2008 Annual Report
Applied® Providing Solutions, Creating Value
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
important risk factors, including those identified on pages
14 and 15 of this report and in our Annual Report on Form
10-K for the fiscal year ended June 30, 2008. 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.
Applied Industrial Technologies is one of North America’s
largest independent industrial distributors with more than
3 million parts critical to the manufacturing and maintenance
operations of businesses in virtually every industry segment.
We are a vital link between suppliers and customers,
providing value-added services for both groups.
Our people make a difference and provide us with unique
advantages that other distributors cannot offer. We use
our knowledge and expertise to better understand our
customers’ businesses, and we help them fi nd ways to
manage their operations more effectively. We are redefi ning
the role of customer service by providing solutions and
creating value for our customers and suppliers, which in
turn create gains for our associates and shareholders.
Applied At A Glance
Applied Industrial Technologies serves Maintenance Repair
Operations (MRO), Original Equipment Manufacturing
(OEM), and Government markets with a diverse range of
quality products, including bearings, power transmission
components, fl uid 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 fl uid power shop services, as well as
services to meet storeroom management and maintenance
training needs.
Headquarters:
Cleveland, Ohio, USA
Customer Accounts:
More than 156,000
Operating Facilities:
459 in 48 U.S. states,
5 Canadian provinces,
Puerto Rico and
13 Mexican states
E-Commerce:
www.applied.com
Distribution Centers:
7
Product Manufacturers:
More than 2,000
Stock Ticker Symbol:
AIT is listed on the
New York Stock Exchange
Employee Associates:
4,831
Stock Keeping Units (SKUs)
Available to Customers:
More than 3 million
ABOUT THE COVER
Today’s plant managers are continuously
looking for new solutions to improve the
effi ciency of their operations. Applied is focused
on Providing Solutions and Creating Value.
Photo © SKF USA Inc.
2008 Financial Highlights
(In millions except per share amounts, shareholder and employment figures)
Year Ended June 30,
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
2008
$ 2,089.5
151.7
$
95.5
$
2.19
$
6,305
43.6
0.60
4,831
20.0%
$
$ 110.3
* Includes employee shareholders in the Applied Industrial Technologies Retirement Savings Plan.
FISCAL YEAR 2008 BUSINESS/OPERATIONAL HIGHLIGHTS
2007
$ 2,014.1
$ 133.8
86.0
$
1.93
$
6,242
44.5
0.48
4,649
19.9%
70.9
$
$
2006
$ 1,900.8
$ 113.1
$ 72.3
$ 1.57
6,192
46.2
$ 0.40
4,684
17.9%
$ 69.9
GROWTH
Applied Industrial Technologies achieved record sales in
fiscal 2008 of $2.1 billion. Net sales increased 3.7% over
fiscal 2007 and earnings per share increased 13.5% to $2.19.
Operating income improved to $152.8 million, a 13.2%
improvement over last year, while operating margin improved
to 7.3%, compared to 6.7% last year. Selling, distribution
and administrative expenses decreased to 19.9% of sales
from 20.5% last year.
STOCK REPURCHASES AND DIVIDENDS
During fiscal 2008, Applied purchased 1,144,900 shares of
the company’s common stock on the open market. Quarterly
dividends for fiscal 2008 totaled $25.7 million or $0.60
per share, a 25% increase over last year. The company
has increased its quarterly dividend 181% over the last
four years.
ACQUISITIONS
Strengthening its position in the Mexican markets, Applied
acquired Suministros Industriales Enol, S.A. de C.V. (Enol)
and its group of companies. Headquartered in Puebla
with 10 service center locations, Enol distributes power
transmission products, bearings, hydraulic hose, electric
motors, conveyor products and lubricants.
Applied also acquired VYCMEX S.A. de C.V. (VYCMEX) and
its group of companies headquartered in Monterrey, Mexico.
VYCMEX is the region’s largest independent fluid power
distributor, serving the manufacturing, mining and metal
processing industries with expertise and capabilities in fluid
power products and systems.
for NSK Corporation,
SUPPLIER AGREEMENTS
in August 2008, the company became an
Effective
authorized distributor
further
broadening Applied’s offering of bearing products. In fiscal
2008, the company formally launched the Sumitomo Drive
Technologies product line and entered into new supplier
agreements with Dixon Sanitary, a supplier of stainless steel
sanitary fittings and valves, and DeWALT Industrial Tool
Company, a leading manufacturer of industrial power tools
and accessories.
HONORS
Applied received numerous customer and supplier awards
for its operational strengths, including outstanding customer
service, technical support, and overall value added.
Forbes magazine again selected Applied to its Platinum
400 List of The Best Big Companies in America. This is
the fifth consecutive year Applied has made the list and is
ranked within the top 100 this year. Forbes’ selection criteria
include five-year profitability and growth, sales and earnings
performance, accounting and governance practices, and
financial condition.
Applied continues to climb the ranks of the prestigious
list of U.S. companies using
InformationWeek 500
information technology (IT) in an innovative manner. For
2007, Applied ranked number 21 out of 500 firms, up from
number 26 last year, for its innovative use of information
technology systems for customer service, its business-to-
business web site, as well as internal IT systems for employee
effectiveness and efficiency. The company has been on this
list annually since 2000 and within the Top 100 four times.
TECHNOLOGY
Applied continues to invest in technology systems that
improve
its operating efficiencies and add value to
customer interactions. In fiscal 2008, Applied further
developed ASYST, a web-based, user-friendly interface for
internal associates. Going forward, we expect ASYST will
help us to continue to reduce transaction cycle time and
improve customer service and associate productivity.
Applied Industrial Technologies, Inc. and Subsidiaries 1
Letter to our Shareholders
David L. Pugh, Benjamin J. Mondics
DEAR SHAREHOLDER:
We are pleased to report that fiscal 2008 was another record year for Applied Industrial Technologies. Our focus on profitable
sales growth has yielded our sixth consecutive year of record sales and earnings. Although the economy did soften in the
second half of the year, our active management of inventory and other assets, productivity improvements, and implementation
of cost controls produced financial results of which we are proud.
