APPLIED®. VALUE FOCUS.
2007 ANNUAL REPORT
AP PL I ED®.
VAL UE FO CU S.
Applied Industrial Technologies is one of North
America’s largest independent industrial distributors.
We supply customers in virtually every segment of
industry, as well as government organizations. We
are a vital link between a full scope of suppliers’
products and capabilities and a broad range of
customers’ needs.
Applied works in close collaboration with our
customers to understand their needs and processes.
That’s where value creation lies. We use that
knowledge to provide products and services when
and where they are needed. We have taken the idea
of customer service to new levels, believing that we
must make ourselves a vital part of our customers’
success.
By focusing on our Four Cornerstone strategies
– Profitable Sales Growth, Margin Enhancement,
Cost Control, and Asset Management – we are
driving value for all our stakeholders – customers,
suppliers, associates and shareholders.
APP LIE D
AT A GL ANCE
Applied serves the Maintenance
Repair Operations (MRO)
and Original Equipment
Manufacturing (OEM)
markets with bearings, power
transmission components,
fluid power components and
systems, industrial rubber
products, linear components,
tools, safety products, and
general maintenance and
mill supply products. We also
provide customized mechanical,
fabricated rubber and fluid
power shop services, as well
as services to meet storeroom
management and maintenance
training needs.
Headquarters:
Cleveland, Ohio, USA
Operating Facilities: 445 in
48 U.S. states, 5 Canadian
provinces, Puerto Rico and
6 Mexican states
E-Commerce: www.applied.com
Distribution Centers: 7
Stock Keeping Units (SKUs) Available to
Customers: More than 3 million
Customer Accounts:
More than 156,000
Product Manufacturers:
More than 2,000
Stock Ticker Symbol: AIT is listed on
the New York Stock Exchange
Employee Associates: 4,649
This report contains statements that are forward-looking,
as that term is defined by the Securities and Exchange
Commission in its rules, regulations and releases. Applied
intends that such forward-looking statements be subject
to the safe harbors created thereby. All forward-looking
statements are based on current expectations regarding
identified
important
on page 15 of this report and in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2007.
Accordingly, actual results may differ materially from those
expressed in the forward-looking statements, and the making
of such statements should not be regarded as a representation
by Applied or any other person that results expressed therein
will be achieved.
including
factors,
those
risk
20 07 FI NANCIAL HIG HLIGHT S
(In millions except per share amounts, shareholder and employment figures)
Year Ended June 30, 2007
Net Sales
Income Before Income Taxes
Net Income
Net Income Per Share
Number of Shareholders at June 30*
Average Common Shares Outstanding
Cash Dividends Per Share
Number of Employees at June 30
Return on Equity
Cash Provided From Operations
2007
2006
2005
$ 2,014.1
$ 133.8
$ 86.0
$ 1.93
6,242
44.5
$ 0.48
4,649
19.9%
$ 70.9
$ 1,900.8
$ 113.1
$ 72.3
$ 1.57
6,192
46.2
$ 1,717.1
$ 86.3
$ 55.3
$ 1.20
6,079
46.1
$ 0.40
$ 0.29
4,684
17.9%
4,441
15.1%
$ 69.9
$ 81.0
* Includes employee shareholders in the Applied Industrial Technologies Retirement Savings Plan.
HIGHLIGHTS
FI SC AL YEAR 2007 BUSINES S/O PE RATIONA L HIGHL IGH TS
GROWTH
Applied Industrial Technologies achieved record sales in fiscal
2007, crossing the $2 billion mark for the first time.
Applied’s net sales in fiscal 2007 increased 6%. Operating
margin improved to 6.7%, while operating income improved
16.8%. Selling, Distribution and Administrative expenses
decreased to 20.5% of sales, representing a 0.5% improvement
from last year.
STOCK REPURCHASES AND DIVIDENDS
During fiscal 2007, Applied purchased 1,401,000 shares of
the company’s common stock on the open market. In April,
the Board authorized the purchase of up to 1,500,000
additional shares, representing approximately 3% of the shares
outstanding.
Quarterly dividends for fiscal 2007 totaled $21 million. In
July 2007, the Board increased the regular quarterly dividend
to $0.15 per share, a 25% increase over the previous quarterly
dividend. The company has raised the dividend 181% over the
last three years.
HONORS
Applied received the 2007 Large Business Contractor of the
Year award from the General Services Administration (GSA)
in recognition of the Company’s growth, value to the federal
marketplace and contribution to the GSA Multiple Award
Schedule Program.
Applied placed 26th on CMP Technology’s 2006
InformationWeek 500 for the innovative use of information
technology. The Company has been featured annually on the
listing since 2000 and within the top 100 three times.
Applied regularly receives supplier and customer awards of
excellence, and fiscal 2007 was another exceptional year. For
example, we received the 2006 Gold Alliance Supplier Award
from Vulcan Materials Company, which was presented in
recognition of product quality, service, support, and value.
Applied was named to the Forbes magazine Platinum
400 list of the Best Big Companies in America for the fourth
consecutive year. The Company ranked 73rd based on metrics
such as a five-year compounded annual growth rate of 31% in
shareholder return, as computed by Forbes.
SUPPLIER AGREEMENTS
Fiscal 2007 included a new supplier agreement with Wire Belt
Company of America and full authorization by Sumitomo at all
U.S. locations. Applied formally launched the Rust-Oleum and
3M product lines, and continued a rollout of Parker Hannifin
(pneumatics).
SERVICE
Applied opened a new Canadian headquarters facility in
Saskatoon, Saskatchewan to support continued growth in sales.
At fiscal year-end, Applied launched a new 1,100-page
master catalog featuring nearly 40,000 parts from more than
100 suppliers. This landmark book is the first Applied-branded
catalog to feature comprehensive product lines from bearings
and power transmission to fluid power and specialty MRO
items. The catalog also includes a 42-page technical section
as value-added support to customers.
TECHNOLOGY
Applied enhanced its point-of-sale system, making the ordering
process quicker and easier for Company associates and, in turn,
serving to better satisfy day-to-day customer needs.
Applied Industrial Technologies, Inc. and Subsidiaries
1
LET TER TO OUR
SHAREHOLDERS
Bill L. Purser, David L. Pugh
Dear Shareholder:
Our focus on value led Applied Industrial Technologies
to a fifth consecutive year of improved financial results
in fiscal 2007. These record results included crossing
the $2 billion sales threshold for the first time, as well
as achieving record earnings and significantly improved
operating margin.
Net sales in fiscal 2007 rose 6% to $2,014,109,000
as Applied’s business benefited from continued growth
in the North American industrial economy. While the
economy did not grow as fast as it did last year, our
performance strategies helped us get the most out of our
selling efforts.
Most notably, our operating margin improved to
6.7% from last year’s 6.1%, while our overall operating
income improved 16.8%. The continued improvement
in operating margin has been driven by company-wide
efforts to enhance our productivity, improve gross profit
margins, and contain expenses. Selling, Distribution
and Administrative expenses were 20.5% of sales, an
improvement of 0.5% over last year and an indication
that we continue to improve productivity by holding increases
in expenses to a lower rate than our growth in sales.
Our balance sheet remains healthy. Our cash balance
of $120 million at year-end exceeds our outstanding
long-term debt for the third consecutive year. This
positions us well to continue to invest in the growth of
the business and to return value to shareholders in the
form of dividends and stock repurchases. Reflecting that
strength, we raised our quarterly dividend rate 25% in
July of 2007.
Strategies Focused on Value
Our Four Cornerstones, Applied’s operational strategies,
helped us generate superior results while supporting our
stated business strategy – to grow profitability in North
America within our current product domain. Our focus
on Profitable Sales Growth, Margin Enhancement, Cost
Control, and Asset Management, drives our continuous
improvement and makes us more efficient and more
effective. They have guided our efforts now for six years,
and we believe they will help us continue to grow our
sales and further improve our operating margin, to deliver
increased value to our shareholders.
Applied’s expansion into Mexico and Canada has
continued to benefit the corporation. Sales grew 8.7%
at our Canadian facilities and 17.6% at our Mexican
2
Applied Industrial Technologies, Inc. and Subsidiaries
facilities. We opened a new Canadian headquarters
facility in Saskatoon mid-year to support our growing
business and help us extend the Applied brand to new
geographic regions.
Another major strategy for 2007 was the expansion
of our government sales. Now in year two of a five-year
plan, we increased our sales by 80% in 2007 and are
investing for additional growth over the next three years.
We received several awards from the GSA this year,
including recognition as their Large Business Contractor
of the Year for 2007.
During the year we converted our Applied.com
e-commerce site to an “open” Browse and Buy design.
This design will allow potential customers to easily
access nearly 500,000 of our parts on the Internet and
purchase using a credit card. At year-end we issued a
new 1,100-page Applied-branded catalog that
provides information on nearly 40,000 parts from more
than 100 suppliers. Both our catalog and our open
Web site are efforts to expand our market reach and
find new customers.
Actions to Grow Shareholder Value
During fiscal 2007, Applied repurchased 1,401,000
shares of its common stock for $34 million. In April, the
Board approved a new authorization to purchase up to
1,500,000 additional shares representing approximately
3% of the shares outstanding. These purchases can be
made in open market and negotiated transactions, from
time-to-time depending upon market conditions. During
the past five years, Applied has repurchased more than
5,847,000 shares.
Shareholders also benefited from payment of dividends
during the year, which totaled $21 million. The quarterly
rate of $0.12 was increased 25% to $0.15 in July of
2007. Over the last three years, Applied has raised its
dividend 181% reflecting the improved profitability of our
business and keeping with our strategy to return value to
our shareholders.
Succession in Place
In January of 2007, we announced Bill Purser’s chosen
retirement date of December 31, 2007. Bill has been our
President since October of 2000 and has more than 40
years of experience in our business. His deep knowledge
and superb leadership style helped us grow and succeed
over the last seven years, and he will be personally and
professionally missed.
Picking a strong, knowledgeable successor was a critical
need for the Company, and we worked on it for two years,
closely involving our Board of Directors in the process.
Our selection of Benjamin J. Mondics, age 49, was made
with careful consideration and analysis. He was elected
to the position of Executive Vice President and Chief
Operating Officer and will
succeed Bill as President at
calendar year-end.
Ben’s sales experience,
industry knowledge and
performance in running our
Midwest Area made him a
great choice and will ensure
continuity of leadership.
Throughout 2007 there has
been close collaboration,
mentoring and strategic
planning to provide a
smooth transition as the
reins are handed over.
Benjamin J. Mondics
Creating More Value
We believe fiscal 2008 should bring continued success
in our strategies to create value. The Four Cornerstones
will help us generate increased productivity and
profitability, and North American economic conditions
should continue to support profitable sales growth. We
believe increased earnings leverage and additional
shareholder value will ensue.
In summary, we achieved substantial progress
during 2007, our 84th year in business, thanks to the
hard work and dedication of our more than 4,600
employee-associates. We thank our loyal customers and
suppliers for their support in the past year, as well as our
shareholders and Board of Directors. We look forward to
another strong year in fiscal 2008.
David L. Pugh
Chairman & Chief
Executive Offi cer
Bill L. Purser
President
August 17, 2007
Applied Industrial Technologies, Inc. and Subsidiaries
3
value focus.x
excellence is in the details.
Value – it signifies worth, importance and achievement of excellence. It’s the ability to look
more closely at every aspect of business and make the most of it – no matter how small.
At Applied, our value focus lies in the ability to concentrate on individual market needs, single
relationships, best practices and unique solutions that create customer success. That focus has
been the driver for record-breaking growth and recognition for excellence.
That well-honed ability to see things differently – more clearly focused on delivering value –
prepares us to face new challenges, new markets and new potential.
But that’s just the beginning, because the Applied value focus is built around our Four
Cornerstones strategy.
Applied’s value focus on Profitable Sales Growth is aimed at seeking
new opportunities to grow and diversify within our current product and
geographical areas. Our emphasis is on profit – not simply growth for
growth’s sake. The difference is in our approach.
profitable
sales growth.
the cornerstone
of potential.
We work to understand the critical influences for our customers and
bring them value they can’t get anywhere else. We invest the time
to visit plants, study new technologies and present new programs.
Currently, the rise in energy costs has opened opportunities in
energy efficiency solutions. Armed with targeted information, we
seek to create value that overcomes, outperforms, and outlasts
the competition.
We continue to invest in Web-based transaction capabilities that
offer convenience and speed. In 2007, we instituted a Browse
and Buy feature on our Web site where visitors can rapidly search
and securely order nearly 500,000 parts, 24 hours a day, 7 days
a week. The new capabilities provide the opportunity for increased
sales, while self-service technology improves efficiencies.
Our push into new markets is built on a different value focus
– knowledge, combined with an acceptable amount of risk. Applied
invests the resources needed to understand every aspect of a new
business. That experience helps define the right product mix and business
tools to yield successful results. Two years ago, this focus launched us into
the government service market. Our recognition by the GSA as the 2007 Large
Business Contractor of the Year is proof that our investment is paying off, and
we will continue looking for those business segments that we consider to be non-
cyclical, persistent product businesses.
4
Applied Industrial Technologies, Inc. and Subsidiaries
margin enhancement. the cornerstone of leadership.
Applied’s value focus is dedicated to constant, incremental Margin Enhancement – a goal that remains always on the
horizon, to be reached by employees looking closely at every factor, every day. We expect smart, focused decisions, and
it starts with good purchasing procedures and disciplined pricing practices.
Over the last four years, we have improved our gross profit by nearly two percentage points. But our value focus
requires more. We continue to work hard to understand what matters to customers, deliver what counts and
eliminate what doesn’t. We seek payment that is commensurate with the needed products, service and expertise
we provide. It’s managing the Four Cornerstones at the customer level, and it’s what sets us apart.
