Company as of June 30, 2010,
and the related statements of consolidated income, shareholders equity, and cash flows for the
year then ended (not presented herein); and in our report dated August 13, 2010, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of June 30, 2010 is fairly
stated, in all material respects, in relation to the consolidated balance sheet from which it has
been derived.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
November 5, 2010
14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Applied Industrial Technologies (Applied, the Company, We, Us or Our) is an
industrial distributor that offers parts critical to the operations of MRO and OEM customers in a
wide range of industries. In addition, Applied provides engineering, design and systems
integration for industrial and fluid power applications, as well as customized fluid power shop,
mechanical and fabricated rubber services. Applied is an authorized distributor for more than
2,000 manufacturers, and we offer access to approximately 4 million stock keeping units (SKUs). A
large portion of our business is selling replacement parts to manufacturers and other industrial
concerns for repair or maintenance of machinery and equipment. We have a long tradition of growth
dating back to 1923, the year our business was founded in Cleveland, Ohio. During the first
quarter of fiscal 2011, business was conducted in the United States, Canada, Mexico and Puerto Rico
from 475 facilities.
The following is Managements Discussion and Analysis of certain significant factors which have
affected our financial condition, results of operations and cash flows during the periods included
in the accompanying condensed statements of consolidated income and consolidated cash flows. When
reviewing the discussion and analysis set forth below, please note that the majority of SKUs we
sell in any given period were not sold in the comparable period of the prior year, resulting in the
inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in
product mix and volume.
Overview
Consolidated net sales for the quarter ended September 30, 2010 increased $89.8 million or 20.5%
compared to the prior year quarter, with acquisitions contributing 1.3% of the increase. Operating
margin increased to 6.6% of net sales from 4.0% for the prior year quarter and net income increased
$9.6 million or 85.5% compared to the prior year quarter. Shareholders equity at September 30,
2010 was $569.1 million. The current ratio moved to 2.4 to 1 from 2.3 to 1 at June 30, 2010.
Applied monitors several economic indices that have been key indicators for industrial economic
activity. These include the Manufacturing Capacity Utilization (MCU) index published by the
Federal Reserve Board and the Manufacturing Index published by the Institute for Supply Management
(ISM). Historically, our performance correlates well with the MCU, which measures productivity and
calculates a ratio of actual manufacturing output versus potential full capacity output. When
manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and
require replacement parts. Our sales tend to lag the MCU on the upswing by up to six months and
move closer in alignment with the declines.
These indices showed moderating growth in the industrial economy during the first quarter of fiscal
2011. The MCU increased in July and August and then declined slightly in September to 72.4, still
well above its last trough of 65.2 in June of 2009. The ISM was 54.4 in September, down from 56.2
in June. The ISM has been generally declining since its year-long high of 60.4 in April. Our
first quarter sales per day run rate was consistent with our June 2010 quarter run rate. We did
experience our normal seasonality with the July and August sales per day rates being down slightly
compared to June. We then saw an improvement in September. We believe
15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
that the recovery of the U.S. industrial economy will continue, but for the remainder of the fiscal
year will settle into a slower pace of growth.
The number of Company associates was 4,652 at September 30, 2010, 4,468 at June 30, 2010, and 4,635
at September 30, 2009. During the quarter, our same-store operations experienced a headcount
reduction of 43 associates and our recent acquisitions added 227 associates. Our operating
facilities totaled 475 at September 30, 2010, 455 at June 30, 2010, and 462 at September 30, 2009.
The net increase in operating facilities from June 30, 2010 is due to recent acquisitions (9) and a
redefinition of how we classify certain shop operations (11).
Results of Operations
Three Months Ended September 30, 2010 and 2009
During the quarter ended September 30, 2010, net sales increased $89.8 million or 20.5% compared to
the prior year quarter. Acquisitions accounted for additional sales of $5.5 million or 1.3% of the
net sales growth, with the remaining increase related to same-store business. The number of
selling days for the quarters ended September 30, 2010 and 2009 were 64 days each.