Net sales in fiscal 2008 rose 3.7% to $2,089,456,000, while earnings per share rose to $2.19, which represents a 13.5%
improvement over last year. Overall net income improved 11.0% to $95.5 million. Despite pricing pressures, our focus on
operating margins was successful as they increased to 7.3%. Our investments in information technology systems and
corporate-wide employee training programs have boosted the efficiency of our day-to-day operations, while also improving
the level of service we deliver to our customers.
Our selling, distribution and administrative expenses were reduced to 19.9% of sales, an historical low, reflecting the
productivity improvements we’ve been developing. Our cash generation from operations also set a record at $110 million,
providing us with a healthy cash balance of $101.8 million and working capital of $409.2 million at year end. Our debt-to-
equity ratio was 5% and the current ratio (current assets to current liabilities) was 3:1. As a result of our strong financial
position, we paid cash dividends of $0.60 per share during the year, which equates to a current yield of 2.4%. Our cash flow
positions us well to invest in continued growth of the business.
PROVIDING SOLUTIONS AND CREATING VALUE
Our strength in providing solutions and technical expertise
strategies, inventory management and training. By bringing
is unique and allows us to focus on creating value for our
these solutions to our customers, we build loyalty and
customers. We help customers improve the efficiency of
increase sales, which yields greater shareholder value.
their operations because we have vast product solutions
and we understand the technical aspects of energy
efficiency, preventative maintenance, parts replacement
Our growth in sales to the government sectors and in fluid
power systems is reflective of the efforts we are putting
into these target markets because they offer profitable
2 Applied Industrial Technologies, Inc. and Subsidiaries
growth potential. Our full-service approach to fl uid power
about the
industrial distribution business and we
distribution provides system design, product solutions,
communicate clearly to our associates, talk frequently with
and repair services, and has proven to be an effective
our suppliers to understand their objectives, and spend time
differentiator
that also builds customer
loyalty and
with our customers understanding their needs.
increased sales.
During fi scal 2008, Applied repurchased 1,144,900 shares
We have continued to make signifi cant investments in our
of its common stock for $33.2 million. At June 30, 2008, we
government business. In fi scal 2008, sales in this segment
had remaining authorization to repurchase an additional
continued to grow at double-digit rates to more than
1,065,100 shares. In keeping with our strategy to return value
$72 million. Our status as a Government Services
to our shareholders, we paid dividends totaling $25.7 million
Administration (GSA) contract holder has helped us win
in fi scal 2008.
signifi cant business for our core products. We have added
government industry managers and expanded our focus
on federal, state and local government opportunities along
with government contractors/agencies. Our large inside
and outside sales force gives us the ability to reach a broad
range of government organizations, including the armed
forces, Army Corps of Engineers, Coast Guard, FEMA,
Homeland Security, local police, fi re and rescue, and many
other government agencies. We have also enhanced our
e-commerce capabilities dedicated to GSA and DOD Emall
contracts, which is having a positive impact on growing our
online business.
ACQUISITIONS
Geographically, we continue to capitalize on market
opportunities
in North America with
two signifi cant
acquisitions in fi scal 2008. Applied purchased the Enol
and VYCMEX companies located in Mexico and expects
these businesses to prosper as we integrate them with our
current Mexican operations. Sales grew 18% in Mexico in
fi scal 2008.
Consistent with our strategy to pursue acquisitions that are
aligned with our geographic and product needs, and offer
a good return to our shareholders, we expect additional
acquisitions in fi scal 2009. Already into this new year, we
plan to fi nalize the acquisition of Fluid Power Resource, LLC
and seven of its fl uid power distribution businesses. These
businesses had sales totaling approximately $244 million
in calendar 2007. We believe that, following the purchase,
Applied will be North America’s largest distributor of fl uid
power products.
Looking further into fi scal 2009 and beyond, we expect to
remain active in acquiring fl uid power distributors in North
America as we expand further with this product category.
ACTIONS TO CREATE SHAREHOLDER VALUE
First and foremost, we focus on delivering value to our
customers because we know that translates into more
profi table sales and, ultimately, enhanced shareholder value.
Our experienced management team is knowledgeable
GROWING OUR BUSINESS
We achieved considerable success in fi scal 2008 but we
recognize the need for continuous improvement if we are
to achieve our goals for fi scal 2009. The economic climate
may present new challenges, but we believe our focus on
profi table sales growth, margin enhancement, cost control,
asset management and hard work will allow us to build on
our growth of the past. We thank our employee-associates
for their dedication and commitment to our goals; we thank
our loyal customers and suppliers for their support; and we
thank you, our shareholders, for your confi dence in our team.
We look forward to another successful year in fi scal 2009.
David L. Pugh
Chairman &
Chief Executive Offi cer
Benjamin J. Mondics
President &
Chief Operating Offi cer
August 15, 2008
NET SALES (Dollars in Billions)
08
07
06
05
04
08
07
06
05
04
08
07
06
05
04
$2.09
$2.01
$1.90
$1.72
$1.52
(Dollars)
$2.19
$1.93
$1.57
$1.20
$0.71
SHAREHOLDERS’ EQUITY (Dollars in Millions)
$502.1
$451.0
$414.8
$393.3
$339.5
Applied Industrial Technologies, Inc. and Subsidiaries 3
Our Focus on Solutions
Quality Products and Exceptional Service Drive Value
Applied Industrial Technologies is one of North America’s largest distributors of industrial parts and components. We deliver
the products, technology and expertise that help our customers run their facilities more efficiently. We are focused on
delivering solutions that add value and build customer loyalty. This solution-based selling allows us to manage our business
for profitable growth, where customers come to us for advanced levels of expertise.
Customer Service drives Customer Satisfaction, which drives Customer Success, and therefore drives Shareholder Value.
Customer
Service
Customer
Satisfaction
Customer
Success
Shareholder
Value
Applied is an authorized distributor for more than 2,000
parts that will meet the most common needs of local
high-quality manufacturers, offering more than 3 million
businesses with same day or next day availability. Seven
products. When a customer needs a part fast, we can
distribution centers across North America provide
deliver. And, we have the technical expertise to make sure
overnight product delivery to our service centers and can
the part they get will deliver maximum life, performance
get most parts to any customer the next day if necessary.
and energy efficiency. Our associates are trained in
problem solving and work to achieve the highest levels
of customer satisfaction. We support our people with
superior
infrastructure,
continuous
training,
and
information technology systems that make them more
efficient in their jobs.
