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| AIT > SEC Filings for AIT > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
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. As an authorized distributor for more than 2,000 manufacturers,
we offer access to approximately 3 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 2010, business
was conducted in the United States, Canada, Mexico and Puerto Rico from 462
facilities.
The following is Management's 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, 2009 decreased
$106.2 million or 19.5% compared to the prior year quarter. Operating margin
declined to 4.0% of net sales from 6.9% and net income decreased $11.3 million
or 50.4% compared to the prior year quarter. Shareholders' equity at
September 30, 2009 was $512.9 million. The current ratio moved to 2.6 to one
from 3.4 to one at June 30, 2009 as $50.0 million of outstanding debt moved to
short-term.
Applied monitors several economic indices that have been key indicators for
industrial economic activity. These include the Manufacturing Index published by
the Institute for Supply Management ("ISM"), and the Manufacturing Capacity
Utilization ("MCU") index published by the Federal Reserve Board. 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 and move with the decline.
These indices tend to support the assertion that the overall economy may have
hit bottom. The Industrial Production index hit 98.5 in September, the 3rd
monthly increase. The MCU also increased for the 3rd consecutive month in
September to 67.5. The ISM Manufacturing Index fell slightly in September to
52.6, and U.S. employment numbers declined by 263,000 jobs.
While there is some encouragement in those numbers, we are mindful that our
results tend to lag the indices by three to six months so we need a few more
months before we know if this uptick will translate into improved sales. Our
sales per day increased 2.1% in the first quarter of fiscal 2010 compared to the
fourth quarter of fiscal 2009, again indicating a slight uptick that correlates
with these indices.
The number of Company associates was 4,635 at September 30, 2009, and 5,254 at
September 30, 2008. The net reduction of 619 associates is attributable to the
economic slowdown and reflects the impact of company-wide reductions in
workforce and deferral of replacements for normal associate attrition. Our
operating facilities totaled 462 at September 30, 2009 compared to 474 at
September 30, 2008.
Results of Operations
Three Months Ended September 30, 2009 and 2008
During the quarter ended September 30, 2009, net sales decreased $106.2 million
or 19.5% compared to the prior year quarter, reflecting decreased net sales in
same-store business. Net sales from acquisitions accounted for additional sales
of approximately $24.4 million. The number of selling days for the quarters
ended September 30, 2009 and 2008 were 64 days each.
Net sales from our Service Center Based Distribution segment decreased
$107.0 million or 22.7% during the quarter ended September 30, 2009 from the
same period in the prior year, attributed to declines in our same-store
business.
Net sales from our Fluid Power Businesses segment increased $0.8 million or 1.1%
during the quarter from the same period in the prior year. Our Fluid Power
Resource, LLC ("FPR") acquisition added $23.1 million in sales as compared to
last year while our same-store business declined $22.3 million or 30.3%.
From a geographic perspective, sales from our U.S. operations were down
$92.2 million which considering acquisitions translates to a decline of
$116.6 million or 24.8%. Sales from our Canadian operations decreased
$9.7 million with approximately $4.0 million attributable to foreign currency
translation. Our Mexican operations decreased $4.3 million of which
approximately $3.3 million is attributable to foreign currency translation.
During the quarter ended September 30, 2009, industrial products and fluid power
products accounted for 73.5% and 26.5%, respectively, of net sales as compared
to 77.4% and 22.6%, respectively, for the same period in the prior year.
Acquisitions since the prior year period have been primarily in our Fluid Power
Businesses segment, accounting for the shift in product mix.
Our gross profit margin decreased to 26.4% compared to the prior year's 26.9%.
This decline is primarily related to greater price competitiveness in the
marketplace and the on-going challenges of passing on supplier price increases
to our large contractual customers.
Given the current reduction in sales and our focus on asset management, we have
undertaken an inventory management program which we expect will result in a
reduction of over $60.0 million in inventory by June 30, 2010 from the June 30,
2009 level. The program calls for a decreased level of inventory purchases which
we expect will result in a significantly lower level of current year purchase
incentives from suppliers and a significant decline in inventories. Inventory
purchase incentives flow into the income statement as inventory is sold to
customers and therefore there was a minimal impact in the first quarter. The
current year inventory purchase incentive reductions will negatively impact
gross profit margins as we proceed through the remainder of this fiscal year.
Additionally, we expect the inventory reductions to result in the liquidation of
LIFO inventory quantities carried at lower costs prevailing in prior years. The
impact of these liquidations is expected to have a positive impact on our
margins for the remainder of the fiscal year. We expect the impact of these
items over the full fiscal year will offset, however, no assurance can be given
that this will happen. We do not believe the inventory management program will
impact our customer service or order fulfillment.
We recorded LIFO income of $0.7 million during the quarter ended September 30,
2009 which reduced the overall LIFO reserve by the same amount. The effect of
LIFO layer liquidations during the current quarter increased gross profit by
$4.4 million. There were no comparable LIFO layer liquidations recorded for the
quarter ended September 30, 2008.
Selling, distribution and administrative expense ("SD&A") was 22.3% of net sales
in the quarter ended September 30, 2009 compared to 20.0% in the prior year
quarter. SD&A decreased $10.9 million compared to the prior year quarter.