Through productivity analysis that offers robust data, tracks various metrics and identifies improvement
opportunities, our field management can more efficiently and effectively monitor all factors that impact the
profitability of a customer. Individual accountability is ingrained in each associate, and we continue to provide
the necessary training that fosters continuous improvement in key business metrics.
Applied Industrial Technologies, Inc. and Subsidiaries
5
value viewpoint.
what makes us focused,
makes us better.
At Applied, we take great care in making sure that each Cornerstone is properly managed
and in perfect balance. From a value viewpoint, the more we know, the more prosperity we can
realize. For our customers, that means going beyond solving problems, beyond just finding
solutions to offer the best products, the best expertise and the best support.
Maintaining that value focus – steeped in the fundamentals of our business – will take us to
new heights and lead us to opportunities for further improvements. We will do this one day at a
time, one customer at a time.
The focus on value at Applied includes an intensive oversight
of Cost Control. Each opportunity to realize savings helps to
enhance shareholder returns, support new training, supplement
system efficiencies, and finance acquisitions and entry into
new markets.
cost control.
the cornerstone
of opportunity.
At the core is a mindset bent on operating excellence.
Practicing Cost Control diligently in every action, in
every task; eliminating errors, exceptions and rework.
Developing purchasing efficiencies that enhance buying
strength and reduce inventory management costs. These
are requirements that must constantly be monitored and
controlled. Improved customer relationships often result,
which can pay enormous dividends in customer loyalty,
retention and profitability to Applied.
To further support our Cost Control opportunities, we
analyze the productivity metrics that drive success. Through
constant measurement of sales per associate and gross profit
per associate, we’re better able to manage our resources while
continuing to increase sales. Objectives are quantified. Performance
is monitored and managed. Opportunities are realized.
6
Applied Industrial Technologies, Inc. and Subsidiaries
asset
management.
the cornerstone
of strength.
Applied’s value focus on Asset Management assures we get the most from every
element of the organization. We strive for effective and efficient management of
traditional measures – inventory, receivables, facilities, property and equipment. We
desire highly-performing assets that support customer needs and shared expectations.
By listening to our customers, we align our assets with their needs for mutual success.
Yet, it’s our intellectual capital that sets us apart. Our knowledge and expertise are the
very assets that position us ahead of our competitors – our customer satisfaction surveys
tell us so. That’s why we’ve invested in development tools, and particularly electronic
learning.
Every day, throughout the organization, our associates gain more management training,
business tools and product knowledge to deliver more value in every decision and interaction. In the
past year, nearly 150,000 electronic learning hours have been logged by more than 3,800 associates.
By preparing our associates to make smarter decisions, improvements are not only attainable, they’re
surpassable.
Applied Industrial Technologies, Inc. and Subsidiaries
7
focus on shareholder value
A $100 investment in Applied shares on July 1, 2002 was worth $376 on June 30, 2007.
That remarkable 276% improvement amply demonstrates our focus on creating value for our
shareholders.
How did we get there? By first creating value for our customers, and then working smart to
generate shareholder value from that base. Our Four Cornerstone strategies have helped us
produce continuous and notable improvement in our operating margin, growing it from 2.1%
in fiscal 2002, to 6.7% in fiscal 2007. Quite simply, we are converting more profit from a given
dollar of sales today than we have in the past. We are running our business better for the benefit
of our owners, and our share price has responded in kind.
COMPARISON OF CUMULATIVE TOTAL RETURN
Performance Results from 7/1/02 through 6/30/07
Applied Industrial Technologies, Inc.
Standard & Poor's 500
Peer Group
$400.00
$350.00
$300.00
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00
2002
2003
2004
2005
2006
2007
Assumes $100 invested at the close of trading 6/30/02 in Applied Industrial Technologies, Inc. common stock. Cumulative total return assumes reinvestment of dividends. The
returns of the companies in the peer group are weighted based on the companies’ relative stock market capitalization.
Applied Industrial Technologies, Inc.
Standard & Poor’s 500
Peer Group
Source: Value Line, Inc.
2002
$100.00
100.00
100.00
2003
$111.24
98.45
93.19
2004
$162.02
115.26
129.95
2005
$265.01
120.36
135.47
2006
$304.08
128.33
180.88
2007
$376.11
151.88
214.66
Peer group companies selected on a line-of-business basis include: Airgas, Inc., Genuine Parts Company, W.W. Grainger, Inc., Kaman Corporation, Lawson
Products, Inc., MSC Industrial Direct Co., Inc., The Timken Company, and WESCO International, Inc.
8
Applied Industrial Technologies, Inc. and Subsidiaries
We continue to return profit to our shareholders through our dividends, raising our quarterly
rate five times in the past three years. Most recently we raised our quarterly dividend to 15 cents,
up from a split-adjusted 5.3 cents – a 181% increase. We have also repurchased shares when
appropriate to support those who invest in our company.
Speaking of investors – our officers, directors and 401(k) plan collectively own 12.5% of
Applied stock, so we share in the risk and the rewards. We invest in our Company, as you do,
because we believe in Applied’s future.
Applied Industrial Technologies, Inc. and Subsidiaries
9
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
With more than 4,600 associates across North America, Applied Industrial
Technologies (“Applied,” the “Company,” “We” or “Our”) is an industrial distributor
that offers parts critical to the operations of MRO and OEM customers in virtually
every industry. In addition, Applied provides customized mechanical, fabricated
rubber and fluid power shop services, as well as storeroom management and
maintenance training. We have a long tradition of growth dating back to 1923,
the year our business was founded in Cleveland, Ohio. During fiscal 2007,
business was conducted in the United States, Canada, Mexico and Puerto Rico
from 445 facilities.
Our fiscal 2007 sales hit a record two billion dollars on an increase of 6.0%
compared to prior year. Our operating income and earnings per share increased
16.8% and 22.9%, respectively, compared to the prior year. Significant factors
that contributed to these increases included the growth and improved profitability
of the service center based distribution business, and the impact of acquired
businesses. Gross margin improved 20 basis points to 27.2% due to higher levels
of supplier purchasing incentives and lower net freight costs. In addition, the rate
of growth in selling, distribution and administrative expense for fiscal 2007 was
held below the rate of increase in sales.
Our consolidated balance sheet remains strong as shown by the increase
in shareholders’ equity from the June 30, 2006 level. Cash provided from
operations was $70.9 million, holding steady with fiscal 2006’s $69.9 million.
The Company has two credit/financing agreements available for a total of up to
$250 million of additional borrowing to fund future acquisitions or other capital
and operating requirements. Receivables and inventory increased as a result of
our sales increase and anticipated future demand for our products. Working
capital was only $4 million below 2006’s level even considering the classification
of $50 million of long-term debt to current liabilities as it is due in December
2007. Continued management of our inventory, receivable and payable balances
aided the stability of our working capital.
Applied monitors the Purchasing Managers Index (PMI) published by the
Institute for Supply Management and the Manufacturers Capacity Utilization
(MCU) index published by the Federal Reserve Board and considers these indices
key indicators of potential Company business environment changes.
Both the PMI and the MCU continued to show a stable economy through the
second half of fiscal 2007. Our sales activity traditionally lags these key indicators
by approximately six months. Given the trend of these indicators, we expect sales
improvements to continue into fiscal 2008.
We are forecasting our sales in fiscal 2008 to increase in the 5% to 8%
range and our gross profit percentage to be consistent with fiscal 2007 levels.
In fiscal 2008, the gross profit margin will be highly dependent on our ability
to manage and recover supplier price increases. We anticipate that fiscal 2008
supplier purchasing incentives will be consistent with the fiscal 2007 levels.
While we consider these purchasing incentives to be compensation for various
sales, marketing and logistics services performed, when they are recognized in
our income statement, they are accounted for as a reduction of cost of sales as
required by the Financial Accounting Standards Board (“FASB”) rules. Our overall
growth in selling, distribution and administrative expenses most likely will exceed
our goal of one half the rate of sales growth due to continued investments in
initiatives that are expected to build profitable future growth.
YEAR ENDED JUNE 30, 2007 VS. 2006
Net sales in fiscal 2007 were $2.0 billion or 6.0% above the prior year sales.
This increase was primarily due to the 4.7% improvement in our service center
based distribution sales and the impact of our acquisitions. The increase in service
center based distribution sales was driven by sales mix, volume, the recovery of
supplier price increases, the strengthening of the Canadian currency and sales
generated by acquired businesses. The majority of the increase in sales at our fluid
power businesses was attributable to businesses acquired in fiscal 2006 which
were only included for a portion of that year. There was one less sales day in fiscal
2007 compared to fiscal 2006.
The sales product mix for fiscal 2007 was 80.2% industrial products and 19.8%
fluid power products compared to 81.8% industrial and 18.2% fluid power in the
prior year. Business acquisitions accounted for most of the shift in sales product
mix.
At June 30, 2007, we had a total of 445 operating facilities in the U.S., Canada
and Mexico versus 452 at June 30, 2006.
Industrial production in the United States slowed somewhat in the first half of
our fiscal year and increased slightly in the second half. There is improvement
among manufacturing customers as reflected in the PMI and MCU indices. We
would anticipate our positive financial results to continue if current economic
trends continue.
Gross profit margin increased to 27.2% during fiscal 2007 from 27.0% during
fiscal 2006. The increase in gross profit margin during fiscal 2007 primarily
reflects higher levels of supplier purchasing incentives. LIFO inventory layer
liquidations resulted in a $1.6 million positive impact during fiscal 2006.
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 increased 3.7%
during fiscal 2007 compared to the prior year, but decreased as a percent of sales
to 20.5% from 21.0% in 2006. Approximately half of the fiscal 2007 increase
was attributable to businesses acquired. The remainder of the increase was
primarily due to increases in associate compensation tied to improved financial
performance.
Operating income increased 16.8% to $135.0 million during fiscal 2007 from
$115.6 million during 2006. As a percent of sales, operating income increased to
6.7% in fiscal 2007 from 6.1% in 2006. The $19.4 million increase in operating
income during fiscal 2007 was primarily due to the increase in gross profit
generated by the service center based distribution business, reflecting higher sales
and supplier purchasing incentives, as well as control of SD&A expenses and the
impact of acquired businesses.
Interest expense-net decreased by 26.5% or $0.9 million during fiscal 2007
compared with the prior year, primarily due to an increase in interest income
associated with higher average balances of temporary investments and higher
interest rates.
Other income, net, represents certain non-operating items of income and
expense. This line increased $0.5 million due primarily to appreciation in
investments held by deferred compensation trusts.
Income tax expense as a percentage of income before taxes was 35.7% for
fiscal 2007 and 36.1% for 2006. The decrease in the effective tax rate was due
10
Applied Industrial Technologies, Inc. and Subsidiaries
to higher levels of non-taxable interest income in the current year. We expect our
overall tax rate for fiscal 2008 to rise to around 36.5%, primarily due to recent
U.S. tax law changes which have eliminated certain deductions related to foreign
sourced income.
Net income for fiscal 2007 increased $13.7 million or 19.0% from the
prior year, reflecting the increases in sales and margins. Net income per share
increased 22.9% to $1.93 in fiscal 2007 from $1.57 in 2006. During fiscal 2007,
we repurchased 1.4 million shares as part of our stock buyback program which
resulted in fewer shares outstanding for the year compared to the prior year.
The number of Company associates was 4,649 at June 30, 2007 and 4,684 at
June 30, 2006.
YEAR ENDED JUNE 30, 2006 VS. 2005
Net sales in fiscal 2006 were $1.9 billion or 10.7% above the prior year
sales. This increase was primarily due to the 7.7% improvement in our service
center based distribution sales and the impact of our acquisitions. The increase in
service center based distribution sales was driven by sales mix, volume, recovery
of supplier price increases, strengthening of the Canadian currency and sales
generated by acquired businesses. The majority of the increase in sales at our
fluid power businesses was attributable to the sales generated by businesses
acquired during the year. The remainder of the increase reflects sales mix, pricing
and volume and the impact of the strengthening of the Canadian currency. The
number of sales days was the same in both annual periods.
The sales product mix for fiscal 2006 was 81.8% industrial products and 18.2%
fluid power products compared to 84.0% industrial and 16.0% fluid power in the
prior year. Business acquisitions accounted for most of the shift in sales product
mix.
At June 30, 2006, we had a total of 452 operating facilities in the U.S., Canada
and Mexico versus 440 at June 30, 2005. The net increase of 12 facilities was
primarily due to the acquisition of two businesses during fiscal 2006.
Gross profit margin increased to 27.0% during fiscal 2006 from 26.5% during
2005. The increase in gross profit margin during fiscal 2006 primarily reflected
improved customer pricing, lower net freight costs and higher levels of supplier
purchasing incentives. The increase in supplier purchasing incentives reflected the
recording of certain supplier purchasing incentives during the first quarter of fiscal
2006 related to inventory purchases made in the prior year. The criteria under
U.S. generally accepted accounting principles necessary to permit us to record
these supplier purchasing incentives were not met until that time. The gross profit
margin was also positively impacted by LIFO inventory layer liquidations during
fiscal 2006, which increased gross profit by $1.6 million. There were no LIFO
layer liquidations during fiscal 2005.
Selling, distribution and administrative expense (“SD&A”) increased 8.6%
during fiscal 2006 compared to the prior year, but decreased as a percent of sales
to 21.0% from 21.4% in 2005. Approximately 40% of the fiscal 2006 increase
was attributable to SD&A amounts of businesses acquired. The remainder of
the increase was primarily due to increases in associate compensation tied to
improved financial performance.