Providing Solutions and Creating Value are
the
differentiators that make Applied the best at what we do.
This business strategy has helped us achieve consistent
sales and earnings growth, and profitable returns on
investment, for our associates and our shareholders. We
support customers in a very diverse group of industries
Applied has more than 400 locally-managed service
so we are better able to manage growth across multiple
centers throughout North America. These centers stock
sectors of the economy.
We recognize the importance of evolving the business to
meet emerging market needs, to introduce new products,
and to use technology to reduce expenses. We are
continuing to expand our fluid power and government
sales activity where solution selling is an advantage. We
are expanding our product lines with a growing number of
green and sustainable products. And, we are investing in
information technology solutions that are streamlining our
internal operations and expanding our external offerings.
4 Applied Industrial Technologies, Inc. and Subsidiaries
Our Focus on People
We Hire Great People and Motivate Them to Excel
Ingrained in the culture of our company is a respect for and
dedication to the people we serve and work with. Whether
they are customers, suppliers, associates or shareholders,
we realize this is a team effort that requires the best people,
skills and results. Associates are trained and motivated
to achieve stretch goals that help them personally and
professionally. Managers are encouraged to use their
knowledge and skills to create new opportunities to manage
the business for profitable growth. We expect our people
to produce extraordinary results, and they do.
We realize that different parts of the country serve different
types of manufacturing industries and we provide each
service center with the support and tools they need to do
their jobs efficiently, while giving them the flexibility to meet
the needs of their unique sales and service area. In some
parts of the country we have primary metals manufacturing
expertise, while other locales may have more experience
with paper mills or metal fabrication. We employ product
and industry specialists to meet the needs of a specific
market so we can add value to our customers in that area.
Our associates undergo extensive professional training
each and every year. Our investment in online e-learning
has made it easier and more effective for our associates to
average more than 40 hours of training annually. Whether it
is technical knowledge or management training, associates
are required to study, train and advance their individual
skills in order to make themselves and our company more
valuable. We recognize it is knowledge and expertise that
position us ahead of our competition. We are investing in
our people because they are Providing Solutions and
Creating Value.
Applied has received numerous awards as a result of our
ability to attract, develop and retain highly skilled associates,
while creating a culture that makes Applied a great place
to work. We clearly communicate our expectations, we
measure our results, and we make continuous adjustments
to improve our performance.
Applied Industrial Technologies, Inc. and Subsidiaries 5
Our Focus on Productivity
Pursuing Operational Excellence in All We Do
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(cid:69)(cid:65)(cid:83)(cid:89)(cid:13)(cid:84)(cid:79)(cid:13)(cid:85)(cid:83)(cid:69)(cid:0) (cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:70)(cid:65)(cid:67)(cid:69)(cid:0) (cid:87)(cid:73)(cid:76)(cid:76)(cid:0) (cid:72)(cid:69)(cid:76)(cid:80)(cid:0) (cid:83)(cid:69)(cid:82)(cid:86)(cid:73)(cid:67)(cid:69)(cid:0) (cid:67)(cid:69)(cid:78)(cid:84)(cid:69)(cid:82)(cid:83)(cid:0) (cid:77)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:0) (cid:73)(cid:78)(cid:86)(cid:69)(cid:78)(cid:84)(cid:79)(cid:82)(cid:73)(cid:69)(cid:83)(cid:12)(cid:0) (cid:79)(cid:82)(cid:68)(cid:69)(cid:82)(cid:0) (cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:12)(cid:0) (cid:77)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:0) (cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82)(cid:0) (cid:65)(cid:67)(cid:67)(cid:79)(cid:85)(cid:78)(cid:84)(cid:83)(cid:12)(cid:0) (cid:65)(cid:67)(cid:67)(cid:69)(cid:83)(cid:83)(cid:0)
(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:0)(cid:83)(cid:80)(cid:69)(cid:67)(cid:73)(cid:108)(cid:67)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83)(cid:12)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:77)(cid:85)(cid:67)(cid:72)(cid:0)(cid:77)(cid:79)(cid:82)(cid:69)(cid:14)(cid:0)(cid:38)(cid:82)(cid:79)(cid:77)(cid:0)(cid:65)(cid:0)(cid:83)(cid:73)(cid:78)(cid:71)(cid:76)(cid:69)(cid:0)(cid:83)(cid:67)(cid:82)(cid:69)(cid:69)(cid:78)(cid:12)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)(cid:73)(cid:78)(cid:83)(cid:73)(cid:68)(cid:69)(cid:0)(cid:83)(cid:65)(cid:76)(cid:69)(cid:83)(cid:0)(cid:83)(cid:84)(cid:65)(cid:70)(cid:70)(cid:0)(cid:87)(cid:73)(cid:76)(cid:76)(cid:0)(cid:66)(cid:69)(cid:0)(cid:65)(cid:66)(cid:76)(cid:69)(cid:0)(cid:84)(cid:79)(cid:0)(cid:73)(cid:78)(cid:83)(cid:84)(cid:65)(cid:78)(cid:84)(cid:76)(cid:89)(cid:0)(cid:65)(cid:67)(cid:67)(cid:69)(cid:83)(cid:83)(cid:0)(cid:65)(cid:76)(cid:76)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)
