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AIT > SEC Filings for AIT > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for APPLIED INDUSTRIAL TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for APPLIED INDUSTRIAL TECHNOLOGIES INC


8-May-2013

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Applied Industrial Technologies ("Applied," the "Company," "We," "Us" or "Our") is a leading industrial distributor serving MRO (Maintenance, Repair & Operations), OEM (Original Equipment Manufacturer) and government markets. Applied is an authorized source for a diverse range of products, including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion components, tools, safety products, and general maintenance and mill supply products. The Company also provides customized shop services for mechanical, fabricated rubber and fluid power products, as well as services to meet storeroom management and maintenance training needs. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the third quarter of fiscal 2013, business was conducted in the United States, Canada, Mexico, Puerto Rico, Australia and New Zealand from 525 facilities.

The following is Management's Discussion and Analysis of 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, consolidated comprehensive 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 necessarily 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 sales for the quarter ended March 31, 2013 increased $16.2 million or 2.7% compared to the prior year quarter, with acquisitions contributing $33.3 million or 5.5% and a favorable foreign currency translation of $1.6 million increasing sales by 0.3%. Operating margin increased to 7.0% of sales from 6.9% for the prior year quarter largely driven by an increase in gross profit, slightly offset by a more than commensurate increase in SD&A. Net income levels were flat compared to the prior year quarter. Shareholders' equity was $738.0 million at March 31, 2013, up from the June 30, 2012 level of $672.1 million. The current ratio was 2.9 to 1 at March 31, 2013 and 2.9 to 1 at June 30, 2012.

Applied monitors several economic indices that have been key indicators for industrial economic activity in the United States. These include the Industrial Production and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) 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.

In the March quarter, Industrial Production increased at an annual rate of 5%, its largest gain since the first quarter of 2012. The MCU for March was 76.4, up slightly from the December 2012 revised reading of 76.3. The ISM PMI averaged 51.3 in the March quarter, an increase from 50.7 in the December quarter, and above 50 (its expansionary threshold).

The number of Company associates was 5,124 at March 31, 2013, 4,664 at June 30, 2012, and 4,645 at March 31, 2012. The number of operating facilities totaled 525 at March 31, 2013 and 476 at June 30, 2012 and 477 at March 31, 2012.

Results of Operations

Three months Ended March 31, 2013 and 2012

The following table is included to aid in review of Applied's condensed
statements of consolidated income.
                                 Three Months Ended March 31,
                                   As a Percent of Net Sales       Change in $'s Versus Prior Period
                                    2013               2012                   - % Increase
Net Sales                            100.0 %             100.0 %                               2.7  %
Gross Profit                          28.1 %              27.7 %                               4.0  %
Selling, Distribution &
Administrative                        21.1 %              20.7 %                               4.2  %
Operating Income                       7.0 %               6.9 %                               3.5  %

Net Income 4.7 % 4.9 % (0.4 )%


Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During the quarter ended March 31, 2013, sales increased $16.2 million or 2.7% compared to the prior year quarter, with acquisitions accounting for $33.3 million or 5.5%, and foreign currency translation increasing sales by $1.6 million or 0.3%. We experienced overall declines in sales during the quarter in our businesses not acquired in the current year of 3.1%. The majority of this decrease is due to there being 62.5 selling days in the quarter ended March 31, 2013 versus 64 selling days in the quarter ended March 31, 2012 which would approximate a 2.3% decrease in sales.

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $19.9 million or 4.1% during the quarter from the same period in the prior year, primarily attributed to acquisition related sales growth. Acquisitions within this segment increased sales by $31.4 million or 6.5%.

Sales from our Fluid Power Businesses segment, which operates primarily in OEM markets, decreased $3.7 million or 3.1% during the quarter from the same period in the prior year, primarily attributed to weakness within a few of our larger Fluid Power Businesses. Acquisitions within this segment increased sales by $1.9 million or 1.6%.