Operating income increased 31.4% to $115.6 million during fiscal 2006
from $88.0 million during 2005. As a percent of sales, operating income
increased to 6.1% in fiscal 2006 from 5.1% in 2005. The $27.6 million increase
in operating income during fiscal 2006 was primarily due to the increase in gross
profit generated by the service center based distribution business, reflecting the
improved gross profit margin noted above on higher sales levels. Operating
income was also positively impacted by the acquisition of two businesses during
fiscal 2006. These increases in operating income were only partially offset by the
increase in SD&A noted above.
Interest expense-net decreased by 32.1% or $1.5 million during fiscal 2006
compared with the prior year, primarily due to an increase in interest income
associated with higher average balances of temporary investments and higher
interest rates.
Other income, net, represented certain non-operating items of income and
expense. The decrease in other income, net in fiscal 2006 was due to $2.9 million
of life insurance settlements received during 2005 which did not recur in 2006.
Income tax expense as a percentage of income before taxes was 36.1% for
fiscal 2006 and 35.9% for 2005. The increase in the effective income tax rate
primarily reflected the benefit of tax-free life insurance proceeds recorded during
fiscal 2005 that did not recur during fiscal 2006, partially offset by lower state and
local income tax rates during fiscal 2006.
Net income for fiscal 2006 increased $17.0 million or 30.6% from the
prior year, reflecting the increases in sales and margins. Net income per share
increased 30.8% to $1.57 in fiscal 2006 from $1.20 in 2005.
Effective July 1, 2005, we closed our Denver distribution center. This was
our smallest distribution center and the least efficient from a cost standpoint.
We transferred a portion of the inventory to the area service centers to provide
additional local inventory resources and availability for emergency shipment
needs. The remainder of the inventory was transferred to our distribution centers
in Texas, California and Oregon that now service the area previously serviced out
of Denver.
The number of Company associates was 4,684 at June 30, 2006 and 4,441 at
June 30, 2005. This increase was primarily due to business acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations depend primarily upon generating operating
income, controlling investment in inventories and receivables, and managing
the timing of payments to suppliers. We continue to monitor and control our
investments in inventories and receivables by taking advantage of supplier
purchasing programs, making internal information system enhancements and
accelerating receivables collection through improvements in invoice delivery,
customer communications and expanded external collection efforts. We
generated $70.9 million of cash from operating activities during fiscal 2007,
$69.9 million during 2006, and $81.0 million during 2005. Cash provided
from operations in fiscal 2007 benefited from our strong operating results.
The operating cash flow increase was partially offset by higher receivables and
inventory balances. Inventory balances did however rise at a lower level than
sales. Prior year acquisitions were integrated allowing us to more efficiently
manage our investment in inventory. Cash flows from operations in fiscal 2007
were also impacted by the timing of certain income tax payments and the timing
of receipts from certain supplier purchasing programs. In fiscal 2007, we changed
Applied Industrial Technologies, Inc. and Subsidiaries
11
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
The following table shows the Company’s approximate obligations and
commitments to make future payments under contractual obligations as of June
30, 2007 (in thousands):
Operating leases
Interest payments
on debt
Planned funding
of postretirement
obligations
Long-term debt
Total Contractual
Cash Obligations
Period Less
Than 1 yr.
Period
Period
4-5 yrs. over 5 yrs.
1-3 yrs.
$ 65,400 $ 19,200 $ 24,200 $ 11,600 $ 10,400
Period
Total
8,700
3,700
4,000
1,000
40,500
4,700
5,600
8,800
21,400
75,000
50,000
25,000
$189,600 $ 77,600 $ 33,800 $ 46,400 $ 31,800
Purchase orders for inventory and other goods and services are not included in
our estimates, as purchase orders generally represent authorizations to buy rather
than binding agreements.
The Board of Directors has authorized the repurchase of shares of the
Company’s common stock, at the Company’s discretion. These purchases may be
made in open market and negotiated transactions, from time-to-time, depending
upon market conditions. At June 30, 2007, we had authorization to purchase an
additional 1,500,000 shares.
Capital resources are obtained from income retained in the business,
borrowings under the Company’s long-term debt facilities, and from operating
lease arrangements. Additionally, we have revolving credit agreements available
for borrowings as required.
See Note 5 to the consolidated financial statements for details regarding
the outstanding debt amounts as of June 30, 2007 and 2006. The average
borrowings totaled $75.0 million during fiscal 2007 and 2006. In fiscal 2007, we
classified $50.0 million of debt that matures in December 2007 as current as we
plan to pay it off with cash at maturity. One-third of the Company’s outstanding
debt has been converted from fixed rate U.S. dollar denominated debt to fixed rate
Canadian dollar denominated debt through the use of a cross currency swap. As
such, consolidated interest expense is affected by changes in the exchange rates of
U.S. and Canadian dollars (see Note 6 to the consolidated financial statements).
The weighted average interest rate on borrowings under our debt agreements,
net of the benefits from interest rate swaps, was 6.8%, 6.7% and 6.5% in fiscal
2007, 2006 and 2005, respectively. The increase in the weighted average interest
rate reflects the impact of the strengthening of the Canadian dollar during fiscal
2007 and 2006. We terminated our interest rate swap agreements for favorable
settlements in prior years. The settlement gains are being amortized as a reduction
in interest expense of $0.8 million per year over the remaining life of the notes
through December 2007.
how we fund our contributions to the Retirement Savings Plan. We now contribute
cash (which is then used by the administrator to purchase Company stock in the
open market) whereas previously we satisfied our obligation by contributing
treasury shares. This reduced operating cash flow in fiscal 2007 by approximately
$6.0 million.
Cash used by investing activities was $10.2 million during fiscal 2007, $37.9
million during 2006 and $12.5 million during 2005. Cash was primarily used
for capital expenditures in fiscal 2007, whereas 2006 and 2005 also included
acquisitions. In fiscal 2006 we acquired two U.S. distributors for $27.7 million,
net of cash acquired, and in fiscal 2005 we acquired one Canadian distributor
for $5.9 million, net of cash acquired. Capital expenditures consisted primarily
of computers and information technology equipment, and buildings and
improvements.
For fiscal 2008, our capital expenditures are expected to be in the $8 million
to $10 million range, consisting primarily of additional computers, information
system technology and infrastructure investments. Depreciation for fiscal 2008 is
expected to be in the range of $12.5 million to $13.5 million.
Cash used in financing activities was $48.4 million during fiscal 2007, $53.8
million during 2006 and $11.7 million during 2005. The reduction in cash used
in financing activities represents fewer shares repurchased in fiscal 2007 versus
fiscal 2006 (reduction of $20.8 million or 1 million shares). Offsetting this are the
excess tax benefits from share-based compensation which dropped $12.5 million
compared to prior year on lower exercises of stock options. Finally, the full year
impact of the fiscal 2006 dividend rate increases accounted for an additional
$3.0 million use of cash versus fiscal 2006. Over the last three fiscal years, we
repurchased 1.4 million, 2.4 million and 0.9 million shares of the Company’s
common stock at an average price per share of $24.26, $23.05 and $16.04,
respectively. During fiscal year 2007, we paid a quarterly dividend of $.12 per
share. In July 2007, the Board declared a quarterly dividend payable on August
31, 2007 to shareholders of record on August 15, 2007 of $.15 per share. This
represents an increase of 25% over the previous regular quarterly cash dividend.
The amount of the dividend paid is recommended quarterly by management and
approved by our Board of Directors based on judgment, financial performance
and cash flow and payout guidelines consistent with other industrial companies.
12
Applied Industrial Technologies, Inc. and Subsidiaries
We manage interest rate risk through the use of a combination of fixed rate
long-term debt, variable rate borrowings under committed revolving credit
agreement and interest rate swaps. At June 30, 2007, we had no variable
rate debt or interest rate swaps outstanding. See Note 6 to the consolidated
financial statements “Risk Management Activities” for additional discussion on our
derivative activities.
The Company’s working capital at June 30, 2007 was $365.5 million
compared to $370.0 million at June 30, 2006. The current ratio was 2.6 at June
30, 2007 and 3.0 at June 30, 2006. The decrease in working capital at June 30,
2007 was primarily due to the increase in long-term debt payable within one year
associated with the debt that matures in December 2007.
The Company amended its five-year committed revolving credit agreement
which now expires in June 2012. This agreement provides for unsecured
borrowings of up to $150.0 million. We had no borrowings outstanding under
this facility at June 30, 2007. Unused lines under this facility, net of outstanding
letters of credit, totaling $144.7 million are available to fund future acquisitions
or other capital and operating requirements. We also have an uncommitted long-
term financing shelf facility which was renewed in fiscal 2007, and now expires in
March 2010, that enables us to borrow up to $100.0 million at our discretion with
terms of up to fifteen years. We had no outstanding borrowings under this facility
at June 30, 2007.
The aggregate annual maturities of outstanding debt are $50.0 million in fiscal
2008 and $25.0 million in fiscal 2011.
Management expects that cash provided from operations, available credit
facilities and the use of operating leases will be sufficient to finance normal working
capital needs, 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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates at a
specific point in time that affect the amounts reported in the consolidated financial
statements and disclosed in the accompanying notes. Note 1 to the consolidated
financial statements describes the significant accounting policies and methods
used in preparation of the consolidated financial statements. Estimates are
used for, but not limited to, determining the net carrying value of trade accounts
receivable, inventories, supplier purchasing incentives receivable, goodwill, other
long-lived assets, recording self-insurance liabilities and other accrued liabilities.
Actual results could differ from these estimates. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates used
in the preparation of the consolidated financial statements.
LIFO Inventory Valuation and Methodology
U.S. inventories are valued at the lower of cost or market, using the last-in, first-
out (“LIFO”) method, and foreign inventories are valued using the average cost
method. We adopted the link chain dollar value LIFO method for accounting for
U.S. inventories in fiscal 1974. Approximately one-third of our domestic inventory
dollars relate to LIFO layers added in the 1970s. The excess of current cost over
LIFO cost is $141.3 million as reflected on our consolidated balance sheet at
June 30, 2007. The Company maintains five LIFO pools based on the following
product groupings: bearings, power transmission products, rubber products,
fluid power products and other products. LIFO layers and/or liquidations are
determined consistently year-to-year in a manner which is in accordance with the
guidance in the 1984 AICPA LIFO Issues Paper, “Identification and Discussion of
Certain Financial Accounting and Reporting Issues Concerning LIFO Inventories.”
See Note 3 to the consolidated financial statements for further information
regarding inventories.
Supplier Purchasing Programs
We enter into agreements with certain suppliers that provide for inventory
purchase incentives. Although these agreements are unique to each supplier, they
are generally annual programs that provide for purchase incentives to be earned
upon achieving specified purchase volumes. These percentages can increase or
decrease based on changes in the volume of purchases.
We accrue for the receipt of these inventory purchase incentives based upon
actual cumulative purchases of inventory and expected total purchases through
the life of the program. Each supplier program is analyzed at least quarterly
to determine the appropriateness of the amount estimated to be received.
Differences between our estimates and actual incentives subsequently received
have not been material.
All benefits under these supplier purchasing programs are recognized under
our LIFO inventory accounting method as a reduction of cost of sales when the
inventories representing these purchases are recorded as cost of sales. Our
accounting for inventory purchase incentives is in accordance with guidance issued
by the FASB in EITF 02-16, “Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor.” While management believes we
will continue to receive inventory purchase incentives, there can be no assurance
that suppliers will continue to provide comparable amounts of incentives in the
future.
Allowances for Slow-Moving and Obsolete Inventories
We evaluate the recoverability of our slow moving or obsolete inventories at
least quarterly. We estimate the recoverable cost of such inventory by product type
while considering factors such as its age, historic and current demand trends,
the physical condition of the inventory, as well as assumptions regarding future
demand. Our ability to recover our cost for slow moving or obsolete inventory
can be affected by such factors as general market conditions, future customer
demand and relationships with suppliers. Historically, most of our inventories have
demonstrated long shelf lives, are not highly susceptible to obsolescence and are
eligible for return under various supplier return programs.
Applied Industrial Technologies, Inc. and Subsidiaries
13
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Allowances for Doubtful Accounts
We evaluate the collectibility of trade accounts receivable based on a
combination of factors. Initially, we estimate an allowance for doubtful accounts
as a percentage of net sales based on historical bad debt experience. This initial
estimate is adjusted based on recent trends of certain customers and industries
estimated to be a greater credit risk, trends within the entire customer pool and
as a result of changes in the overall aging of accounts receivable. While we have
a large customer base that is geographically dispersed, a general economic
downturn in any of the industry segments in which we operate could result in higher
than expected defaults, and therefore, the need to revise estimates for bad debts.
Self-Insurance Liabilities
We maintain business insurance programs with significant self-insured
retention, which cover workers’ compensation, business automobile, general
product liability and other claims. We accrue estimated losses using actuarial
calculations, models and assumptions based on historical loss experience. We
maintain a self-insured health benefits plan, which provides medical benefits
to employees electing coverage under the plan. We maintain a reserve for
all unpaid medical claims including those incurred but not reported based on
historical experience and other assumptions. The Company utilizes independent
actuarial firms and other specialists to assist in determining the adequacy of all
self-insurance liability reserves. Although management believes that the estimated
liabilities for self-insurance are adequate, the estimates described above may not
be indicative of current and future losses. In addition, the actuarial calculations
used to estimate self-insurance liabilities are based on numerous assumptions,
some of which are subjective. We will continue to adjust our estimated liabilities
for self-insurance, as deemed necessary, in the event that future loss experience
differs from historical loss patterns.
liabilities related
Pension and Other Postemployment Benefit Plans
The measurement of
to pension plans and other
postemployment benefit plans is based on management’s assumptions related
to future events including interest rates, return on pension plan assets, rate of
compensation increases, and healthcare cost trend rates. We evaluate these
assumptions and adjust them as necessary.