(cid:73)(cid:78)(cid:70)(cid:79)(cid:82)(cid:77)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)(cid:84)(cid:72)(cid:69)(cid:89)(cid:0)(cid:78)(cid:69)(cid:69)(cid:68)(cid:0)(cid:84)(cid:79)(cid:0)(cid:81)(cid:85)(cid:73)(cid:67)(cid:75)(cid:76)(cid:89)(cid:0)(cid:80)(cid:82)(cid:79)(cid:67)(cid:69)(cid:83)(cid:83)(cid:0)(cid:65)(cid:78)(cid:0)(cid:79)(cid:82)(cid:68)(cid:69)(cid:82)(cid:0)(cid:79)(cid:82)(cid:0)(cid:81)(cid:85)(cid:79)(cid:84)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:14)(cid:0)
(cid:52)(cid:72)(cid:73)(cid:83)(cid:0)(cid:78)(cid:69)(cid:87)(cid:0)(cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:70)(cid:65)(cid:67)(cid:69)(cid:0)(cid:65)(cid:76)(cid:83)(cid:79)(cid:0)(cid:73)(cid:78)(cid:67)(cid:76)(cid:85)(cid:68)(cid:69)(cid:83)(cid:0)(cid:80)(cid:82)(cid:79)(cid:80)(cid:82)(cid:73)(cid:69)(cid:84)(cid:65)(cid:82)(cid:89)(cid:0)(cid:67)(cid:82)(cid:79)(cid:83)(cid:83)(cid:13)(cid:83)(cid:69)(cid:76)(cid:76)(cid:73)(cid:78)(cid:71)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:85)(cid:80)(cid:83)(cid:69)(cid:76)(cid:76)(cid:73)(cid:78)(cid:71)(cid:0)(cid:84)(cid:79)(cid:79)(cid:76)(cid:83)(cid:0)(cid:84)(cid:72)(cid:65)(cid:84)(cid:0)(cid:87)(cid:73)(cid:76)(cid:76)(cid:0)(cid:72)(cid:69)(cid:76)(cid:80)(cid:0)(cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82)(cid:83)(cid:0)(cid:71)(cid:69)(cid:84)(cid:0)(cid:65)(cid:76)(cid:76)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:0)(cid:84)(cid:72)(cid:69)(cid:89)(cid:0)
(cid:78)(cid:69)(cid:69)(cid:68)(cid:0)(cid:84)(cid:79)(cid:0)(cid:67)(cid:79)(cid:77)(cid:80)(cid:76)(cid:69)(cid:84)(cid:69)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:74)(cid:79)(cid:66)(cid:14)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:0)(cid:67)(cid:82)(cid:79)(cid:83)(cid:83)(cid:0)(cid:82)(cid:69)(cid:70)(cid:69)(cid:82)(cid:69)(cid:78)(cid:67)(cid:69)(cid:0)(cid:71)(cid:85)(cid:73)(cid:68)(cid:69)(cid:83)(cid:12)(cid:0)(cid:81)(cid:85)(cid:73)(cid:67)(cid:75)(cid:0)(cid:82)(cid:69)(cid:70)(cid:69)(cid:82)(cid:69)(cid:78)(cid:67)(cid:69)(cid:0)(cid:83)(cid:72)(cid:69)(cid:69)(cid:84)(cid:83)(cid:12)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:83)(cid:65)(cid:76)(cid:69)(cid:83)(cid:0)(cid:83)(cid:67)(cid:82)(cid:73)(cid:80)(cid:84)(cid:73)(cid:78)(cid:71)(cid:0)(cid:68)(cid:79)(cid:67)(cid:85)(cid:77)(cid:69)(cid:78)(cid:84)(cid:83)(cid:0)(cid:87)(cid:73)(cid:76)(cid:76)(cid:0)(cid:81)(cid:85)(cid:73)(cid:67)(cid:75)(cid:76)(cid:89)(cid:0)
(cid:73)(cid:68)(cid:69)(cid:78)(cid:84)(cid:73)(cid:70)(cid:89)(cid:0)(cid:67)(cid:79)(cid:77)(cid:80)(cid:65)(cid:78)(cid:73)(cid:79)(cid:78)(cid:0)(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:14)(cid:0)(cid:52)(cid:72)(cid:69)(cid:0)(cid:82)(cid:69)(cid:83)(cid:85)(cid:76)(cid:84)(cid:0)(cid:87)(cid:73)(cid:76)(cid:76)(cid:0)(cid:66)(cid:69)(cid:0)(cid:77)(cid:79)(cid:82)(cid:69)(cid:0)(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:86)(cid:69)(cid:0)(cid:69)(cid:77)(cid:80)(cid:76)(cid:79)(cid:89)(cid:69)(cid:69)(cid:83)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:77)(cid:79)(cid:82)(cid:69)(cid:0)(cid:83)(cid:65)(cid:84)(cid:73)(cid:83)(cid:108)(cid:69)(cid:68)(cid:0)(cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82)(cid:83)(cid:14)(cid:0)(cid:55)(cid:73)(cid:84)(cid:72)(cid:0)(cid:77)(cid:79)(cid:82)(cid:69)(cid:0)(cid:84)(cid:72)(cid:65)(cid:78)(cid:0)
(cid:19)(cid:0)(cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78)(cid:0)(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:0)(cid:84)(cid:79)(cid:0)(cid:77)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:12)(cid:0)(cid:87)(cid:69)(cid:0)(cid:65)(cid:82)(cid:69)(cid:0)(cid:67)(cid:79)(cid:77)(cid:77)(cid:73)(cid:84)(cid:84)(cid:69)(cid:68)(cid:0)(cid:84)(cid:79)(cid:0)(cid:80)(cid:82)(cid:79)(cid:86)(cid:73)(cid:68)(cid:73)(cid:78)(cid:71)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)(cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82)(cid:83)(cid:0)(cid:87)(cid:73)(cid:84)(cid:72)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:77)(cid:79)(cid:83)(cid:84)(cid:0)(cid:65)(cid:67)(cid:67)(cid:85)(cid:82)(cid:65)(cid:84)(cid:69)(cid:0)(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:0)(cid:73)(cid:78)(cid:70)(cid:79)(cid:82)(cid:77)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)
(cid:84)(cid:72)(cid:69)(cid:0)(cid:70)(cid:65)(cid:83)(cid:84)(cid:69)(cid:83)(cid:84)(cid:0)(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:0)(cid:68)(cid:69)(cid:76)(cid:73)(cid:86)(cid:69)(cid:82)(cid:89)(cid:14)(cid:0)(cid:33)(cid:51)(cid:57)(cid:51)(cid:52)(cid:0)(cid:72)(cid:69)(cid:76)(cid:80)(cid:83)(cid:0)(cid:85)(cid:83)(cid:0)(cid:80)(cid:82)(cid:79)(cid:86)(cid:73)(cid:68)(cid:69)(cid:0)(cid:79)(cid:80)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76)(cid:0)(cid:69)(cid:88)(cid:67)(cid:69)(cid:76)(cid:76)(cid:69)(cid:78)(cid:67)(cid:69)(cid:0)(cid:73)(cid:78)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)(cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82)(cid:0)(cid:84)(cid:82)(cid:65)(cid:78)(cid:83)(cid:65)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83)(cid:14)