Sales in our U.S. operations were down $7.9 million or 1.5%, with acquisitions adding $10.3 million or 2.0%. Sales from our Canadian operations increased $5.2 million or 7.9%, with acquisitions adding $4.3 million or 6.6% and a favorable foreign currency translation increasing Canadian sales by $0.9 million or 1.3%. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $18.9 million or 109.6% above the prior year. Virtually all of this increase relates to our new Australian and New Zealand operations.

During the quarter ended March 31, 2013, industrial products and fluid power products accounted for 72.6% and 27.4%, respectively, of sales as compared to 71.1% and 28.9%, respectively, for the same period in the prior year.

Our gross profit margin for the quarter was 28.1%, as compared to the prior year's quarter of 27.7%. The increased margins are attributable to the impact of relatively higher gross margins from acquired operations.

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 Company's 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 21.1% of sales in the quarter ended March 31, 2013 compared to 20.7% in the prior year quarter. The increase in SD&A as a percentage of sales is due to the relatively higher level of SD&A expense from acquired operations. On an absolute basis, SD&A increased $5.3 million or 4.2% compared to the prior year quarter.

Operating income increased 3.5% or $1.5 million, and as a percent of sales increased to 7.0% from 6.9% during the prior year quarter. The period increase in operating income primarily reflects the higher gross profit levels offset somewhat by an increase in SD&A.

Operating income as a percentage of sales for the Service Center Based Distribution segment decreased to 7.0% in the current year quarter from 7.4% in the prior year quarter. This decrease is primarily attributable to a 0.2% decrease in our core operations gross profit margins coupled with a 0.2% impact from a lower level of profitability experienced in the quarter from our recent acquisition in Australia and New Zealand.

Operating income as a percentage of sales for the Fluid Power Business segment decreased to 8.4% in the current year quarter from 8.8% in the prior year quarter. This decrease is primarily attributable to a 0.3% lower level of gross profit margins along with a 0.1% negative impact of SD&A expenses as a percentage of sales due to lower sales levels.

Segment operating income is impacted by changes in the amounts and levels of expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.

The effective income tax rate was 34.0% for the quarter ended March 31, 2013 compared to 32.9% for the quarter ended March 31, 2012. In the prior year the lower rate was primarily due to several discrete items that did not recur in the current year. We expect our full year tax rate for fiscal year 2013 to be in the 34.0% range.


Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As a result of the factors addressed above, net income decreased $0.1 million or 0.4% compared to the prior year quarter. Net income per share was $0.69 per share for the quarter ended March 31, 2013, compared to $0.69 in the prior year quarter.

Nine months Ended March 31, 2013 and 2012

The following table is included to aid in review of Applied's condensed statements of consolidated income.

                                Nine Months Ended March 31,
                                 As a Percent of Net Sales         Change in $'s Versus Prior
                                  2013               2012             Period - % Increase
Net Sales                          100.0 %             100.0 %                            3.8 %
Gross Profit                        27.5 %              27.4 %                            4.2 %
Selling, Distribution &
Administrative                      20.5 %              20.7 %                            2.8 %
Operating Income                     7.0 %               6.8 %                            8.2 %
Net Income                           4.7 %               4.4 %                           11.9 %

During the nine months ended March 31, 2013, sales increased $66.3 million or 3.8% compared to the same period in the prior year, with acquisitions accounting for $78.1 million or 4.5%, and foreign currency translation decreasing sales by $1.2 million or 0.1%. We experienced overall declines in sales during the year to date period in our businesses not acquired in the current year of 0.6%. The majority of this decrease is due to there being 187.5 selling days in the period ended March 31, 2013 and 189 selling days in the period ended March 31, 2012 which would approximate a 0.8% decrease in sales.

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $76.0 million or 5.4% during the nine months ended March 31, 2013 from the same period in the prior year, primarily attributed to acquisition related sales growth. Acquisitions within this segment increased sales by $75.1 million or 5.3%.

Sales from our Fluid Power Businesses segment, which operates primarily in OEM markets, decreased $9.8 million or 2.8% during the nine months ended March 31, 2013 from the same period in the prior year, primarily attributed to weakness within a few of our Fluid Power Businesses. Acquisitions within this segment increased sales by $3.1 million or 0.9%.