In 2007, we adopted the recognition and disclosure provisions of Financial
Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (“SFAS 158”). As a result of our adoption of SFAS 158, we
recorded a decrease in other non-current assets of $0.2 million, an increase in
postemployment benefits of $7.7 million, and a decrease in accumulated other
comprehensive income (loss) of $7.9 million.
Income Taxes
As of June 30, 2007, the Company had recognized $30.9 million of net
deferred tax assets. Management believes that sufficient income will be earned
in the future to realize its deferred income tax assets. The realization of these
deferred tax assets can be impacted by changes to tax laws, statutory tax rates and
future taxable income levels.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48, which is an interpretation of
SFAS No. 109, “Accounting for Income Taxes,” provides guidance on the manner
in which tax positions taken or to be taken on tax returns should be reflected in
an entity’s financial statements prior to their resolution with taxing authorities.
The Company is required to adopt FIN 48 during the first quarter of fiscal 2008.
The Company is currently evaluating the requirements of FIN 48 and has not yet
determined the impact, if any, this interpretation will have on its consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. The provisions of SFAS 157 apply
under other accounting pronouncements that require or permit fair value
measurements. We are required to adopt SFAS 157 effective for our fiscal
year 2009. The impact on our consolidated financial statements has not been
determined.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits
companies to measure many financial instruments and certain other items at fair
value. We are required to adopt SFAS 159 effective for our fiscal year 2009. The
impact on our consolidated financial statements has not been determined.
OTHER MATTERS
In two of the past three fiscal years, we have acquired distributors thereby
extending our business over a broader geographic area. In fiscal 2006, we
acquired two U.S. based distributors of industrial and fluid power products for
a combined purchase price of $28.6 million. In fiscal 2005, we acquired a
Canadian distributor of industrial products for a purchase price of $6.6 million.
Results of operations of all of the above acquisitions, which have all been
accounted for as purchases, are included in the accompanying consolidated
financial statements from their respective acquisition dates. The results of
operations for these acquisitions are not material for all years presented.
14
Applied Industrial Technologies, Inc. and Subsidiaries
within the Company; the volatility of our stock price and the resulting impact on
our financial statements; adverse regulation and legislation; 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 above in
“Management’s Discussion and Analysis” as well as other of our filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-K
for the year ended June 30, 2007.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has evaluated its exposure to various market risk factors,
including but not limited to, interest rate, foreign currency exchange and
commodity price risks. The Company is primarily affected by market risk exposure
through the effect of changes in interest rates and, to a lesser extent, through the
change in exchange rates.
The Company manages interest rate risk through the use of a combination of
fixed rate long-term debt, variable rate borrowings under its committed revolving
credit agreement and interest rate swaps. The Company had no variable rate
borrowings under its committed revolving credit agreement and no interest rate
swap agreements outstanding at June 30, 2007. All the Company’s outstanding
debt is currently at fixed interest rates at June 30, 2007 and scheduled for
repayment in December 2007 and beyond.
The Company mitigates its foreign currency exposure from the Canadian
dollar through the use of cross currency swap agreements as well as foreign-
currency denominated debt. Hedging of the U.S. dollar denominated debt, used
to fund a substantial portion of the Company’s net investment in its Canadian
operations, is accomplished through the use of cross currency swaps. Any gain
or loss on the hedging instrument offsets the gain or loss on the underlying debt.
Translation exposures with regard to our Mexican business are not hedged, as
our Mexican activity is not material. For the year ended June 30, 2007, a uniform
10% strengthening of the U.S. dollar relative to foreign currencies that affect
the Company would have resulted in a $1.0 million decrease in net income. A
uniform 10% weakening of the U.S. dollar would have resulted in a $1.0 million
increase in net income.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES
LITIGATION REFORM ACT
This Annual Report to Shareholders, including Management’s Discussion and
Analysis, contains 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,” “anticipate,” “forecast” 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 such 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; 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 more 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; changes in accounting policies and practices; organizational changes
Applied Industrial Technologies, Inc. and Subsidiaries
15
STATEMENTS OF CONSOLIDATED INCOME
(In thousands, except per share amounts)
Year Ended June 30,
Net Sales
Cost of Sales
Selling, Distribution and Administrative, including depreciation
Operating Income
Interest Expense
Interest Income
Other Income, net
Income Before Income Taxes
Income Tax Expense
Net Income
Net Income Per Share – Basic
Net Income Per Share – Diluted
See notes to consolidated financial statements.
2007
$ 2,014,109
1,466,057
548,052
413,041
135,011
5,798
(3,438)
(1,179)
1,181
133,830
47,808
$ 86,022
$ 1.97
$ 1.93
2006
$ 1,900,780
1,386,895
513,885
398,293
115,592
5,523
(2,313)
(717)
2,493
113,099
40,800
$ 72,299
$ 1.62
$ 1.57
2005
$ 1,717,055
1,262,206
454,849
366,881
87,968
5,816
(1,086)
(3,101)
1,629
86,339
31,000
$ 55,339
$ 1.24
$ 1.20
16
Applied Industrial Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
Assets
Current assets
Cash and cash equivalents
Accounts receivable, less allowances of
$6,134 and $6,000
Inventories
Other current assets
Total current assets
Property – at cost
Land
Buildings
Equipment
Less accumulated depreciation
Property – net
Goodwill
Other assets
Total Assets
Liabilities
Current liabilities
Accounts payable
Long-term debt payable within one year
Compensation and related benefits
Other current liabilities
Total current liabilities
Long-term debt
Postemployment benefits
Other liabilities
Total Liabilities
Shareholders’ Equity
Preferred stock – no par value; 2,500 shares
authorized; none issued or outstanding
Common stock – no par value; 80,000 shares
authorized; 54,213 shares issued
Additional paid-in capital
Income retained for use in the business
Treasury shares – at cost (11,097 and 10,146 shares)
Accumulated other comprehensive (loss) income
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See notes to consolidated financial statements.
2007
2006
$ 119,665
$ 106,428
248,698
199,886
32,284
600,533
10,850
69,938
106,006
186,794
119,006
67,788
57,550
51,498
$ 777,369
$ 97,166
50,395
59,536
27,913
235,010
25,000
36,552
29,824
326,386
10,000
127,569
473,899
(159,803)
(682)
450,983
$ 777,369
231,524
190,537
29,955
558,444
10,916
68,136
107,230
186,282
115,488
70,794
57,222
44,211
$ 730,671
$ 109,440
54,852
24,139
188,431
76,186
27,441
23,791
315,849
10,000
122,146
408,847
(130,967)
4,796
414,822
$ 730,671
Applied Industrial Technologies, Inc. and Subsidiaries
17
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
2007
2006
2005
$ 86,022
$ 72,299
$ 55,339
13,489
(6,424)
2,927
1,045
1,462
(334)
(791)
1,921
(17,415)
(7,934)
(1,369)
(12,220)
10,546
70,925
(11,192)
1,275
(302)
(10,219)
(33,988)
(20,970)
3,885
2,663
(48,410)
941
13,237
106,428
$ 119,665
13,128
1,000
2,978
732
1,953
(294)
(791)
8,937
(17,067)
2,103
(8,066)
2,223
(9,282)
69,853
(11,057)
1,244
(27,672)
(429)
(37,914)
(54,778)
(17,973)
16,400
2,569
(53,782)
1,135
(20,708)
127,136
$ 106,428
13,832
(3,900)
2,437
992
1,958
(1,427)
(790)
9,506
(9,594)
(10,360)
(2,658)
22,510
3,189
81,034
(9,208)
4,020
(5,914)
(1,437)
(12,539)
(14,596)
(12,740)
15,590
(11,746)
720
57,469
69,667
$ 127,136
$ 42,857
$ 5,488
$ 31,337
$ 5,290
$ 29,624
$ 5,343
Year Ended June 30,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation
Deferred income taxes
Stock-based compensation
Amortization of intangibles
Provision for losses on accounts receivable
Gain on sale of property
Amortization of gain on interest rate swap terminations
Treasury shares contributed to employee
benefit and deferred compensation plans
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
Inventories
Other operating assets
Accounts payable
Accrued expenses
Net Cash provided by Operating Activities
Cash Flows from Investing Activities
Property purchases
Proceeds from property sales
Net cash paid for acquisition of businesses, net of cash
acquired of $968 in 2006
Other
Net Cash used in Investing Activities
Cash Flows from Financing Activities
Purchases of treasury shares
Dividends paid
Excess tax benefits from share-based compensation
Exercise of stock options
Net Cash used in Financing Activities
Effect of Exchange Rate Changes on Cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes
Interest
See notes to consolidated financial statements.
18
Applied Industrial Technologies, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(In thousands, except per share amounts)
For the Years Ended June 30, 2007, 2006 and 2005
Balance at July 1, 2004
Net income
Unrealized loss on cash flow hedge, net of income
tax of $(634)
Unrealized gain on investment securities available for
sale, net of income tax of $42
Increase in minimum pension liability, net of income
tax of $(1,643)
Foreign currency translation adjustment, net of income
tax of $693
Total comprehensive income
Cash dividends – $.29 per share
Purchases of common stock for treasury
Treasury shares issued for:
Retirement Savings Plan contributions
Exercise of stock options
Deferred compensation plans
Compensation expense – stock options and
appreciation rights
Amortization of restricted common stock compensation
Other
Balance at June 30, 2005
Net income
Unrealized gain on cash flow hedge, net of income
tax of $384
Unrealized gain on investment securities available for
sale, net of income tax of $43
Reduction in minimum pension liability, net of income
tax of $283
Foreign currency translation adjustment, net of income
tax of $1,258
Total comprehensive income
Cash dividends – $.40 per share
Purchases of common stock for treasury
Treasury shares issued for:
Retirement Savings Plan contributions
Exercise of stock options
Deferred compensation plans
Compensation expense – stock options and
appreciation rights
Amortization of restricted common stock compensation
Reclassification of unearned restricted stock
compensation due to the adoption of SFAS 123[R]
Other
Balance at June 30, 2006
Net income
Unrealized loss on cash flow hedge, net of income
tax of $(59)
Unrealized gain on investment securities available for
sale, net of income tax of $68
Increase in minimum pension liability, net of income
tax of $(185)
Foreign currency translation adjustment, net of income
tax of $194
Total comprehensive income
Cash dividends – $.48 per share
Purchases of common stock for treasury
Treasury shares issued for:
Retirement Savings Plan contributions
Exercise of stock options
Deferred compensation plans
Compensation expense – stock options and
appreciation rights
Amortization of restricted common stock compensation
Adjustment to initially apply SFAS 158, net of income
tax of $(4,899)
Other
Balance at June 30, 2007
See notes to consolidated fi nancial statements.
Shares of
Common Stock
Outstanding
43,886
Additional
Paid-in
Capital
$ 10,000 $ 90,520
Common
Stock
(911)
446
1,467
114
45,002
10,000
(2,379)
348
1,088
21
(13)
44,067
10,000
(1,401)
5
366
78
4,623
4,934
728
2,111
253
71
103,240
4,892
11,279
269
2,658
320
(825)
313
122,146
47
796
1,613
2,494
433
Income
Retained
for Use in
the Business
$ 311,922 $ (72,870)
Unearned
Restricted
Accumulated
Other
Treasury
Total
Shares - Common Stock Comprehensive Shareholders’
Equity
at Cost Compensation
$ 339,535
$ (1,158)
55,339
(Loss) Income
$ 1,121
55,339
(12,740)
354,521
72,299
(14,596)
3,304
10,656
851
(5)
(72,660)
326
7
(825)
(17,973)
(54,778)
3,583
(6,945)
193
(360)
(130,967)
408,847
86,022
825
0
(20,970)
(33,988)
65
4,157
1,046
(1,002)
(1,002)
74
74
(2,858)
(2,858)
1,676
(989)
598
72
542
4,573
4,796
(93)
110
(301)
2,703
(7,897)
1,676
53,229
(12,740)
(14,596)
7,927
15,590
1,579
2,111
579
73
393,287
72,299
598
72
542
4,573
78,084
(17,973)
(54,778)
8,475
4,334
462
2,658
320
(47)
414,822
86,022
(93)
110
(301)
2,703
88,441
(20,970)
(33,988)
112
4,953
2,659
2,494
433
(7,897)
(76)
$ 450,983
1
43,116
40
$ 10,000 $ 127,569
(116)
$ 473,899 $ (159,803)
$ 0
$ (682)
Applied Industrial Technologies, Inc. and Subsidiaries
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES
Business
Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) is one of North America’s leading distributors of industrial products. Industrial products
include bearings, power transmission components, fluid power components and systems, industrial rubber products, linear components, tools, safety products, general
maintenance, and a variety of mill supply products. Fluid power products include hydraulic, pneumatic, lubrication, and filtration components and systems. The Company
also provides mechanical, rubber shop and fluid power services. The Company offers technical application support for these products and provides solutions to help
customers minimize downtime and reduce overall procurement costs. Although the Company does not generally manufacture the products it sells, it does assemble and
repair certain products and systems. Most of the Company’s sales are in the maintenance and replacement markets to customers in a wide range of industries, principally
in North America.
Consolidation
The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. The financial results of the Company’s Canadian subsidiaries are included in the consolidated financial statements
based upon their fiscal year ended May 31. Prior to June 30, 2006, the Company was considered the primary beneficiary for iSource Performance Materials, LLC
(iSource) and included their accounts in the consolidated financial statements. Effective June 30, 2006, the Company ended its venture with iSource and is no longer the
primary beneficiary. As of June 30, 2006, iSource’s operating results and balances were no longer included in the Company’s consolidated financial statements.
Foreign Currency
The financial statements of the Company’s Canadian and Mexican subsidiaries are measured using local currencies as their functional currencies. Assets and
liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average monthly exchange rates. Translation gains
and losses are included as components of accumulated other comprehensive income in shareholders’ equity. Transaction gains and losses included in the statements of
consolidated income were not material.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated
financial statements.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates market value.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries doing business throughout North America. As such, the Company does not believe
that a significant concentration of credit risk exists.