Providing Solutions and Creating Value(cid:0) (cid:77)(cid:69)(cid:65)(cid:78)(cid:83)(cid:0) (cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82)(cid:83)(cid:0) (cid:67)(cid:65)(cid:78)(cid:0) (cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:65)(cid:67)(cid:84)(cid:0) (cid:87)(cid:73)(cid:84)(cid:72)(cid:0) (cid:33)(cid:80)(cid:80)(cid:76)(cid:73)(cid:69)(cid:68)(cid:0) (cid:84)(cid:72)(cid:82)(cid:79)(cid:85)(cid:71)(cid:72)(cid:0) (cid:79)(cid:85)(cid:82)(cid:0) (cid:65)(cid:80)(cid:80)(cid:82)(cid:79)(cid:88)(cid:73)(cid:77)(cid:65)(cid:84)(cid:69)(cid:76)(cid:89)(cid:0) (cid:17)(cid:12)(cid:21)(cid:16)(cid:16)(cid:0)
(cid:73)(cid:78)(cid:83)(cid:73)(cid:68)(cid:69)(cid:0)(cid:83)(cid:65)(cid:76)(cid:69)(cid:83)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:17)(cid:12)(cid:16)(cid:16)(cid:16)(cid:0)(cid:79)(cid:85)(cid:84)(cid:83)(cid:73)(cid:68)(cid:69)(cid:0)(cid:83)(cid:65)(cid:76)(cid:69)(cid:83)(cid:0)(cid:83)(cid:84)(cid:65)(cid:70)(cid:70)(cid:14)(cid:0)(cid:47)(cid:82)(cid:12)(cid:0)(cid:84)(cid:72)(cid:69)(cid:89)(cid:0)(cid:67)(cid:65)(cid:78)(cid:0)(cid:79)(cid:82)(cid:68)(cid:69)(cid:82)(cid:0)(cid:84)(cid:72)(cid:82)(cid:79)(cid:85)(cid:71)(cid:72)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)(cid:79)(cid:78)(cid:76)(cid:73)(cid:78)(cid:69)(cid:0)(cid:67)(cid:65)(cid:84)(cid:65)(cid:76)(cid:79)(cid:71)(cid:0)(cid:65)(cid:84)(cid:0)(cid:87)(cid:87)(cid:87)(cid:14)(cid:65)(cid:80)(cid:80)(cid:76)(cid:73)(cid:69)(cid:68)(cid:14)(cid:67)(cid:79)(cid:77)(cid:0)(cid:79)(cid:82)(cid:0)(cid:66)(cid:89)(cid:0)(cid:85)(cid:83)(cid:73)(cid:78)(cid:71)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)
(cid:84)(cid:82)(cid:65)(cid:68)(cid:73)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76)(cid:0)(cid:80)(cid:82)(cid:73)(cid:78)(cid:84)(cid:69)(cid:68)(cid:0)(cid:67)(cid:65)(cid:84)(cid:65)(cid:76)(cid:79)(cid:71)(cid:14)(cid:0)(cid:37)(cid:65)(cid:67)(cid:72)(cid:0)(cid:79)(cid:70)(cid:0)(cid:84)(cid:72)(cid:69)(cid:83)(cid:69)(cid:0)(cid:73)(cid:77)(cid:80)(cid:79)(cid:82)(cid:84)(cid:65)(cid:78)(cid:84)(cid:0)(cid:83)(cid:65)(cid:76)(cid:69)(cid:83)(cid:0)(cid:67)(cid:72)(cid:65)(cid:78)(cid:78)(cid:69)(cid:76)(cid:83)(cid:0)(cid:73)(cid:83)(cid:0)(cid:68)(cid:69)(cid:83)(cid:73)(cid:71)(cid:78)(cid:69)(cid:68)(cid:0)(cid:84)(cid:79)(cid:0)(cid:83)(cid:85)(cid:80)(cid:80)(cid:79)(cid:82)(cid:84)(cid:0)(cid:79)(cid:85)(cid:82)(cid:0)(cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82)(cid:83)(cid:0)(cid:87)(cid:73)(cid:84)(cid:72)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:76)(cid:69)(cid:86)(cid:69)(cid:76)(cid:0)(cid:79)(cid:70)(cid:0)
(cid:83)(cid:69)(cid:82)(cid:86)(cid:73)(cid:67)(cid:69)(cid:0)(cid:84)(cid:72)(cid:69)(cid:89)(cid:0)(cid:78)(cid:69)(cid:69)(cid:68)(cid:0)(cid:84)(cid:79)(cid:0)(cid:77)(cid:69)(cid:69)(cid:84)(cid:0)(cid:84)(cid:72)(cid:69)(cid:73)(cid:82)(cid:0)(cid:85)(cid:78)(cid:73)(cid:81)(cid:85)(cid:69)(cid:0)(cid:82)(cid:69)(cid:81)(cid:85)(cid:73)(cid:82)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:83)(cid:14)
The new ASYST program has several
productivity enhancements including:
(cid:115)(cid:0)(cid:73)(cid:77)(cid:80)(cid:82)(cid:79)(cid:86)(cid:69)(cid:68)(cid:0)(cid:79)(cid:82)(cid:68)(cid:69)(cid:82)(cid:0)(cid:80)(cid:82)(cid:79)(cid:67)(cid:69)(cid:83)(cid:83)(cid:73)(cid:78)(cid:71)
(cid:115)(cid:0)(cid:69)(cid:88)(cid:80)(cid:65)(cid:78)(cid:68)(cid:69)(cid:68)(cid:0)(cid:83)(cid:69)(cid:65)(cid:82)(cid:67)(cid:72)(cid:0)(cid:67)(cid:65)(cid:80)(cid:65)(cid:66)(cid:73)(cid:76)(cid:73)(cid:84)(cid:73)(cid:69)(cid:83)
(cid:115)(cid:0)(cid:65)(cid:67)(cid:67)(cid:79)(cid:85)(cid:78)(cid:84)(cid:0)(cid:83)(cid:84)(cid:65)(cid:84)(cid:85)(cid:83)(cid:0)(cid:86)(cid:65)(cid:76)(cid:73)(cid:68)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)
(cid:115)(cid:0)(cid:83)(cid:84)(cid:79)(cid:67)(cid:75)(cid:0)(cid:76)(cid:79)(cid:67)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:65)(cid:86)(cid:65)(cid:73)(cid:76)(cid:65)(cid:66)(cid:73)(cid:76)(cid:73)(cid:84)(cid:89)(cid:0)(cid:83)(cid:84)(cid:65)(cid:84)(cid:85)(cid:83)
(cid:115)(cid:0)(cid:65)(cid:68)(cid:68)(cid:73)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76)(cid:0)(cid:84)(cid:69)(cid:67)(cid:72)(cid:78)(cid:73)(cid:67)(cid:65)(cid:76)(cid:0)(cid:73)(cid:78)(cid:70)(cid:79)(cid:82)(cid:77)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)
(cid:115)(cid:0)(cid:69)(cid:77)(cid:65)(cid:73)(cid:76)(cid:0)(cid:80)(cid:65)(cid:82)(cid:84)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:79)(cid:82)(cid:68)(cid:69)(cid:82)(cid:0)(cid:83)(cid:69)(cid:65)(cid:82)(cid:67)(cid:72)(cid:0)(cid:82)(cid:69)(cid:83)(cid:85)(cid:76)(cid:84)(cid:83)
(cid:115)(cid:0)(cid:79)(cid:80)(cid:84)(cid:73)(cid:77)(cid:73)(cid:90)(cid:69)(cid:68)(cid:0)(cid:83)(cid:72)(cid:73)(cid:80)(cid:80)(cid:73)(cid:78)(cid:71)(cid:0)(cid:84)(cid:79)(cid:79)(cid:76)(cid:83)
6 Applied Industrial Technologies, Inc. and Subsidiaries
Our Focus on Creating Value
Our Documented Value Added® Programs Have Tracked
Billions of Dollars Saved
and we know how to manage our own
inventory to provide same day delivery
when necessary. All of our service centers
offer 24-hour emergency service, seven days
a week, and customers know they can call
on us whenever they need our assistance.
Applied
is a
leader
in offering our
customers a Documented Value Added®