Net sales from our Service Center Based Distribution segment increased $60.6 million or 16.7%
during the quarter from the same period in the prior year, primarily attributed to increases in our
same-store business. Acquisitions within this segment increased sales by $5.5 million, or 1.5%.
Net sales from our Fluid Power Businesses segment increased $29.1 million or 39.1% during the
quarter from the same period in the prior year, attributed to increases in same-store business and
in particular, sales to customers in high-tech industries.
From a geographic perspective, sales from our U.S. operations were up $80.4 million or 21.2%,
driven by same-store business, acquisitions accounted for 0.9% of the U.S. increase. Sales from
our Canadian operations increased $6.5 million or 13.6%. This increase consists of $3.3 million
due to favorable foreign currency translation, $2.0 million from acquisitions and the remaining
increase attributed to increases in same-store business. Our Mexican operations increased $2.9
million or 26.1% primarily due to increases in same-store business.
During the quarter ended September 30, 2010, industrial products and fluid power products accounted
for 71.5% and 28.5%, respectively, of net sales as compared to 73.5% and 26.5%, respectively, for
the same period in the prior year. The increase in fluid power products is reflective of the Fluid
Power Businesses segment being favorably impacted by a quicker economic recovery, largely driven by
customers in high-tech industries.
Our gross profit margin for the quarter increased to 27.1% compared to the prior year quarters
26.4%. The current quarters gross profit was positively impacted by LIFO benefits of $2.7 million
or 0.5% resulting from effective price decreases. These decreases flow through the LIFO
calculation as a benefit as the price paid for product (net of inventory purchasing incentives) is
16
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
lower this year versus last. We expect to see a minor additional benefit from this in the
December quarter and we do not anticipate any impact in the third or fourth quarters. We are also
experiencing competitive market pressures in passing on supplier price increases within our Service
Center Based Distribution segment.
Selling, distribution and administrative expense (SD&A) consists of associate compensation,
benefits and other expenses associated with selling, purchasing, warehousing, supply chain
management and providing marketing and distribution of the Companys products, as well as costs
associated with a variety of administrative functions such as human resources, information
technology, treasury, accounting, legal, and facility related expenses. SD&A was 20.5% of net
sales in the quarter ended September 30, 2010 compared to 22.3% in the prior year quarter. On an
absolute basis, SD&A increased $10.4 million or 10.7% compared to the prior year quarter. Of this
amount, acquisitions added $2.9 million, while increases in wages and benefits totaled $7.1
million, primarily driven by variable compensation tied to improved performance.
Operating income increased 97.8% to $34.9 million during the quarter compared to $17.6 million
during the prior year quarter. Operating income as a percentage of sales for the Service Center
Based Distribution segment increased to 6.1% in the current year quarter, from 4.8% in the prior
year quarter. This increase as compared to the prior year quarter reflects improved operating
leverage on the increase in sales. The Fluid Power Businesses operating margins increased to 9.1%
in the current year quarter from 4.4% in the prior year quarter. This improvement is driven
largely by significant leverage in increases in sales.
The effective income tax rate was 39.2% for the quarter ended September 30, 2010 compared to 33.1%
for the quarter ended September 30, 2009. The increase from the prior year quarter is due to a
provision made for U.S. income tax expense on a portion of undistributed earnings not considered
permanently reinvested in our Canadian subsidiaries. Additionally, the first quarter of fiscal
2010 included $0.5 million of benefits relating to foreign and state income taxes which did not
recur.
As a result of the factors addressed above, net income increased $9.6 million or 85.5%
compared to the prior year quarter. Net income per share was $0.48 per share for the quarter ended
September 30, 2010, compared to $0.26 in the prior year quarter.