The Company maintains its cash and cash equivalents with federally insured financial institutions. Deposits held with banks may exceed insurance limits. These
deposits may be redeemed upon demand.
Allowances for Doubtful Accounts
The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful
accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries
estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While the Company has a large
customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher
than expected defaults, and therefore, the need to revise estimates for bad debts.
Inventories
U.S. inventories are valued at the lower of cost or market, using the last-in, first-out (LIFO) method, and foreign inventories are valued using the average cost method.
The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2007, approximately one-third of the
Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings:
bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-
year in a manner which is in accordance with the guidance in the 1984 AICPA LIFO Issues Paper, “Identification and Discussion of Certain Financial Accounting and
Reporting Issues Concerning LIFO Inventories.” See Note 3 for further information regarding inventories.
The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the recoverable cost of such inventory
by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory as well as assumptions regarding
future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future
20
Applied Industrial Technologies, Inc. and Subsidiaries
customer demand and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence
and are eligible for return under various supplier return programs.
Supplier Purchasing Programs
The Company enters into agreements with certain suppliers providing for inventory purchase incentives. The Company’s inventory purchase incentive arrangements
are unique to each supplier and are generally annual programs ending at either the Company’s fiscal year end or the supplier’s year end. Incentives are received in the
form of cash or credits against purchases upon attainment of specified purchase volumes and are received monthly, quarterly or annually based upon actual purchases
for such period. The incentives are a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages
can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon
cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Each
supplier program is analyzed, reviewed and reconciled each quarter as information becomes available to determine the appropriateness of the amount estimated to be
received. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier
purchasing programs are recognized under the Company’s LIFO inventory accounting method as a reduction of cost of sales when the inventories representing these
purchases are recorded as cost of sales. The Company’s accounting for inventory purchase incentives is in accordance with guidance issued by the Financial Accounting
Standards Board (“FASB”) in EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.”
Property and Depreciation
Property and equipment are recorded at cost. Depreciation of buildings and equipment is computed using the straight-line method over the estimated useful
lives of the assets and is included in selling, distribution and administrative expenses in the accompanying statements of consolidated income. Buildings and related
improvements are depreciated over ten to thirty years and equipment is depreciated over three to eight years. The carrying values of property and equipment are
reviewed for impairment on a quarterly basis or when events or changes in circumstances indicate that the recorded value cannot be recovered from undiscounted future
cash flows. To analyze recoverability, the Company considers market values, where available, or will project undiscounted net future cash flows over the remaining life
of such assets. If these market values or projected cash flows are less than the carrying amount, an impairment would be recognized, resulting in a write-down of assets
with a corresponding charge to earnings. Impairment losses, if any, are measured based upon the difference between the carrying amount and the fair value of the
assets.
Goodwill and Other Intangible Assets
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized.
The Company recognizes acquired intangible assets such as non-competition agreements, customer relationships, exclusive supplier distribution agreements, and
trademarks apart from goodwill. Amortization of intangible assets is computed using the straight-line method over the estimated period of benefit and is included in
selling, distribution and administrative expenses in the accompanying statements of consolidated income. The weighted-average amortization period for intangible
assets with an unamortized balance as of June 30, 2007 was 7 years for non-competition agreements, 14 years for customer relationships, 12 years for exclusive
supplier distribution agreements and 13 years for trademarks.
Goodwill and other intangible assets are tested for impairment annually as of January 1 or when changes in conditions indicate carrying value may not be
recoverable. Impairment exists when the carrying value of goodwill or other intangible assets exceed their fair value. The results of the Company’s annual testing
indicated no impairment.
Self-Insurance Liabilities
The Company maintains business insurance programs with significant self-insured retention, which cover workers’ compensation, business automobile, general
product liability and other claims. The Company accrues estimated losses using actuarial calculations, models and assumptions based on historical loss experience. The
Company maintains a self-insured health benefits plan, which provides medical benefits to employees electing coverage under the plan. The Company estimates its
reserve for all unpaid medical claims including those incurred but not reported based on historical experience and other assumptions. The Company utilizes independent
actuarial firms and other specialists to assist in determining the adequacy of all self-insurance liability reserves.
Revenue Recognition
Sales are recognized when the sales price is fixed, collectibility is reasonably assured and the product’s title and risk of loss is transferred to the customer. Typically,
these conditions are met when the product is shipped to the customer. The Company recognizes shipping and handling fees when products are shipped or delivered to
a customer, and includes such amounts in net sales. The Company reports its sales net of the amount of actual sales returns and the amount of reserves established for
anticipated sales returns based on historical return rates. Sales tax collected from customers is excluded from net sales in the accompanying statements of consolidated
income.
Shipping and Handling Costs
The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expenses in the
accompanying statements of consolidated income.
Applied Industrial Technologies, Inc. and Subsidiaries
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
Income Taxes
Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future
tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws.
Net Income Per Share
The following is a computation of the basic and diluted earnings per share:
Year Ended June 30,
Net Income
Average Shares Outstanding:
Weighted average common shares outstanding for basic computation
Dilutive effect of common stock equivalents
Weighted average common shares outstanding for dilutive computation
Net Income Per Share – Basic
Net Income Per Share – Diluted
2007
$ 86,022
43,630
865
44,495
$ 1.97
$ 1.93
2006
$ 72,299
44,620
1,560
46,180
$ 1.62
$ 1.57
2005
$ 55,339
44,481
1,610
46,091
$ 1.24
$ 1.20
Options and stock appreciation rights to acquire 460, 301, and 516 shares of common stock were outstanding at June 30, 2007, 2006, and 2005, respectively, but
were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.
Stock-Based Compensation
Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), which is a
revision of SFAS 123. The adoption of SFAS 123(R) did not have a material impact on the determination of stock based compensation expense. The Company follows
the transition guidance of SFAS 123(R) in determining the additional paid-in capital pool.
Prior to the adoption of SFAS 123(R), all tax benefits resulting from the exercise of stock awards were reported as operating cash flows in the Company’s statements
of consolidated cash flows. In accordance with and effective upon the adoption of SFAS 123(R), excess tax benefits are now reported as financing cash flows in the
Company’s statements of consolidated cash flows. Excess tax benefits for fiscal year 2005 resulting from the vesting and exercise of stock awards totaled $4,828 and
are reported as operating cash flows in the accompanying statements of consolidated cash flows.
Also effective upon the adoption of SFAS 123(R), the amount of unearned restricted common stock compensation for non-vested awards, previously reported as a
separate component of shareholders’ equity, was eliminated against additional paid-in capital.
Treasury Shares
Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated
balance sheets. The Company uses the weighted average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the
reissuance price is added to or deducted from additional paid-in capital.
Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income is comprised of the following:
June 30,
Unrealized loss in cash flow hedge, net of taxes
Unrealized gain on investment securities available for sale, net of taxes
Minimum pension liability, net of taxes
Foreign currency translation, net of taxes
Pension liability, net of taxes
Total accumulated other comprehensive (loss) income
2007
$ (664)
256
10,240
(10,514)
$ (682)
2006
$ (572)
145
(2,316)
7,539
$ 4,796
New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48, which is an interpretation of SFAS No.
109, “Accounting for Income Taxes,” provides guidance on the manner in which tax positions taken or to be taken on tax returns should be reflected in an entity’s
financial statements prior to their resolution with taxing authorities. The Company is required to adopt FIN 48 during the first quarter of fiscal 2008. The Company is
currently evaluating the requirements of FIN 48 and has not yet determined the impact, if any, this interpretation may have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS 157 apply under other accounting
pronouncements that require or permit fair value measurements. We are required to adopt SFAS 157 effective for our fiscal year 2009. The impact on our consolidated
financial statements has not been determined.
In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits companies
to measure many financial instruments and certain other items at fair value. We are required to adopt SFAS 159 effective for our fiscal year 2009. The impact on our
consolidated financial statements has not been determined.
22
Applied Industrial Technologies, Inc. and Subsidiaries
Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentation.
NOTE 2: BUSINESS COMBINATIONS
In two of the past three fiscal years, the Company acquired distributors to complement and extend its business over a broader geographic area. In fiscal 2006, the
Company acquired two U.S. based distributors of industrial and fluid power products for a combined purchase price of $28,639. In 2005, the Company acquired a
Canadian distributor of industrial products for a purchase price of $6,599.
Results of operations of the above acquisitions, which have been accounted for as purchases, are included in the accompanying consolidated financial statements
from their respective acquisition dates. The results of operations for these acquisitions are not material for all years presented.
NOTE 3: INVENTORIES
Inventories consist of the following:
June 30,
U.S. inventories at current cost
Foreign inventories at average cost
Less: Excess of current cost over LIFO cost for U.S. inventories
Inventories on consolidated balance sheets
2007
$ 294,897
46,333
341,230
141,344
$ 199,886
2006
$ 279,619
48,547
328,166
137,629
$ 190,537
Reductions in certain U.S. inventories during fiscal 2006 resulted in the liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The
effect of the liquidations increased fiscal 2006 gross profit by $1,647, net income by $1,013 and net income per share by $0.02. There were no LIFO layer liquidations
during fiscal 2007 and 2005.
NOTE 4: GOODWILL AND OTHER INTANGIBLES
The changes in the carrying amount of goodwill for the years ended June 30, 2007 and 2006, are as follows:
Balance at July 1, 2005
Goodwill acquired during the year
Currency translation adjustment
Balance at June 30, 2006
Other, primarily currency translation
Balance at June 30, 2007
Service Center Based
Distribution Segment
$ 51,083
4,801
1,079
$ 56,963
341
$ 57,304
Fluid Power
Businesses Segment
$ 259
$ 259
(13)
$ 246
Total
$ 51,083
5,060
1,079
$ 57,222
328
$ 57,550
The Company’s intangible assets resulting from business combinations are included in other assets in the consolidated balance sheets and are amortized over their
estimated period of benefit and consist of the following:
June 30, 2007
Non-competition agreements
Customer relationships
Exclusive supplier distribution agreements
Trademarks
June 30, 2006
Non-competition agreements
Customer relationships
Exclusive supplier distribution agreements
Trademarks
Amount (a)
$ 657
8,347
1,071
924
$ 10,999
Amount (a)
$ 750
8,397
1,127
1,163
$ 11,437
Accumulated
Amortization
$ 355
1,477
311
144
$ 2,287
Accumulated
Amortization
$ 380
954
305
174
$ 1,813
Net
Book Value
$ 302
6,870
760
780
$ 8,712
Net
Book Value
$ 370
7,443
822
989
$ 9,624
(a) Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During fiscal 2006, the Company recorded intangible assets of $200 for non-competition agreements, $4,890 for customer relationships, $290 for exclusive supplier
distribution agreements and $750 for trade names in connection with the acquisition of two U.S. distributors of industrial products (see Note 2).
Amortization expense for other intangible assets totaled $1,045, $732 and $992 in fiscal 2007, 2006, and 2005, respectively. Amortization of other intangible assets
at June 30, 2007 is expected to be $1,350 for 2008, $1,250 for 2009, $1,150 for 2010, $1,000 for 2011 and $850 for 2012.
Applied Industrial Technologies, Inc. and Subsidiaries
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
NOTE 5: DEBT
Long-term debt consists of:
June 30,
7.98% Private placement debt, due at maturity in November 2010
6.60% Senior $50,000 unsecured term notes, due at maturity in December 2007,
including effects of interest rate swaps (see Note 6)
Total long-term debt
Less payable within one year
Total long-term debt less current portion
2007
$ 25,000
50,395
75,395
50,395
$ 25,000
2006
$ 25,000
51,186
76,186
$ 76,186
The aggregate annual maturities of long-term debt over the next five years as of June 30, 2007 include $50,395 in fiscal 2008 and $25,000 in fiscal 2011.
Based upon current market rates for debt of similar maturities, the Company’s long-term debt had an estimated fair value of $76,995 and $77,305 as of June 30,
2007 and 2006, respectively.
In June 2007, the Company replaced its existing revolving credit facility with a new five year committed revolving credit facility with a group of banks. This agreement
provides for unsecured borrowings of up to $150,000 at various interest rate options, none of which is in excess of the banks’ prime rate at interest determination dates.
Fees on this facility range from .07% to .15% per year on the average amount of the total revolving credit commitments during the year. Unused lines under this facility,
net of outstanding letters of credit ($5,317 for securing certain insurance obligations), totaled $144,683 at June 30, 2007 and are available to fund future acquisitions
or other capital and operating requirements. The Company had no borrowings outstanding under this facility at June 30, 2007.
During March 2007, the Company renewed its agreement with Prudential Insurance Company, for an uncommitted shelf facility that enables the Company to borrow
up to $100,000 in additional long-term financing at the Company’s sole discretion with terms of up to fifteen years. The new agreement expires in March 2010. At June
30, 2007, there was no borrowing under this agreement.
The revolving credit facility, private placement debt and senior unsecured term notes contain restrictive covenants regarding liquidity, tangible net worth, financial
ratios and other covenants. At June 30, 2007, the most restrictive of these covenants required that the Company have consolidated income before interest, taxes,
depreciation and amortization at least equal to 300% of net interest expense. At June 30, 2007, the Company was in compliance with all covenants.
NOTE 6: RISK MANAGEMENT ACTIVITIES
The Company is exposed to market risks, primarily resulting from changes in interest rates and currency exchange rates. To manage these risks, the Company may
enter into derivative transactions pursuant to the Company’s written policy. These transactions are accounted for in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”). The Company does not hold or issue derivative financial instruments for trading purposes.