(DVA®) program where our associates
monitor and report value-added services
on a monthly, quarterly, semi-annual or
annual basis. Beyond product cost, we
track many underlying costs that can be
minimized to increase a facility’s profitability.
We calculate savings
from
improved
product life, reduced maintenance and
labor costs, reduced energy consumption,
reduced inventory investment, and other
transactional savings.
In one example, a manufacturer’s production
line came to a halt because a unique bearing
assembly failed and the replacement parts
were not available. The Applied associate
used his knowledge to modify a standard
bearing assembly that was in stock and
saved the company 12 days of downtime,
plus significant transportation and labor
costs, totaling more than $2 million. In
another case, Applied saw that a large
manufacturing operation was investing a lot
of time and expense in relubricating bearings
on a cooling conveyor. Our recommendation
to replace those bearings with composite
Applied associates are constantly looking for ways to create value for the
organization. When we create value in our jobs, we create value for our
customers, our suppliers, our shareholders and ourselves. We have been
successful offering our customers energy-efficiency programs that allow us
to analyze their business operations and make product recommendations
that will reduce their energy usage and minimize energy costs. New,
high-efficiency motors, drives and power transmission components can
significantly reduce energy consumption. Applied account managers are
trained to be experts in evaluating plant operations and recommending
solutions that save our customers money or improve productivity.
In addition, Applied offers world-class supply chain management systems
bearings that require no relubrication saved
that can support our customers with on-site and off-site inventory. We
the company $155,000 per year at one
have replacement part strategies that advise customers on when it is more
plant and is being implemented at two
cost-effective to replace a part than to repair a part, based on new energy-
additional plants.
efficiency improvements and expected product life.
Many customers have goals to reduce
Downtime can cost an organization thousands of dollars per minute, and
costs within their organization and our DVA
Applied is proactive about helping customers manage their service needs
programs are Providing Solutions and
to reduce downtime. We also understand the needs of many businesses
Creating Value.
Applied Industrial Technologies, Inc. and Subsidiaries 7
Our Focus on Growth & Acquisition
Building On Our Strengths
Applied will continue to focus on its core businesses in
The fluid power business continues to be a strong part of our
North America as our best opportunities for growth. We
growth strategy as we pursue acquisitions for geographic
have core competencies in providing sales and service
penetration, as well as new suppliers for an expanded line
support for a wide range of industrial supplies that include
of products and services. Our technical expertise in system
bearings, power transmission components, fluid power
design and integration has become a solid opportunity to
components and systems, industrial rubber products, linear
grow the business with a stronger presence in hydraulic,
components, tools, safety products, general maintenance
pneumatic, and fluid filtration applications.
and a variety of mill supply products.
With the planned acquisition of Fluid Power Resource,
Our government sales have experienced double-digit
LLC (fiscal 2009), Applied will have 67 sales and service
growth the past few years and are forecast to continue at
facilities across North America dedicated to providing
this rate. This business has allowed us to expand into new
fluid power products and services. Applied’s strong track
federal markets with our core products, while also allowing
record of fluid power sales, aided by acquisitions and
us to introduce new products to a very broad and diverse
effective management, will result in this product category
market of state and local government facilities.
representing approximately 25% of total net sales in
Federal and defense spending is expected to be strong for
fiscal 2009.
the next several years. The federal government has many
Our steady growth in this market will allow us to expand our
buildings and vehicles that are targeted for refurbishment,
services to include additional capabilities for fluid power
while the Air Force has a “Refresh and Reset” program that
system integration, manifold design, machining, assembly,
will provide growth opportunities.
and repair shop services in many locations, giving us unique
advantages for Providing Solutions and Creating Value.
Applied is an authorized GSA contract holder and offers
procurement and logistic services that meet the needs
of many government contract purchase agreements. We
have added government industry managers in many of our
regional offices to increase our proactive sales efforts for
this market. We are also training our service center staff to
be supportive of the unique requirements for government
business opportunities. Our technical service expertise
is a key advantage and differentiator for our business in
this market.