During the nine months ended March 31, 2013, sales in our U.S. operations increased $4.3 million or 0.3% with acquisitions adding $11.9 million or 0.8%. Sales from our Canadian operations increased $6.5 million or 3.0%, with acquisitions adding $14.8 million or 7.0%. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, increased $55.5 million or 101.8% from the the prior year, primarily attributed to the acquisition of our new Australian and New Zealand operations.

During the nine months ended March 31, 2013, industrial products and fluid power products accounted for 72.3% and 27.7%, respectively, of sales as compared to 70.9% and 29.1%, respectively, for the same period in the prior year.

Our gross profit margin for the period was 27.5% as compared to the prior year's period of 27.4%. The increase in gross profit margin was attributable to an increase in sales of 3.8% with an increase in cost of sales of only 3.6%.


Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Company's 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 sales for the nine months ended March 31, 2013 compared to 20.7% in the prior year period. On an absolute basis, SD&A increased $10.3 million or 2.8% compared to the prior year period. In the prior year period we incurred approximately $4.5 million of non-recurring SD&A expense mostly pertaining to a curtailment loss incurred when we froze participant benefits provided under our Supplemental Executive Retirement Benefits Plan as well as costs associated with our CEO transition. Adjusting for these items, the adjusted SD&A expenses would have shown a 4.1% increase over the prior year period. This increase in adjusted SD&A was entirely the result of acquired operations as our ongoing operations experienced SD&A expense declines.

Operating income increased 8.2% or $9.7 million, and as a percent of sales increased to 7.0% from 6.8% during the prior year period. The period increase in operating income primarily reflects higher gross profit with a less than commensurate increase in SD&A.

Operating income as a percentage of sales for the Service Center Based Distribution segment decreased slightly to 6.6% in the current year period, from 6.7% in the prior year period remaining relatively consistent.

Operating income as a percentage of sales for the Fluid Power Business segment decreased to 8.5% in the current year period, from 9.2% in the prior year period. The decrease is primarily attributable to a 0.3% negative impact of SD&A expenses as a percentage of sales due to lower sales levels, coupled with a 0.4% impact of lower gross profit margins.

Segment operating income is impacted by changes in the amounts and levels of expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.

The effective income tax rate was 34.0% for the nine month period ended March 31, 2013 compared to 34.8% for the nine month period ended March 31, 2012. The impact of lower effective tax rates in foreign jurisdictions reduced our rate by approximately 0.7% in the period, and other tax items reduced the rate by 0.1%. We expect our full year tax rate for fiscal 2013 to be in the 34.0% range.

As a result of the factors addressed above, net income increased $9.1 million or 11.9% compared to the prior year period. Net income per share was $2.02 per share for the nine month period ended March 31, 2013, compared to $1.79 in the prior year period.

Liquidity and Capital Resources

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At March 31, 2013 and March 31, 2012, we had no outstanding borrowings. 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.

The Company's working capital at March 31, 2013 was $462.1 million, compared to $435.6 million at June 30, 2012. The current ratio was 2.9 to 1 at March 31, 2013 and 2.9 to 1 at June 30, 2012.

In the first quarter, the Company acquired SKF's company-owned distribution businesses in Australia and New Zealand for cash consideration. The Company funded this acquisition from its available cash.

In the second quarter, the Company acquired Parts Associates Inc. based in Cleveland, Ohio. The Company funded this acquisition with funds drawn on the Company's revolving credit facility, which has since been repaid. The company also acquired Bearings & Oil Seals Specialists Inc. based in Ontario, Canada, as well as HyQuip Inc. based in Wisconsin. The Company funded these acquisitions from its available cash.


Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In the third quarter, the Company acquired Norma Bearings Inc. located in Laval, Quebec. The Company funded this acquisition from its available cash.