During fiscal 2002, the Company entered into two interest rate swap agreements with two banks which effectively converted the fixed interest rate on the 6.60% senior
unsecured term notes to a floating variable rate based on LIBOR. In October 2001 and August 2002, the Company terminated the swap agreements for favorable
settlements of $2,000 and $2,500, respectively. These settlement gains are being amortized as a reduction in interest expense of approximately $790 per year over the
remaining life of the notes through December 2007. The effect of the swap agreements was to decrease interest expense by $791 in fiscal 2007, $791 in 2006 and
$790 in 2005.
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.
The Company has designated one of the cross-currency swaps, with a $20,000 U.S. notional amount, as a foreign currency cash flow hedge. The fair value of the cross-
currency swap was a liability of $9,372 and $8,401 at June 30, 2007 and 2006, respectively. These liabilities were recorded in other liabilities and the related unrealized
losses are included in accumulated other comprehensive (loss) income (net of tax). The second cross-currency swap, however, has not been designated as a hedging
instrument under the hedge accounting provisions of SFAS 133. The fair value of this cross-currency swap was a liability of $2,343 and $2,100 at June 30, 2007 and 2006,
respectively. Changes in the fair value of this derivative instrument are recorded in the statements of consolidated income as a component of other income, net.
NOTE 7: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
Year Ended June 30,
U.S.
Foreign
Total income before taxes
2007
$ 119,275
14,555
$ 133,830
2006
$ 100,462
12,637
$ 113,099
2005
$ 77,263
9,076
$ 86,339
24
Applied Industrial Technologies, Inc. and Subsidiaries
Provision
The provision (benefit) for income taxes consists of:
Year Ended June 30,
Current:
Federal
State and local
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Total deferred
Total
2007
2006
2005
$ 43,325
5,341
5,566
54,232
(5,914)
(342)
(168)
(6,424)
$ 47,808
$ 31,100
3,600
5,100
39,800
900
400
(300)
1,000
$ 40,800
$ 28,200
3,700
3,000
34,900
(4,500)
(100)
700
(3,900)
$ 31,000
The exercise of non-qualified stock options and stock appreciation rights during fiscal 2007, 2006 and 2005 resulted in $2,860, $16,155 and $4,575, respectively,
of income tax benefits to the Company derived from the difference between the market price at the date of exercise and the option price. Vesting of stock awards and
other stock compensation in fiscal 2007 and 2006 resulted in $1,025 and $245, respectively, of incremental income tax benefits over the amounts previously reported
for financial reporting purposes. These tax benefits were recorded in additional paid-in capital.
Effective Tax Rates
The following reconciles the federal statutory income tax rate and the Company’s effective tax rate:
Year Ended June 30,
Statutory tax rate
Effects of:
State and local income taxes
Foreign income taxes
Tax exempt interest
Non-deductible expenses
Deductible dividend
Non-taxable life insurance settlement
Income tax examinations
Other, net
Effective tax rate
Consolidated Balance Sheets
Significant components of the Company’s net deferred tax assets are as follows:
June 30,
Deferred tax assets:
Compensation liabilities not currently deductible
Reserves not currently deductible
Goodwill and other intangibles
Net operating loss carryforwards
Total deferred tax assets
Deferred tax liabilities:
Inventories
Depreciation and differences in property bases
Other
Total deferred tax liabilities
Net deferred tax assets
2007
35.0%
2.3
(.8)
(.3)
.1
(.5)
.1
(.2)
35.7%
2006
35.0%
2.4
(.7)
(.1)
.2
(.6)
(.1)
36.1%
2005
35.0%
2.8
(.7)
.3
(.5)
(1.2)
.2
35.9%
2007
2006
$ 30,171
7,454
563
438
38,626
(4,061)
(1,471)
(2,181)
(7,713)
$ 30,913
$ 20,091
7,998
1,296
422
29,807
(5,471)
(2,598)
(2,045)
(10,114)
$ 19,693
At June 30, 2007 and 2006, $7,710 and $6,169, respectively, of the net deferred tax assets were included in other current assets and $19,597 and $13,524, respectively,
were included in other assets in the accompanying consolidated balance sheets. Management believes that sufficient income will be earned in the future to realize its deferred
income tax assets. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future taxable income levels.
No provision has been made for income taxes on undistributed earnings of consolidated non-U.S. subsidiaries since it is the Company’s intention to indefinitely reinvest
undistributed earnings of its foreign subsidiaries. Determination of the net amount of unrecognized taxes with respect to these earnings is not practicable, however, foreign
tax credits would be available to partially reduce U.S. income taxes in the event of a distribution.
Applied Industrial Technologies, Inc. and Subsidiaries
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
NOTE 8: SHAREHOLDERS’ EQUITY
Stock-Based Incentive Plans
The 1997 Long-Term Performance Plan (the “1997 Plan”), which expires in 2012, provides for granting of stock options, stock appreciation rights (“SARs”), stock
awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or the Corporate Governance
Committee of the Board of Directors (the “Committees”) may determine to officers, other key associates and members of the Board of Directors. Grants are generally
made by the Committees during regularly scheduled meetings. The number of shares of common stock which may be awarded in each fiscal year under the 1997 Plan
is two percent (2%) of the total number of shares of common stock outstanding on the first day of each year for which the plan is in effect. Common stock available for
distribution under the 1997 Plan, but not distributed, may be carried over to the following year. Shares available for future grants at June 30, 2007 and 2006 were 2,601
and 2,050, respectively.
Stock Option and Appreciation Rights
SARs and non-qualified stock options are granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. SAR and
stock option awards generally vest over four years of continuous service and have 10-year contractual terms.
Compensation expense related to stock options and SARs recorded for the years ended June 30, 2007, 2006 and 2005 was $2,494, $2,658 and $2,111,
respectively. Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. Compensation
expense for stock options and SARs has been determined using the Black-Scholes option pricing model. Determining the appropriate fair value of stock-based awards
requires management to select a fair value model and make certain estimates and assumptions. The weighted average assumptions used for SAR and stock option grants
issued in fiscal 2007, 2006 and 2005 are:
Expected life, in years
Risk free interest rate
Dividend yield
Volatility
2007
5.1
4.8%
2.2%
46.7%
2006
7.2
4.3%
1.4%
42.3%
2005
8.0
3.9%
2.0%
31.5%
The expected life is based upon historical exercise experience of the officers, other key associates and members of the Board of Directors currently awarded stock-
based compensation. The risk free interest rate is based upon the U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the stock options
and SARs. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends and stock prices. The
volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life.
It has been the Company’s practice to issue shares from Treasury to satisfy requirements of SAR and option exercises. SARs are redeemable solely in Company
common stock. The exercise price of option awards may be settled by the holder with cash or by tendering Company common stock. A summary of stock option and
SAR activity is presented below:
(Share amounts in thousands)
2007
Outstanding, beginning of year
Granted
Exercised
Outstanding, end of year
Exercisable at end of year
Weighted average fair value of SARs and options granted during year
2006
Outstanding, beginning of year
Granted
Exercised
Expired/canceled
Outstanding, end of year
Exercisable at end of year
Weighted average fair value of SARs and options granted during year
2005
Outstanding, beginning of year
Granted
Exercised
Expired/canceled
Outstanding, end of year
Exercisable at end of year
Weighted average fair value of SARs and options granted during year
26
Applied Industrial Technologies, Inc. and Subsidiaries
Shares
2,486
319
(421)
2,384
1,533
4,302
306
(2,103)
(19)
2,486
1,381
5,253
516
(1,455)
(12)
4,302
2,763
Weighted
Average
Exercise
Price
$ 11.23
22.11
8.61
$ 13.15
$ 10.63
$ 8.74
$ 8.68
23.40
7.76
14.04
$ 11.23
$ 9.85
$ 10.29
$ 7.87
13.80
7.57
7.76
$ 8.68
$ 8.18
$ 4.67
The weighted average remaining contractual terms for SARs/options outstanding and exercisable at June 30, 2007 were 6.3 and 5.4 years, respectively. The
aggregate intrinsic values of SARs/options outstanding and exercisable at June 30, 2007 were $31,350 and $16,293, respectively. The aggregate intrinsic value of the
SARs/options exercised during fiscal 2007, 2006 and 2005 was $7,887, $41,966 and $12,891, respectively.
A summary of the status of the Company’s nonvested stock options and SARs at June 30, 2007, all of which are expected to vest, is presented below:
(Share amounts in thousands)
2007
Nonvested, beginning of year
Granted
Vested
Nonvested, end of year
Weighted
Average
Grant-Date
Fair Value
$ 4.61
8.74
3.69
$ 6.77
Shares
1,105
319
(573)
851
As of June 30, 2007, unrecognized compensation cost related to stock options and SARs amounted to $2,787. That cost is expected to be recognized over a weighted
average period of 2.6 years. The total fair value of shares vested during fiscal 2007, 2006 and 2005 was $2,116, $2,388 and $2,125, respectively.
Restricted Stock
Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or
transferring the shares prior to vesting. Restricted stock awards vest over a period of one to four years. The aggregate fair market value of the restricted stock is considered
unearned compensation at the time of grant and is amortized over the vesting period.
At June 30, 2007 and 2006, the Company had 43 and 63 shares of restricted stock outstanding at weighted average prices of $13.77 and $10.14, respectively.
During fiscal 2007, restricted stock was granted at an average grant price of $23.34 per share. Unamortized compensation related to unvested restricted stock awards
aggregated $349 and $515 at June 30, 2007 and 2006, respectively. The unamortized compensation cost related to restricted stock is expected to be amortized over
the remaining vesting period of 0.8 years.
Long-Term Performance Grants
The Committee also makes annual awards of three-year performance grants to key officers. A target payout is established at the beginning of each three-year
performance period. The actual payout at the end of the period is calculated based upon the Company’s achievement of objective sales growth, return on sales, and
total shareholder return targets. Total shareholder return is calculated based upon the increase in the Company’s common stock price, including dividend reinvestment,
over the performance period as compared to the Company’s peers, as defined. Payouts are made in cash, common stock, or a combination thereof, as determined by
the Committee at the end of the performance period.
During fiscal 2007, 2006 and 2005, the Company recorded $549, $540 and $784, respectively, of compensation expense for achievement relative to the total
shareholder return-based goals of the Company’s performance grants. At June 30, 2007 and 2006, the Company had accrued $1,174 and $1,308, respectively, for
compensation relative to these goals. At June 30, 2007 and 2006, potential compensation expense related to the outstanding performance grants aggregated $2,124
and $1,234, respectively. This compensation expense is expected to be recognized over the remaining performance period of 1.6 years.
Shareholders’ Rights
In 1998 the Company’s Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one preferred share purchase right for
each outstanding share of Company common stock. The rights become exercisable only if a person or group acquires beneficial ownership or commences a tender
or exchange offer for 20% or more of the Company’s common stock, unless the tender or exchange offer is for all outstanding shares of the Company upon terms
determined by the Company’s continuing directors to be in the best interests of the Company and its shareholders. When exercisable, the rights would entitle the holders
(other than the acquirer) to buy shares of the Company’s common stock having a market value equal to two times the right’s exercise price or, in certain circumstances,
to buy shares of the acquiring company having a market value equal to two times the right’s exercise price.
Treasury Shares
At June 30, 2007, 596 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change
in control and director and officer indemnification agreements.
NOTE 9: BENEFIT PLANS
Retirement Savings Plan
Substantially all U.S. associates participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company makes a discretionary profit-sharing
contribution to the Retirement Savings Plan generally based upon a percentage of the Company’s U.S. income before income taxes and before the amount of the
contribution (5% for fiscal 2007, 2006 and 2005). The Company also partially matches 401(k) contributions by participants, who may elect to contribute up to 50% of
their compensation, subject to Internal Revenue Code maximums. Until July 1, 2006, matching contributions were made with the Company’s common stock and were
determined quarterly using rates based on achieving pre-determined quarterly earnings per share levels (ranging from 25% to 100% of the first 6% of compensation
contributed to the plan). Effective July 1, 2006, the matching contribution is made in cash which is then used by the administrator to purchase Company stock in the
open market.
Applied Industrial Technologies, Inc. and Subsidiaries
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
The Company’s expense for contributions to the above plan was $11,548, $11,365 and $9,947 during fiscal 2007, 2006 and 2005, respectively.
Deferred Compensation Plans
The Company has deferred compensation plans that enable certain associates of the Company to defer receipt of a portion of their compensation and non-employee
directors to defer receipt of director fees. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Contributions consist of
Company common stock and investments in money market and mutual funds.
Postemployment Benefit Plans
The Company provides the following postemployment benefits:
Supplemental Executive Retirement Benefits Plan
The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable at retirement based upon a
percentage of the participant’s compensation.
Qualified Defined Benefit Retirement Plan
The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly associates at retirement. The benefits are based on length of
service and date of retirement. These associates do not participate in the Retirement Savings Plan.
Salary Continuation Benefits
The Company has agreements with certain retirees to pay monthly retirement benefits for a period not in excess of 15 years. The discount rates used in determining
the benefit obligation were 6.0% and 5.8% at June 30, 2007 and 2006, respectively.
Retiree Medical Benefits
The Company provides health care benefits to eligible retired associates who elect to pay the Company a specified monthly premium. Premium payments are based
upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by
the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides
health care benefits to eligible retired associates at no cost to the individual.
Adoption of Statement of Financial Accounting Standards No. 158
In September 2006, the FASB issued SFAS No.158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of SFAS
87, 88, 106, and 132 (R)” (“SFAS 158”). This statement requires a company to recognize the funded status of retirement and other postretirement benefit plans as an
asset or liability in its balance sheet, measured as the difference between plan assets at fair value and the benefit obligation. It also requires the Company to recognize
changes in that funded status, other than those recognized as components of net periodic benefit cost, in the year in which the changes occur through accumulated
other comprehensive income (loss), net of tax. The Company adopted SFAS 158 on a prospective basis effective June 30, 2007.