New products introduced as a result of government
business opportunities include:
(cid:115)(cid:0)(cid:0)(cid:48)(cid:79)(cid:87)(cid:69)(cid:82)(cid:38)(cid:76)(cid:65)(cid:82)(cid:69)® –
tough, durable LED flares used by
police, fire and EMS agencies
(cid:115)(cid:0)(cid:0)(cid:34)(cid:73)(cid:79)(cid:50)(cid:69)(cid:77)(cid:0)(cid:18)(cid:16)(cid:16)(cid:16)(cid:0)(cid:110)(cid:0)
biodegradable cleaner that
neutralizes chemical spills
(cid:115)(cid:0)(cid:0)(cid:45)(cid:65)(cid:75)(cid:73)(cid:84)(cid:65)(cid:0)(cid:83)(cid:80)(cid:65)(cid:82)(cid:75)(cid:76)(cid:69)(cid:83)(cid:83)(cid:0)(cid:68)(cid:82)(cid:73)(cid:76)(cid:76)(cid:0)(cid:110)(cid:0)
for hazardous environments
(cid:115)(cid:0)(cid:0)(cid:37)(cid:77)(cid:69)(cid:82)(cid:71)(cid:69)(cid:78)(cid:67)(cid:89)(cid:0)(cid:48)(cid:82)(cid:69)(cid:80)(cid:65)(cid:82)(cid:69)(cid:68)(cid:78)(cid:69)(cid:83)(cid:83)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)
(cid:115)(cid:0)(cid:52)(cid:79)(cid:79)(cid:76)(cid:83)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:52)(cid:79)(cid:79)(cid:76)(cid:75)(cid:73)(cid:84)(cid:83)
PowerFlare®
8 Applied Industrial Technologies, Inc. and Subsidiaries
Our Focus on Shareholder Value
Superior 5-Year Growth
A $100 investment in Applied shares at the close of business on June 30, 2003 was worth $282 on June 30, 2008. This
cumulative total return is significantly better than industry average returns for the same period and is a result of our focus on
the four cornerstones of our strategy:
(cid:0)
(cid:115)(cid:0)(cid:48)(cid:82)(cid:79)(cid:108)(cid:84)(cid:65)(cid:66)(cid:76)(cid:69)(cid:0)(cid:51)(cid:65)(cid:76)(cid:69)(cid:83)(cid:0)(cid:39)(cid:82)(cid:79)(cid:87)(cid:84)(cid:72)(cid:0)(cid:0)
(cid:115)(cid:0)(cid:45)(cid:65)(cid:82)(cid:71)(cid:73)(cid:78)(cid:0)(cid:37)(cid:78)(cid:72)(cid:65)(cid:78)(cid:67)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:0)
(cid:0)(cid:115)(cid:0)(cid:35)(cid:79)(cid:83)(cid:84)(cid:0)(cid:35)(cid:79)(cid:78)(cid:84)(cid:82)(cid:79)(cid:76)(cid:0)(cid:0)
(cid:115)(cid:0)(cid:33)(cid:83)(cid:83)(cid:69)(cid:84)(cid:0)(cid:45)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)
We continue to manage the business
for growth and a profitable return on
investments. Our strategy of focusing
on value-based solutions for our
customers is the foundation of our
business. We manage our investment
opportunities to yield increased sales
and productivity improvements that
boost shareholder value. We have
significantly outperformed our peers
over this 5-year period.
We continue to return profit to
our shareholders
through our
dividends, and we repurchase shares
when appropriate to support our
investments. Officers, directors and
associates all share in the risks and
rewards of our business. It is our
commitment to continue our focus
on shareholder value.
COMPAPP RISON OF FIVE-YEAR CUMULATAA IVE TOTATT L RETURN
Applied Industrial TeTT chnologies, Inc., Standard & Poor’s 500, and Peer Group
(Perfoff rmance Results from 7/01/03 through 6/30/08)
Applied Industrial Technologies, Inc.
Standard & Poor’s 500
Peer Group
$238.24
$273.36
$194.10
$145.66
$145.38
$139.45
$117.07
$122.25
$130.34
$338.11
$230.35
$154.27
$282.75
$203.61
$131.35
$400.00
$350.00
$300.00
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00
2003
2004
2005
2006
2007
2008
Assumes $100 invested at the close of trading 6/30/03 in Applied Industrial TeTT chnologies, Inc. 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 markket capitalization.
Peer group companies selected on a line-of-business basis include: Airgas, Inc., Genuine Parts Company, W.W. Grainger,rr Inc.,
Kaman Corporation, Lawson Products, Inc., MSC Industrial Direct Co., Inc., The Timken Company, and WEESCO International, Inc.
Applied Industrial Technologies, Inc.
Standard & Poor’s 500
Peer Group
Source: Value Line, Inc.
2005
2004
2003
2008
$ 100.00 $ 145.66 $ 238.24 $ 273.36 $ 338.11 $ 282.75
131.35
203.61
117.07
139.45
100.00
100.00
122.25
145.38
130.34
194.10
154.27
230.35
2006
2007
Applied Industrial Technologies, Inc. and Subsidiaries 9
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
With more than 4,800 associates across North America, Applied
Industrial Technologies (“Applied,” the “Company,” “We,” “Us”
or “Our”) is an industrial distributor that offers parts critical to the
operations of MRO and OEM customers in a wide range of industries.
In addition, Applied provides engineering, design and systems
integration for industrial and fluid power applications, as well as
customized fluid power shop, mechanical and fabricated rubber
services. We have a long tradition of growth dating back to 1923, the
year our business was founded in Cleveland, Ohio. During fiscal 2008,
business was conducted in the United States, Canada, Mexico and
Puerto Rico from 459 facilities.
Applied is an authorized distributor for more than 2,000 manufacturers
and offers access to approximately 3 million stock keeping units
(“SKUs”). A large portion of our business is selling replacement
parts to manufacturers for repair or maintenance of machinery and
equipment. When reviewing the discussion and analysis set forth
below, please note that the majority of SKUs we sell in any given year
were not sold in the prior year, resulting in the inability to quantify
commonly used comparative metrics such as changes in product mix
and volume.