Liquidity and Capital Resources
Net cash provided by operating activities for the three months ended September 30, 2010 was $4.5
million. This compares to $50.2 million provided by operating activities in the same period a year
ago. The most significant factor in the $45.7 million fluctuation relates to changes in inventory.
In the prior year, we were reducing inventory levels whereas inventory has increased slightly in
the current year.
17
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net cash used in investing activities during the current year was $28.5 million; $27.7 million was
used for acquisitions and $0.9 million for capital expenditures. In the first three months of
fiscal 2010, we used $1.3 million in investing activities primarily for capital expenditures.
Net cash used in financing activities was $56.7 million for the three months ended September 30,
2010. In the first quarter of fiscal 2011, we repaid $50.0 million under our revolving credit
facility and we paid dividends of $7.2 million. In the prior year, financing activities used $10.9
million of cash; we repaid a net $5.0 million on our revolving credit facility and paid dividends
of $6.4 million. We did not repurchase shares of treasury stock in the first quarter of fiscal
2011 or 2010.
On October 1, 2010, Applied announced its selection of SAP to help transform the Companys
technology platforms and enhance its business information and transaction systems for future
growth. We expect capital expenditures for this ERP project for all of fiscal 2011 to be around
$16.0 million, of which $10.0 million is included in the September quarter. These amounts
primarily relate to hardware and software fees. This capital expenditure amount of $16.0 million
should be added to the previous capital expenditure guidance of $8.0 to $9.5 million provided in
our fiscal year 2010 annual report. We expect SD&A expenses associated with this project to be
approximately $3.5 million in fiscal year 2011.
We have a $150.0 million revolving credit facility with a group of banks expiring in June 2012.
There are no borrowings outstanding under this facility at September 30, 2010. At September 30,
2010, unused lines under this facility, net of outstanding letters of credit, total $143.2 million
and are available to fund future acquisitions or other capital and operating requirements.
We have an uncommitted shelf facility with Prudential Insurance Company that enables us to borrow
up to $100.0 million in additional long-term financing with terms of up to fifteen years. This
agreement expires in February 2013. At September 30, 2010, there were no outstanding borrowings
under this agreement. We believe in the current borrowing environment, that any funds drawn down
under this facility would carry interest rates in the 4.0% to 5.0% range.
The $25.0 million of debt classified as short-term is private placement debt which matures in
November 2010.
The Board of Directors has authorized the repurchase of shares of the Companys common stock.
These purchases may be made in open market and negotiated transactions, from time to time,
depending upon market conditions. We did not acquire shares of common stock in the quarter ended
September 30, 2010. At September 30, 2010, we had authorization to repurchase an additional
837,200 shares.
Management expects that our existing cash, cash equivalents, funds available under the revolving
credit facility, cash provided from operations, and the use of operating leases will be sufficient
to
finance normal working capital needs, payment of short-term debt, payment of dividends,
acquisitions, investments in properties, facilities and equipment, and the purchase of
18
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
additional Company common stock. Management also believes that additional long-term debt and line
of credit financing could be obtained based on the Companys credit standing and financial
strength, however, any additional debt may be at higher rates than under the terms of the revolving
credit facility.
Cautionary Statement Under Private Securities Litigation Reform Act
Managements Discussion and Analysis and other sections of this report, including documents
incorporated by reference, contain statements that are forward-looking, based on managements
current expectations about the future. Forward-looking statements are often identified by
qualifiers, such as guidance, expect, believe, plan, intend, will, should, could,
would, anticipate, estimate, forecast, may, and derivative or similar words or
expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also
forward-looking statements. These statements may discuss, among other things, expected growth,
future sales, future cash flows, future capital expenditures, future performance, and the
anticipation and expectations of the Company and its management as to future occurrences and
trends. The Company intends that the forward-looking statements be subject to the safe harbors
established in the Private Securities Litigation Reform Act of 1995 and by the Securities and
Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking statements. All
forward-looking statements are based on current expectations regarding important risk factors, many
of which are outside the Companys control. Accordingly, actual results may differ materially from
those expressed in the forward-looking statements, and the making of those statements should not be
regarded as a representation by the Company or any other person that the results expressed in the
statements will be achieved. In addition, the Company assumes no obligation publicly to update or
revise any forward-looking statements, whether because of new information or events, or otherwise,
except as may be required by law.