Acquisitions added $6.7 million of SD&A, including additional amortization
expense of $1.3 million. Associate compensation and benefits including amounts
tied to financial performance were approximately $11.0 million lower in the
current quarter as compared to the prior year quarter. Reduced discretionary
spending accounts for the majority of the remaining decrease, although foreign
currency translation and lower fuel costs were also favorable.
Operating income decreased 52.8% to $17.6 million during the quarter compared to
$37.4 million during the prior year quarter. Operating income as a percentage of
sales for the Service Center Based Distribution segment declined from 6.3% in
the prior year quarter to 4.8% in the current year quarter. The Fluid Power
Businesses saw operating margins decline from 8.3% to 4.4% in the comparable
periods. These changes reflect the impact of a sales decline at a greater rate
than SD&A expense declines.
Interest expense, net for the current quarter increased $0.5 million from the
same period in the prior year. Lower invested cash balances and lower interest
rates on invested cash contributed to a reduction in interest income of
$0.4 million for the quarter. Interest expense increased $0.1 million from the
prior year quarter due to higher average borrowings.
Other (income) expense, net for the quarter ended September 30, 2009 increased
$1.1 million due to a $2.0 million fluctuation in market values of investments
held by non-qualified deferred compensation trusts, partially offset by a
$0.9 million unfavorable fluctuation in the fair value of a cross-currency swap.
The effective income tax rate was 33.1% for the quarter ended September 30, 2009
compared to 37.2% for the quarter ended September 30, 2008. During the quarter,
we recorded $0.5 million of discrete tax adjustments relating to foreign and
state income taxes.
As a result of the factors addressed above, net income decreased $11.3 million
or 50.4% compared to the prior year quarter. Net income per share was $0.26 per
share for the quarter ended September 30, 2009, compared to $0.52 in the prior
year quarter.
Liquidity and Capital Resources
Net cash provided by operating activities for the three months ended
September 30, 2009 was $50.2 million. This compares to $48.9 million provided by
operating activities in the same period a year ago. Cash flows in the current
year period were aided by a $28.7 million reduction in inventories. We expect to
continue to reduce our inventory for the remainder of fiscal 2010 ending up with
a cumulative reduction of at least $60.0 million.
Net cash used in investing activities during the current year of $1.3 million
was primarily used for capital expenditures. In the first quarter of fiscal
2009, we used $168.5 million in investing activities, $167.1 million for
acquisitions and $1.7 million for capital expenditures.
Net cash used in financing activities was $10.9 million for the three months
ended September 30, 2009. Through the first quarter in fiscal 2010, we repaid a
net $5.0 million under our revolving credit facility and we paid dividends of
$6.4 million. In the prior year, financing activities provided $77.1 million of
cash as we borrowed a net $83.0 million on our revolving credit facility
associated with the FPR acquisition. This was partially offset by dividend
payments of $6.3 million in the first quarter of fiscal 2009. We did not
repurchase shares of treasury stock in the first quarter of fiscal 2010 or 2009.
We have a $150.0 million revolving credit facility with a group of banks
expiring in June 2012. We had $50.0 million of borrowings outstanding under this
facility at September 30, 2009. The weighted average interest rate on the
outstanding balance along with the related interest rate swap agreement was
3.33% at September 30, 2009. We intend to maintain a balance of at least $50.0
million outstanding on the revolving credit facility, utilizing the one-month
LIBOR borrowing option though September 19, 2010, per the terms of the interest
rate swap agreement. At September 30, 2009, unused lines under this facility,
net of outstanding letters of credit, total $93.9 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 at
the Company's discretion with terms of up to fifteen years. This agreement
expires in March 2010. At September 30, 2009, 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 5.0% to 6.0% range.
Debt classified as long-term is made up of $25.0 million of long-term debt which
matures in November 2010.
The Board of Directors has authorized the repurchase of shares of the Company's
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, 2009. At
September 30, 2009, we had authorization to repurchase an additional 997,100
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 dividends, acquisitions, investments in properties, facilities and
equipment, and the purchase of additional Company common stock. Management also
believes that additional long-term debt and line of credit financing could be
obtained based on the Company's credit standing and financial strength, however
any additional debt may be at higher rates than the Company is currently paying.
Cautionary Statement Under Private Securities Litigation Reform Act
Management's Discussion and Analysis and other sections of this report,
including documents incorporated by reference, contain statements that are
forward-looking, based on management's current expectations about the future.
Forward-looking statements are often identified by qualifiers, such as "expect,"
"expected," "expectation," "believe," "plan," "intend," "will," "should,"
"could," "anticipate," "intention," "estimated," "would be," and similar
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 Company's
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 current economic conditions on the collectibility 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; competitive pressures; the cost of products and energy and other operating costs; disruption of our information systems; 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; 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; risks related to legal proceedings to which we are a party; the variability and timing of new business opportunities 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; the impact of our inventory management program on order fulfillment and our gross profit margin; 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; adverse regulation and legislation, including potential changes in tax regulations (e.g., those affecting the use of 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, 2009.
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