The Company uses a June 30 measurement date for all plans. The following illustrates the incremental effect of applying SFAS 158 on individual lines on our
consolidated balance sheet as of June 30, 2007:
Other assets
Total Assets
Postemployment benefits
Total Liabilities
Accumulated other comprehensive income (loss), net of tax
Total Shareholders’ Equity
Before Application
of SFAS 158
$ 51,736
$ 777,607
$ 28,894
$ 318,728
$ 7,215
$ 458,880
SFAS 158
Adjustments
$ (238)
$ (238)
$ 7,658
$ 7,658
$ (7,897)
$ (7,897)
Reported as of
June 30, 2007
$ 51,498
$ 777,369
$ 36,552
$ 326,386
$ (682)
$ 450,983
28
Applied Industrial Technologies, Inc. and Subsidiaries
The changes in benefit obligations, plan assets and funded status for the plans described above were as follows:
Pension Benefits
2007
2006
Other Benefits
2007
2006
Change in benefit obligation:
Benefit obligation at beginning of the year
Service cost
Interest cost
Plan participants’ contributions
Benefits paid
Amendments
Actuarial loss (gain) during year
Benefit obligation at June 30
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Fair value of plan assets at June 30
Funded status at June 30
Net amount recognized:
Obligations in excess of plan assets
Unrecognized net loss (gain)
Unrecognized prior service cost
Net amount recognized
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost
Intangible assets
Current liabilities
Noncurrent liabilities
Additional minimum liability recognized in accumulated other
comprehensive loss
Net amount recognized
Amounts recognized in accumulated other
comprehensive loss (income) consist of:
Net actuarial loss (gain)
Prior service cost
Total accumulated other comprehensive loss (income)
$ 32,035
1,450
1,601
(832)
817
$ 35,071
$ 4,831
515
740
(832)
$ 5,254
$ (29,817)
$ (29,817)
11,011
3,970
$ (14,836)
$ 1,782
3,403
(716)
(22,981)
3,676
$ (14,836)
$ 35,071
1,685
2,032
(855)
1,404
2,873
$ 42,210
$ 5,254
731
763
(855)
$ 5,893
$ (36,317)
$ (36,317)
$ (36,317)
$ 873
(4,541)
(32,649)
$ (36,317)
$ 12,813
4,716
$ 17,529
$ 3,981
56
222
28
(223)
141
(32)
$ 4,173
$ 194
29
(223)
$ 0
$ (4,173)
$ (4,173)
$ (4,173)
$ 5,209
55
253
28
(265)
(1,299)
$ 3,981
$ 237
28
(265)
$ 0
$ (3,981)
$ (3,981)
(837)
98
$ (4,720)
$ (270)
(3,903)
$ (260)
(4,460)
$ (4,173)
$ (4,720)
$ (760)
190
$ (570)
The discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the discount rate decreases and decreases
as the discount rate increases. The Company selects a discount rate using the Citigroup Pension Liability Index over the estimated duration of the plans.
The weighted-average actuarial assumptions at June 30 used to determine benefit obligations for the plans were as follows:
Discount rate
Expected return on plan assets
Rate of compensation increase
Pension Benefits
Other Benefits
2007
6.0%
8.0%
5.5%
2006
5.8%
8.0%
5.5%
2007
6.0%
N/A
N/A
2005
5.8%
N/A
N/A
The following table provides information for pension plans with an accumulated benefit obligation and projected benefit obligation in excess of plan assets:
Projected benefit obligations
Accumulated benefit obligations
Pension Benefits
2007
$ 37,191
28,963
2006
$ 35,071
28,560
Applied Industrial Technologies, Inc. and Subsidiaries
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
The net periodic pension costs are as follows:
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Amortization of prior service cost
Net periodic pension cost
Service cost
Interest cost
Recognized net actuarial (gain) loss
Amortization of prior service cost
Net periodic pension cost
2007
$ 1,685
2,032
(415)
804
658
$ 4,764
2007
$ 56
222
(109)
49
$ 218
Pension Benefits
2006
$ 1,450
1,601
(381)
784
627
$ 4,081
Other Benefits
2006
$ 55
253
28
49
$ 385
2005
$ 1,274
1,638
(353)
479
627
$ 3,665
2005
$ 48
292
14
49
$ 403
The estimated net loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive (loss) income into net periodic benefit
cost over the next fiscal year are $941 and $635, respectively. The estimated net gain and prior service cost for the other benefits that will be amortized from accumulated
other comprehensive (loss) income into net periodic benefit cost over the next fiscal year are $107 and $45, respectively.
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for post-retirement benefits other than pensions were 10% as of June
30, 2007 and June 30, 2006, decreasing to 5% by 2012 and 2010, respectively. A one-percentage point change in the assumed health care cost trend rates would have
had the following effects as of June 30, 2007 and for the year then ended:
Effect on total service and interest cost components of periodic expense
Effect on post-retirement benefit obligation
One-Percentage
Point Increase
$ 46
$ 592
One-Percentage
Point Decrease
$ (38)
$ (488)
Obligations and Funded Status Plan Assets
Applied Industrial Technologies, Inc.’s Qualified Defined Benefit Retirement Plan weighted average asset allocation and target allocation are as follows:
Percentage of Pension Plan
Assets At Fiscal Year End
2006
2007
Target
Allocation
2008
Asset Category:
Equity securities
Debt securities
Other
Total
55-65%
30-35%
0-10%
100%
61%
33%
6%
100%
66%
34%
0%
100%
Equity securities do not include any Applied Industrial Technologies, Inc. common stock.
The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in conjunction with the Qualified
Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term objectives and invest
the pension assets in accordance with ERISA and fiduciary standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital,
without undue exposure to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment results that
meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets assumption was developed by considering the historical
returns and the future expectations for returns of each asset class as well as the target asset allocation of the pension portfolio.
30
Applied Industrial Technologies, Inc. and Subsidiaries
Cash Flows
Employer Contributions
The Company expects to contribute $4,500 to its pension benefit plans and $200 to its other benefit plans in 2008.
Estimated Future Benefit Payments
The Company expects to make the following benefit payments, which reflect expected future service:
During Fiscal Years
2008
2009
2010
2011
2012
2013 through 2017
Pension Benefits
$ 4,700
4,500
900
5,000
3,500
14,600
Other Benefits
$ 200
200
300
300
300
1,300
NOTE 10: LEASES
The Company leases its corporate headquarters facility along with certain service center and distribution center facilities, vehicles and equipment under non-
cancelable lease agreements accounted for as operating leases. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 2007
are as follows:
2008
2009
2010
2011
2012
Thereafter
Total minimum lease payments
$ 19,200
14,100
10,100
6,600
5,000
10,400
$ 65,400
Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment were $28,300 in fiscal 2007, $26,700 in
2006 and $25,500 in 2005.
NOTE 11: SEGMENT INFORMATION
The Company has identified two reportable segments: Service Center Based Distribution and Fluid Power Businesses. The Service Center Based Distribution segment
provides customers with solutions to their maintenance, repair and original equipment manufacturing needs through the distribution of industrial products including
bearings, power transmission components, fluid power components, industrial rubber products, linear motion products, safety products, general maintenance and a
variety of mill supply products. The Fluid Power Businesses segment distributes fluid power components and operates shops that assemble fluid power systems and
components, performs equipment repair, and offers technical advice to customers.
The accounting policies of the Company’s reportable segments are the same as those described in Note 1. Sales between the Service Center Based Distribution
segment and the Fluid Power Businesses segment have been eliminated.
Segment Financial Information:
Year Ended June 30, 2007
Net sales
Operating income
Assets used in the business
Depreciation
Capital expenditures
Year Ended June 30, 2006
Net sales
Operating income
Assets used in the business
Depreciation
Capital expenditures
Year Ended June 30, 2005
Net sales
Operating income
Assets used in the business
Depreciation
Capital expenditures
Service Center
Based Distribution
$ 1,806,284
122,684
715,864
12,166
10,074
$ 1,725,392
111,774
670,619
12,019
10,310
$ 1,601,531
83,059
660,616
13,135
8,789
Fluid Power
Businesses
$ 207,825
14,427
61,505
1,323
1,118
$ 175,388
11,849
60,052
1,109
747
$ 115,524
7,183
29,554
697
419
Total
$ 2,014,109
137,111
777,369
13,489
11,192
$ 1,900,780
123,623
730,671
13,128
11,057
$ 1,717,055
90,242
690,170
13,832
9,208
Applied Industrial Technologies, Inc. and Subsidiaries
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
A reconciliation of operating income for reportable segments to the consolidated income before income taxes is as follows:
Year Ended June 30,
Operating income for reportable segments
Adjustments for:
Amortization expense of intangibles
Corporate and other expense, net (a)
Total operating income
Interest expense, net
Other income, net
Income before income taxes
2007
$ 137,111
2006
$ 123,623
2005
$ 90,242
1,045
1,055
135,011
2,360
1,179
$ 133,830
732
7,299
115,592
3,210
717
$ 113,099
992
1,282
87,968
4,730
3,101
$ 86,339
(a) The change in corporate and other expense, net is due to various changes in the levels and amounts of expenses being allocated to the segments. The expenses being
allocated include miscellaneous corporate charges for working capital, logistics support and other items.
Net sales by product category are as follows:
Year Ended June 30,
Industrial
Fluid power (b)
Net sales
2007
$ 1,614,515
399,594
$ 2,014,109
2006
$ 1,554,589
346,191
$ 1,900,780
2005
$ 1,442,308
274,747
$ 1,717,055
(b) The fluid power product category includes sales of hydraulic, pneumatic, lubrication and filtration components, and systems and repair services through the Company’s
service centers as well as the fluid power businesses.
Net sales are presented in the geographic area in which the Company’s customers are located. Information by geographic area is as follows:
Year Ended June 30,
Net Sales:
United States
Canada
Other
Total
Long-Lived Assets:
United States
Canada
Other
Total
2007
2006
2005
$ 1,539,143
160,396
17,516
$ 1,717,055
$ 1,778,993
211,446
23,670
$ 2,014,109
$ 111,357
19,440
3,253
$ 134,050
$ 1,686,066
194,594
20,120
$ 1,900,780
$ 115,935
18,445
3,260
$ 137,640
Long-lived assets are comprised of property, goodwill and other intangible assets.
NOTE 12: COMMITMENTS AND CONTINGENCIES
In connection with the construction and lease of its corporate headquarters facility, the Company has guaranteed repayment of a total of $5,678 of taxable
development revenue bonds issued by Cuyahoga County and the Cleveland-Cuyahoga County Port Authority. These bonds were issued with a 20-year term and are
scheduled to mature in March 2016. Any default, as defined in the guarantee agreements, would obligate the Company for the full amount of the outstanding bonds
through maturity. Due to the nature of the guarantee, the Company has not recorded any liability on the financial statements. In the event of a default and subsequent
payout under any or all guarantees, the Company maintains the right to pursue all legal options available to mitigate its exposure.
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company does not believe that
any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on the Company’s consolidated financial position, results of
operations, or cash flows.
32
Applied Industrial Technologies, Inc. and Subsidiaries
NOTE 13: OTHER INCOME, NET
Other income, net consists of the following:
Year Ended June 30,
Unrealized loss on cross-currency swap
Unrealized gain on deferred compensation trusts
Benefit from payouts on corporate-owned life insurance policies
Gain on sale of investments available for sale
Other
Total other income, net
2007
$ 243
(1,397)
(25)
$ (1,179)
2006
$ 595
(869)
(443)
$ (717)
2005
$ 901
(518)
(2,945)
(166)
(373)
$ (3,101)
The Company is the owner and beneficiary under life insurance policies acquired in conjunction with a fiscal 1998 acquisition, with benefits in force of $14,000 and
a net cash surrender value of $2,700 at June 30, 2007.
Applied Industrial Technologies, Inc. and Subsidiaries
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2007
and 2006, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2007.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Applied Industrial Technologies, Inc. and
subsidiaries at June 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2007, in
conformity with accounting principles generally accepted in the United States of America.
As discussed in Notes 1 and 9, respectively, to the consolidated financial statements, the Company changed its method of accounting for stock-based
compensation to conform to Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, effective July 1, 2005, and adopted SFAS
No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, in 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s
internal control over financial reporting as of June 30, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated August 17, 2007 expressed an unqualified opinion on management’s assessment
of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
Cleveland, Ohio
August 17, 2007
34
Applied Industrial Technologies, Inc. and Subsidiaries
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed by, or under the supervision of, the Chairman & Chief Executive Officer and the Vice President – Chief
Financial Officer & Treasurer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United
States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management
and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the consolidated financial statements.
Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with respect to the preparation
and presentation of the consolidated financial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of
internal control over financial reporting may vary over time.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2007. This evaluation
was based on the criteria set forth in the framework Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over financial reporting was effective as of June
30, 2007.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2007 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
August 17, 2007
David L. Pugh
Chairman & Chief Executive Officer
Mark O. Eisele
Vice President – Chief Financial Officer & Treasurer
Bill L. Purser
President
Daniel T. Brezovec
Corporate Controller
Applied Industrial Technologies, Inc. and Subsidiaries
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Applied
Industrial Technologies, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of June 30, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of June 30, 2007, is fairly stated,
in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June
30, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and
the related statements of consolidated income, shareholders’ equity and cash flows as of and for the year ended June 30, 2007 of the Company and our report
dated August 17, 2007 expressed an unqualified opinion on those consolidated financial statements.