Important risk factors include, but are not limited to, the following: risks relating to the
operations levels of our customers and the economic factors that affect them; the impact of
economic conditions on the collectability of trade receivables; reduced demand for our products in
targeted markets due to reasons including consolidation in customer industries and the transfer of
manufacturing capacity to foreign countries; changes in customer preferences for products and
services of the nature and brands sold by us; changes in customer procurement policies and
practices; changes in the prices for products and services relative to the cost of providing them;
loss of key supplier authorizations, lack of product availability, or changes in supplier
distribution programs; the potential for product shortages if suppliers are unable to fulfill in a
timely manner increased demand in the economic recovery; competitive pressures; the cost of
products and energy and other operating costs; our reliance on information systems; our ability to
implement our ERP system in a timely, cost-effective, and competent manner, and to capture its
planned benefits; our ability to retain and attract qualified sales and customer service personnel;
our ability to identify and complete acquisitions, integrate them effectively, and realize their
anticipated
benefits; the variability and timing of new business opportunities
19
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
including acquisitions,
alliances, customer relationships, and supplier authorizations; the incurrence of debt and
contingent liabilities in connection with acquisitions; our ability to access capital markets as
needed on reasonable terms; disruption of operations at our headquarters or distribution centers;
risks and uncertainties associated with our foreign operations, including volatile economic
conditions, political instability, cultural and legal differences, and currency exchange
fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting
policies and practices; organizational changes within the Company; the volatility of our stock
price and the resulting impact on our consolidated financial statements; risks related to legal
proceedings to which we are a party; adverse regulation and legislation, including potential
changes in tax regulations (e.g., those affecting the use of the LIFO inventory accounting method
and the taxation of foreign-sourced income); and the occurrence of extraordinary events (including
prolonged labor disputes, natural events and acts of God, terrorist acts, fires, floods, and
accidents). Other factors and unanticipated events could also adversely affect our business,
financial condition or results of operations. We discuss certain of these matters more fully in
our Annual Report on Form 10-K for the year ended June 30, 2010.
20
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has evaluated its exposure to various market risk factors, including its primary market
risk exposure through the effects of changes in exchange rates. We occasionally utilize derivative
instruments as part of our overall financial risk management policy, but do not use derivative
instruments for speculative or trading purposes.
During the three months ended September 30, 2010, there were no material changes in our market risk
exposure. In September 2010, we settled the interest rate swap outstanding at June 30, 2010. For
quantitative and qualitative disclosures about market risk, see Item 7A Quantitative and
Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended
June 30, 2010.
21
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
The Companys management, under the supervision and with the participation of the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Companys
disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the
period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the
Companys disclosure controls and procedures are effective.
During the first quarter of fiscal 2011, there were no changes in the Companys internal controls
or in other factors that materially affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.
22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to pending legal proceedings with respect to various product
liability, commercial, and other matters. Although it is not possible to predict the
outcome of these proceedings or the range of possible loss, the Company believes, based on
circumstances currently known, that the likelihood is remote that the ultimate resolution of
any of these proceedings will have, either individually or in the aggregate, a material
adverse effect on the Companys consolidated financial position, results of operations, or
cash flows.
ITEM 1A. Risk Factors.
Except as set forth below, there are no material changes from the risk factors set forth
under Part I, Item 1A, Risk Factors, in our annual report on Form 10-K for the fiscal year
ended June 30, 2010. You should carefully consider these factors in addition to the other
information set forth in this report which could materially affect our business, financial
condition, or future results. The risks and uncertainties described in this report and in
our annual report on Form 10-K for the year ended June 30, 2010, are not the only risks and
uncertainties facing us. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also impact our business and operations.