Net Cash Flows
The following table is included to aid in review of Applied's condensed
statements of consolidated cash flows; all amounts are in thousands.
                                            Nine Months Ended March 31,
Net Cash Provided by (Used in):               2013               2012
Operating Activities                    $      69,056       $      61,971
Investing Activities                          (76,690 )           (31,383 )
Financing Activities                          (28,828 )           (41,342 )
Exchange Rate Effect                            1,103                (930 )
Decrease in Cash and Cash Equivalents   $     (35,359 )     $     (11,684 )

Net cash provided by operating activities was $69.1 million for the nine months ended March 31, 2013 as compared to $62.0 million for the same period a year ago. The increase is due primarily to increased net income while experiencing our normal seasonal working capital demands.

Net cash used in investing activities during the nine months ended March 31, 2013 increased to $76.7 million during the current period versus $31.4 million in the prior period. The increase is due to a higher level of acquisitions during the current period of $67.6 million compared to $14.3 million in the prior period. Partially offsetting the increase is a lower level of property additions of $9.8 million compared to $18.3 million in the prior period as we begin to wind down the capitalized assets added due to the implementation of our new ERP system.

Net cash used in financing activities decreased to $28.8 million for the nine months ended March 31, 2013 versus $41.3 million in the prior period. The decrease is primarily due to $19.0 million used in the prior year for repurchases of 644,100 shares of treasury stock, no purchases of treasury stock were completed in the current period. Partially offsetting the decrease is higher dividend payments of $27.5 million compared to $24.9 million due to increases in the dividend per common share.

ERP Project
In the second quarter of fiscal 2011, Applied commenced its ERP (SAP) project to transform the Company's technology platforms and enhance its business information and transaction systems for future growth. We have deployed our solution in a portion of our Canadian and U.S. operations. Deployments have continued in the third quarter with further deployments planned for fiscal 2013 and 2014.

Share Repurchases
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 any shares of treasury stock in the nine months ended March 31, 2013. At March 31, 2013, we had authorization to repurchase an additional 1,142,800 shares. During the nine months ended March 31, 2012, we acquired 644,100 shares of treasury stock for $19.0 million.

Borrowing Arrangements
We have a $150.0 million revolving credit facility with a group of banks expiring in May 2017. There are no borrowings outstanding under this facility at March 31, 2013. At March 31, 2013, unused capacity under this facility, net of outstanding letters of credit, was $140.9 million and is available to fund future acquisitions or other capital and operating requirements.

We also have an uncommitted long-term financing shelf facility which expires in February 2016, enabling us to borrow up to $125 million with terms of up to fifteen years. This facility had no borrowings outstanding at March 31, 2013.


Table of Contents
             APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
      ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and
the associated provision for losses on accounts receivable:
                                                     March 31,             June 30,
                                                       2013                  2012
Accounts receivable, gross                     $          344,762    $          315,375
Allowance for doubtful accounts                             8,517                 8,332
Accounts receivable, net                       $          336,245    $          307,043
Allowance for doubtful accounts, % of gross
receivables                                                   2.5 %                 2.6 %

                                                      Nine Months Ended March 31,
                                                       2013                  2012
Provision for losses on accounts receivable    $            1,273    $            2,947
Provision as a % of net sales                                0.07 %                0.17 %

Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables for each of the Company's locations.

On a consolidated basis, DSO was 48.3 at March 31, 2013 versus 45.2 at June 30, 2012. Accounts receivable increased 9.5% this year, compared to a 3.8% increase in sales in the nine months ended March 31, 2013. We primarily attribute the increase in DSO to the timing of the March month end.

The lower provision for losses on accounts receivable reflects a lower level of customer bankruptcies in the current year period.

Approximately 2.9% of our accounts receivable balances are more than 90 days past due. On an overall basis, our provision for losses from uncollected receivables represent 0.07% of our sales in the nine months ended March 31, 2013. Historically, this percentage is around 0.14%. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.

Inventory Analysis
Inventories are valued at the lower of cost or market, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at current costs. The annualized inventory turnover for the period ended March 31, 2013 was 4.1 versus 4.6 at June 30, 2012. We believe inventory turnover will improve through our June year-end, although it will not reach the levels achieved in the fiscal 2012. This slight decline in inventory turns pertains to our current year acquisitions as well as additions to core inventory in support of our strategic objectives.


Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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," "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 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; risks and uncertainties associated with executing our strategic business plan; changes in the prices for products and services relative to the . . .

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