Cleveland, Ohio
August 17, 2007
36
Applied Industrial Technologies, Inc. and Subsidiaries
QUARTERLY OPERATING RESULTS AND MARKET DATA Unaudited
(In thousands, except per share amounts)
Per Common Share (B)
2007 (A)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2006 (A)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2005 (A)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net
Sales
Gross
Profit
Operating
Income
Net
Income
$ 492,590
472,365
521,129
528,025
$ 2,014,109
$ 135,134
130,151
140,572
142,195
$ 548,052
$ 443,205
456,180
497,198
504,197
$ 1,900,780
$ 122,304
121,397
136,815
133,369
$ 513,885
$ 33,377
28,929
34,105
38,600
$ 135,011
$ 27,802
25,214
32,085
30,491
$ 115,592
$ 21,117
18,568
21,697
24,640
$ 86,022
$ 16,850
15,294
19,990
20,165
$ 72,299
$ 413,126
404,139
446,470
453,320
$ 1,717,055
$ 109,522
103,948
119,293
122,086
$ 454,849
$ 21,503
17,223
24,080
25,162
$ 87,968
$ 13,040
9,980
16,336
15,983
$ 55,339
Net
Income -
Diluted
$ 0.47
0.42
0.49
0.56
$ 1.93
$ 0.36
0.33
0.43
0.44
$ 1.57
$ 0.29
0.22
0.35
0.34
$ 1.20
Cash Price Range
Dividend
High
Low
$0.12 $ 25.50 $ 20.75
23.61
30.00
0.12
22.72
26.95
0.12
0.12
24.26
30.73
$ 0.48
$ 0.08 $ 25.03 $ 21.33
20.41
22.50
21.97
24.54
31.15
31.67
0.10
0.10
0.12
$ 0.40
$ 0.06 $ 15.89 $ 11.73
14.83
15.19
16.13
21.33
20.01
22.60
0.06
0.08
0.08
$ 0.29
(A) Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are
primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs. Reductions in year-end inventories during the fiscal year ended June 30, 2006 resulted in
liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these liquidations for the year ended June 30, 2006 increased gross profit by $1,647, net income by $1,013
and diluted net income per share by $0.02, respectively. There were no LIFO layer liquidations for fiscal 2007 and 2005.
(B) On August 10, 2007 there were 6,265 shareholders of record including 3,962 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company’s common stock is listed on the
New York Stock Exchange. The closing price on August 10, 2007 was $29.93 per share.
Applied Industrial Technologies, Inc. and Subsidiaries
37
10 YEAR SUMMARY
(In thousands, except per share amounts and statistical data)
sales
Consolidated Operations –
Year Ended June 30
Net
Operating income
Income before cumulative effect of accounting change
Net
Per share data
income
Income before cumulative effect of accounting change
Basic
Diluted
Net income
Basic
Diluted
Cash dividend
Year-End Position – June 30
Working capital
Long-term debt (including amounts classified as current)
Total assets
Shareholders’ equity
Year-End Statistics – June 30
Current ratio
Operating facilities
Shareholders of record
38
Applied Industrial Technologies, Inc. and Subsidiaries
2007
2006
2005
2004
$ 2,014,109
135,011
86,022
86,022
$ 1,900,780
115,592
72,299
72,299
$ 1,717,055
87,968
55,339
55,339
$ 1,517,004
51,448
31,471
31,471
1.97
1.93
1.97
1.93
0.48
1.62
1.57
1.62
1.57
0.40
1.24
1.20
1.24
1.20
0.29
0.73
0.71
0.73
0.71
0.21
$ 365,523
75,395
777,369
450,983
$ 370,013
76,186
730,671
414,822
$ 345,806
76,977
690,170
393,287
$ 286,022
77,767
596,841
339,535
2.6
445
6,242
3.0
452
6,192
2.9
440
6,079
2.9
434
6,154
NET INCOME PER SHARE (Dollars)
$0.06
$0.71
$0.46
$0.63
$0.67
$0.61
$0.41
NET SALES (Dollars in Billions)
07
06
05
04
03
02
01
00
99
98
07
06
05
04
03
02
01
00
99
98
$1.93
$1.57
$1.20
$2.01
$1.90
$1.72
$1.52
$1.46
$1.45
$1.63
$1.60
$1.56
$1.52
2003
2002
2001
2000
1999
1998
$ 1,464,367
36,254
19,832
19,832
$ 1,446,569
30,834
14,755
2,655
$ 1,625,755
55,001
28,048
28,048
$ 1,601,084
57,779
31,048
31,048
$ 1,555,424
42,269
19,933
19,933
$ 1,518,615
58,520
30,125
30,125
0.47
0.46
0.47
0.46
0.21
$ 259,359
78,558
553,404
307,856
2.8
440
6,157
0.34
0.34
0.06
0.06
0.21
0.64
0.63
0.64
0.63
0.21
$ 250,644
83,478
534,566
298,147
$ 279,001
113,494
578,854
311,518
2.9
449
6,455
3.2
469
6,697
0.68
0.67
0.68
0.67
0.21
$ 255,132
112,168
594,667
299,331
2.6
478
6,548
0.41
0.41
0.41
0.41
0.21
$ 258,730
126,000
574,349
293,586
3.0
444
6,869
0.62
0.61
0.62
0.61
0.21
$ 221,766
90,000
606,091
299,502
2.1
449
6,731
NET INCOME (Dollars in Millions)
SHAREHOLDERS’ EQUITY (Dollars in Millions)
07
06
05
04
03
02
01
00
99
98
07
06
05
04
03
02
01
00
99
98
$2.7
$31.5
$19.8
$28.0
$31.0
$30.1
$19.9
$86.0
$72.3
$55.3
07
06
05
04
03
02
01
00
99
98
DIVIDENDS PER SHARE (Dollars)
$0.48
$0.40
$0.29
$0.21
$0.21
$0.21
$0.21
$0.21
$0.21
$0.21
$451.0
$414.8
$393.3
$339.5
$307.9
$298.1
$311.5
$299.3
$293.6
$299.5
Applied Industrial Technologies, Inc. and Subsidiaries
39
Back Row (L to R): Peter A. Dorsman,
Thomas A. Commes, William G. Bares,
Stephen E. Yates, John F. Meier, David L. Pugh,
Peter C. Wallace
Front Row (L to R): L. Thomas Hiltz,
Edith Kelly-Green, J. Michael Moore,
Jerry Sue Thornton, Ph.D.
DIRECTORS
OFFICERS
WILLIAM G. BARES (3, 4) Age 66
Former Chairman and
Chief Executive Officer
The Lubrizol Corporation
(Specialty Chemical Products)
THOMAS A. COMMES (1, 3) Age 65
Former President and
Chief Operating Officer
The Sherwin-Williams Company
(Paints and Coatings)
PETER A. DORSMAN (2) Age 52
Vice President and
General Manager
NCR Corporation,
Systemedia Division
(Transaction and Data Warehousing
Solutions)
L. THOMAS HILTZ (2) Age 61
Attorney
EDITH KELLY-GREEN (1) Age 54
Former Vice President and
Chief Sourcing Officer
FedEx Express
(Express Transportation)
JOHN F. MEIER (4) Age 59
Chairman and
Chief Executive Officer
Libbey Inc.
(Tableware Products)
J. MICHAEL MOORE (1) Age 64
President
Oak Grove Consulting Group, Inc.
(Management Consulting)
Former Chairman and
Chief Executive Officer
Invetech Company
(Industrial Distributor)
DAVID L. PUGH (3) Age 58
Chairman &
Chief Executive Officer
Applied Industrial Technologies, Inc.
JERRY SUE THORNTON, Ph.D. (2)
Age 60
President
Cuyahoga Community College
(Two-Year Educational Institution)
PETER C. WALLACE (2) Age 53
President and
Chief Executive Officer
Robbins & Myers, Inc.
(Equipment Manufacturer)
STEPHEN E. YATES (4) Age 59
Executive Vice President and
Chief Information Officer
KeyCorp
(Financial Services)
Committees of The Board
(1) Audit Committee
(2) Corporate Governance Committee
(3) Executive Committee
(4) Executive Organization and
Compensation Committee
DAVID L. PUGH, Age 58
Chairman & Chief Executive Officer
BILL L. PURSER, Age 64
President
BENJAMIN J. MONDICS, Age 49
Executive Vice President &
Chief Operating Officer
TODD A. BARLETT, Age 52
Vice President – Acquisitions and
Global Business Development
FRED D. BAUER, Age 41
Vice President –
General Counsel & Secretary
MICHAEL L. COTICCHIA, Age 44
Vice President –
Chief Administrative Officer and
Government Business
MARK O. EISELE, Age 50
Vice President – Chief Financial Officer
& Treasurer
JAMES T. HOPPER, Age 63
Vice President –
Chief Information Officer
JEFFREY A. RAMRAS, Age 52
Vice President – Marketing and
Supply Chain Management
RICHARD C. SHAW, Age 58
Vice President –
Communications and Learning
DANIEL T. BREZOVEC, Age 46
Corporate Controller
JODY A. CHABOWSKI, Age 47
Assistant Controller
ALAN M. KRUPA, Age 51
Assistant Treasurer
OTH ER KE Y
MAN AGEM ENT
THOMAS E. ARMOLD, Age 52
Vice President –
Product Management & Marketing
IVAN J. BATISTA, Age 34
General Director –
Rafael Benitez Carrillo, Inc.
(Puerto Rico)
HENRY C. CARL, Age 63
Vice President –
Strategic Accounts
ROBERT E. CURLEY, Age 47
Vice President – Southeast Area
BARBARA D. EMERY, Age 48
Vice President – Human Resources
WARREN E. HOFFNER, Age 47
Vice President, General Manager –
Fluid Power
MARY E. KERPER, Age 56
Vice President –
Operational Excellence
JOHN M. LEYO, Age 56
Vice President –
North Atlantic Area
MARK A. STONEBURNER, Age 43
Vice President – Midwest Area
SERGIO H. NEVÁREZ, Age 49
General Director – Applied Mexico
RONALD A. SOWINSKI, Age 46
President &
Chief Operating Officer –
Applied Industrial Technologies Ltd.
(Canada)
DONN G. VEENHUIS, Age 58
Vice President – Western Area
THEODORE L. WOLICKI, Age 53
Vice President – Central States Area
40 Applied Industrial Technologies, Inc. and Subsidiaries
SHAREHOLDER INFORMATION
Applied Industrial Technologies, Inc. common stock is listed on the
New York Stock Exchange under the symbol AIT. The company is
identified in most financial listings as “AppliedIndlTch.”
Research on Applied Industrial Technologies is available through:
BB&T CAPITAL MARKETS
Holden Lewis, 804/782-8820
SOLEIL – GREAT LAKES REVIEW
Elliot Schlang, 216/767-1340
CLEVELAND RESEARCH COMPANY
Adam Uhlman, 216/649-7241
STEPHENS INC.
Matt Duncan, 501/377-3723
KEYBANC CAPITAL MARKETS®
Jeffrey D. Hammond, 216/443-2825
WACHOVIA CAPITAL MARKETS, LLC
Allison Poliniak, 212/214-5062
MORGAN KEEGAN
Brent D. Rakers, 901/579-4427
SHAREHOLDER INQUIRIES
Requests to transfer Applied Industrial Technologies, Inc. shares and
all correspondence regarding address change information, duplicate
mailings, missing certificates, failure to receive dividend checks in a
timely manner or to participate in the Company’s direct stock purchase
program should be directed to the Company’s transfer agent and
registrar:
COMPUTERSHARE INVESTOR SERVICES
250 Royall Street
Mail Stop 1A
Canton, MA 02021
800/988-5291
Investor relations inquiries should be directed to:
MARK O. EISELE
Vice President – Chief Financial Officer & Treasurer
Applied Industrial Technologies
One Applied Plaza
Cleveland, OH 44115-5014
Telephone: 216/426-4000, Fax: 216/426-4845
ANNUAL REPORT ON FORM 10-K
The Applied Industrial Technologies, Inc. Annual Report on Form
10-K for the fiscal year ended June 30, 2007, including the
financial statements and schedules thereto, is available at our
Web site at www.applied.com. It is also available without charge
upon written request to the Vice President – Chief Financial
Officer & Treasurer at the preceding address.
REGULATORY CERTIFICATIONS
In fiscal 2007, the Chief Executive Officer (CEO) of Applied Industrial
Technologies, Inc. provided to the New York Stock Exchange (NYSE)
the annual CEO certification regarding the Company’s compliance
with NYSE corporate governance listing standards. In addition, the
Company’s CEO and Chief Financial Officer filed with the Securities
and Exchange Commission the required certifications regarding the
quality of the Company’s public disclosures in its fiscal 2007 reports
and the effectiveness of internal control over financial reporting.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m.,
Tuesday, October 23, 2007, at the Corporate Headquarters of
Applied Industrial Technologies, One Applied Plaza, East 36th and
Euclid Avenue, Cleveland, Ohio 44115.
QUARTERLY VOLUME, PRICE AND DIVIDEND INFORMATION
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Shares Traded
Average Daily Volume
High
Low
Cash Dividend
Price Range
20,528,900
16,447,500
17,787,400
18,389,300
11,773,500
17,774,000
15,937,300
26,181,000
14,504,400
20,312,400
16,635,500
15,018,000
325,900
261,100
291,600
291,900
184,000
282,100
257,000
415,600
226,700
317,400
272,700
234,600
$ 25.50
30.00
26.95
30.73
$ 25.03
24.54
31.15
31.67
$ 15.89
21.33
20.01
22.60
$ 20.75
23.61
22.72
24.26
$ 21.33
20.41
22.50
21.97
$ 11.73
14.83
15.19
16.13
$ 0.12
0.12
0.12
0.12
$ 0.08
0.10
0.10
0.12
$ 0.06
0.06
0.08
0.08
Applied Industrial Technologies, Inc. and Subsidiaries
41
Applied Industrial Technologies
Corporate Headquarters
One Applied Plaza
Cleveland, Ohio 44115
216/426-4000