We face risks in connection with the implementation of a new integrated information
technology platform for our business.
We have announced our intent to replace multiple legacy applications with a common SAP
information technology platform. The implementation is expected to occur over several years
in planned phases, primarily based on geographic region. The process will be technically
intensive, requiring design, testing, modifications, and project coordination. Because of
the projects complexity, we could experience disruptions in our business operations related
to the implementation effort. Disruptions could result in material adverse consequences,
including delays, loss of information, damage to our ability to process transactions or harm
to our control environment, and unanticipated increases in costs.
23
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Repurchases in the quarter ended September 30, 2010 were as follows:
|
|
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|
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|
|
(c) Total Number |
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(d) Maximum |
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|
|
|
|
|
|
|
|
|
of Shares |
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
that May Yet Be |
|
|
(a) Total |
|
(b) Average |
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of Publicly |
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Purchased Under |
|
|
Number of |
|
Price Paid per |
|
Announced Plans |
|
the Plans or |
Period |
|
Shares |
|
Share ($) |
|
or Programs |
|
Programs (1) (2) |
|
July 1, 2010 to
July 31, 2010 |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
837,200 |
|
August 1, 2010 to
August 31, 2010 |
|
|
-0- |
|
|
|
-0- |
|
|
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-0- |
|
|
|
837,200 |
|
September 1, 2010
to September 30,
2010 |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
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837,200 |
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Total |
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-0- |
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-0- |
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-0- |
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837,200 |
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(1) |
|
On January 23, 2008, the Board of Directors authorized the purchase of up to 1.5
million shares of the Companys common stock. The Company publicly announced the
authorization that day. These purchases may be made in the open market or in privately
negotiated transactions. This authorization is in effect until all shares are purchased
or the authorization is revoked or amended by the Board of Directors. |
|
(2) |
|
During the quarter the Company purchased 236 shares in connection with the
deferred compensation program and the vesting of stock awards. |
ITEM 6. Exhibits.
|
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Exhibit No. |
|
Description |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as
amended on October 25, 2005 (filed as Exhibit 3(a) to the Companys Form 10-Q for the quarter
ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference). |
|
|
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3.2
|
|
Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999
(filed as Exhibit 3(b) to the Companys Form 10-Q for the quarter ended September 30, |
24
|
|
|
Exhibit No. |
|
Description |
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|
|
|
|
1999,
SEC File No. 1-2299, and incorporated here by reference). |
|
|
|
4.1
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|
Certificate of Merger of Bearings, Inc. (Ohio) (now named Applied Industrial Technologies,
Inc.) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18,
1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as
Exhibit 4(a) to the Companys Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by reference). |
|
|
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4.2
|
|
Private Shelf Agreement dated as of November 27, 1996, between
the Company and Prudential Investment Management, Inc. (assignee of The
Prudential Insurance Company of America), conformed to show all amendments
(filed as Exhibit 4.2 to the Companys Form 10-Q for the Quarter ended March
31, 2010, SEC File No. 1-2299, and incorporated here by reference). |
|
|
|
4.3
|
|
Credit Agreement dated as of June 3, 2005 among the Company, KeyBank National Association as
Agent, and various financial institutions (filed as Exhibit 4.7 to the Companys Form 10-Q
dated February 9, 2010, SEC File
No. 1-2299, and incorporated here by reference). |
|
|
|
4.4
|
|
First Amendment Agreement dated as of June 6, 2007, among the Company, KeyBank National
Association as Agent, and various financial institutions, amending June 3, 2005 Credit
Agreement (filed as Exhibit 4 to the Companys Form 8-K dated June 11, 2007, SEC File No.
1-2299, and incorporated here by reference). |
|
|
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10
|
|
Performance Shares Terms and Conditions, as amended for
performance shares awarded to executive officers in September 2010. |
|
|
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15
|
|
Independent Registered Public Accounting Firms Awareness
Letter. |
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|
31
|
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Rule 13a-14(a)/15d-14(a) certifications. |
|
|
|
32
|
|
Section 1350 certifications. |
25
The Company will furnish a copy of any exhibit described above and not contained herein upon
payment of a specified reasonable fee which shall be limited to the Companys reasonable expenses
in furnishing the exhibit.
Certain instruments with respect to long-term debt have not been filed as exhibits because the
total amount of securities authorized under any one of the instruments does not exceed 10 percent
of the total assets of the Company and its subsidiaries on a consolidated basis. The Company
agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such
instrument.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
|
|
Date: November 5, 2010 |
By: |
/s/ David L. Pugh
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David L. Pugh |
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Chairman & Chief Executive Officer |
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Date: November 5, 2010 |
By: |
/s/ Mark O. Eisele
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Mark O. Eisele |
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Vice President-Chief Financial Officer
& Treasurer |
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26
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010
|
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|
|
EXHIBIT NO. |
|
DESCRIPTION |
|
|
|
|
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation of Applied
Industrial Technologies, Inc., as amended on October 25, 2005 (filed as
Exhibit 3(a) to the Companys Form 10-Q for the quarter ended December
31, 2005, SEC File No. 1-2299, and incorporated here by reference). |
|
|
|
|
|
|
|
3.2
|
|
Code of Regulations of Applied Industrial Technologies, Inc.,
as amended on October 19, 1999 (filed as Exhibit 3(b) to the Companys
Form 10-Q for the quarter ended September 30, 1999, SEC File No.
1-2299, and incorporated here by reference). |
|
|
|
|
|
|
|
4.1
|
|
Certificate of Merger of Bearings, Inc. (Ohio) (now named
Applied Industrial Technologies, Inc.) and Bearings, Inc. (Delaware)
filed with the Ohio Secretary of State on October 18, 1988, including
an Agreement and Plan of Reorganization dated September 6, 1988 (filed
as Exhibit 4(a) to the Companys Registration Statement on Form S-4
filed May 23, 1997, Registration No. 333-27801, and incorporated here
by reference). |
|
|
|
|
|
|
|
4.2
|
|
Private Shelf Agreement dated as of November 27,
1996, between the Company and Prudential
Investment Management, Inc. (assignee of The
Prudential Insurance Company of America),
conformed to show all amendments (filed as
Exhibit 4.2 to the Companys Form 10-Q for the
Quarter ended March 31, 2010, SEC File No.
1-2299, and incorporated here by reference). |
|
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|
|
|
|
|
4.3
|
|
Credit Agreement dated as of June 3, 2005 among
the Company, KeyBank National Association as Agent,
and various financial institutions (filed as Exhibit
4.7 to
the Companys Form 10-Q dated February 9, 2010, SEC
File No. 1-2299, and incorporated here by reference). |
|
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|
|
|
EXHIBIT NO. |
|
DESCRIPTION |
|
|
|
4.4
|
|
First Amendment Agreement dated as of June 6, 2007, among the
Company, KeyBank National Association as Agent, and various financial
institutions, amending June 3, 2005 Credit Agreement (filed as Exhibit
4 to the Companys Form 8-K dated June 11, 2007, SEC File No. 1-2299,
and incorporated here by reference). |
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|
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10
|
|
Performance Shares Terms and Conditions, as
amended for performance shares awarded
to executive officers in September 2010. |
|
Attached |
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|
|
|
15
|
|
Independent Registered Public Accounting
Firms Awareness Letter.
|
|
Attached |
|
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|
|
|
31
|
|
Rule 13a-14(a)/15d-14(a) certifications.
|
|
Attached |
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|
|
|
32
|
|
Section 1350 certifications.
|
|
Attached |