Our fiscal 2008 sales hit a record $2.1 billion dollars, an increase of
3.7% compared to the prior year. Our operating income and earnings
per share increased 13.2% and 13.5%, 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 held steady at 27.2%. In addition, the rate of growth in
selling, distribution and administrative expense for fiscal 2008 was
held below the rate of increase in sales, coming in at less than 1.0%.
Our consolidated balance sheet remains strong as shown by the
increase in shareholders’ equity from the June 30, 2007 level.
Management of our working capital and strong earnings resulted in
cash provided by operations of $110.3 million, more than 50% higher
than fiscal 2007’s $70.9 million. Working capital increased $43.7
million from June 30, 2007 to $409.2 million at June 30, 2008.
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 business
environment changes.
Both the PMI and the MCU signaled a weakening economy in fiscal
2008. Our sales activity traditionally lags these key indicators by
approximately 6 months. Consistent with these indicators, we saw
greater sales increase percentages in the first half of fiscal 2008
versus the second half.
Industrial production in the United States slowed in this fiscal year and
there continues to be projected softness in the industrial economy in
fiscal 2009 as reflected in the PMI and MCU indices.
Exclusive of the impact of any acquisitions subsequent to June 30,
2008, we are forecasting our sales in fiscal 2009 to increase in the
2.0% to 7.0% range and our gross profit percentage to be consistent
with fiscal 2008 levels. In fiscal 2009, the gross profit margin will
be highly dependent on our ability to manage and recover supplier
price increases. We anticipate that fiscal 2009 supplier purchasing
incentives will be consistent with the fiscal 2008 levels. While
10 Applied Industrial Technologies, Inc. and Subsidiaries
we consider these purchasing incentives to be compensation for
various sales, marketing and logistics services performed, when
they are recognized in our statements of consolidated income, 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 expense (“SD&A”)
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, 2008 vs. 2007
Net sales in fiscal 2008 were $2.1 billion or 3.7% above the prior year
sales. This increase was due to improvements in our service center
based distribution sales of 3.3% and in our fluid power businesses’
sales of 7.7%. The increase in service center based distribution sales
was primarily driven by an increase in national contract business and
the recovery of supplier price increases. Within the service center
based distribution segment, the impact of the strengthening Canadian
currency was largely offset by a 9.3% volume decline in our Canadian
market. The increase in sales at our fluid power businesses was
approximately 45% attributable to favorable currency fluctuations
at the Canadian locations and approximately 25% related to the
VYCMEX S.A. de C.V. (“VYCMEX”) acquisition. Also contributing to
these increases was an additional sales day in fiscal 2008 compared
to fiscal 2007.
The sales product mix for fiscal 2008 was 80.0% industrial products
and 20.0% fluid power products compared to 80.2% industrial and
19.8% fluid power in the prior year.
At June 30, 2008, we had a total of 459 operating facilities in the
U.S., Canada and Mexico versus 445 at June 30, 2007. The increase
in facilities is largely attributed to 5 facilities from the acquisition of
VYCMEX midway through the fiscal year and 10 facilities from the
acquisition of Suministros Industriales Enol, S.A. de C.V. (“Enol”) at
the end of fiscal 2008.
Our gross profit margin maintained the 27.2% achieved in fiscal 2007.
Slightly higher levels of supplier purchasing incentives were largely
offset by continued pressures in gross profit margin with national
contracts. LIFO inventory layer liquidations resulted in a $0.6 million
positive impact during fiscal 2008.
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 0.8% during fiscal 2008 compared to the prior year,
but decreased as a percent of sales to 19.9% from 20.5% in 2007.
Approximately one third of the fiscal 2008 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 13.2% to $152.8 million during fiscal
2008 from $135.0 million during 2007. As a percent of sales, operating
income increased to 7.3% in fiscal 2008 from 6.7% in 2007. The $17.8
million increase in operating income during fiscal 2008 primarily
reflects the impact of higher sales at a stable gross profit percentage
with only modest increases in SD&A expenses.
Interest expense, net decreased by 62.6% or $1.5 million during fiscal
2008 compared with the prior year, primarily due to repayment of
$50.0 million of long-term debt in December 2007.
Other expense (income), net, represents certain non-operating
items of income and expense. This line decreased $1.4 million due
primarily to the loss in market value in investments held by deferred
compensation trusts.
Income tax expense as a percentage of income before taxes was
37.1% for fiscal 2008 and 35.7% for 2007. The increase in the
effective tax rate was due to higher effective state tax rates in the
current year and U.S. federal tax law changes which have eliminated
the deductibility of certain expenses. Exclusive of the impact of any
acquisitions subsequent to June 30, 2008, we expect our overall tax
rate for fiscal 2009 to rise to around 37.5%, primarily due to the full
year impact of the items noted above.
As a result of the factors addressed above, net income for fiscal 2008
increased $9.4 million or 11.0% from the prior year. Net income per
share increased 13.5% to $2.19 in fiscal 2008 from $1.93 in 2007.
During fiscal 2008 and 2007, we repurchased 1.1 million and 1.4 million
shares, respectively, which resulted in fewer shares outstanding for
the year compared to the prior year. The buybacks in fiscal 2008
contributed approximately $0.03 cents per share.
The number of Company associates was 4,831 at June 30, 2008 and
4,649 at June 30, 2007.
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 improvement in
our service center based distribution sales and the impact of our
acquisitions which accounted for approximately one quarter of the
increase in sales. The increase in service center based distribution
sales was driven by sales mix, volume, the recovery of supplier
price increases, sales generated by acquired businesses and the
strengthening of the Canadian currency. 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.
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 reflected higher levels of supplier purchasing
incentives. LIFO inventory layer liquidations resulted in a $1.6 million
positive impact during fiscal 2006.
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
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 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 on the growth 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 expense (income), net, 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 to higher levels of non-taxable interest
income in fiscal year 2007.
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, 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.
in
investment
income, controlling
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations depend primarily upon generating
operating
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 $110.3 million of cash from operating activities during
fiscal 2008, $70.9 million during 2007, and $69.9 million during
2006. Cash provided from operations in fiscal 2008 benefited from
our strong operating results. The operating cash flow increase was
largely generated by a lower receivables balance, timing of certain
supplier payments and improved net income. 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 how we fund our
contributions to the Applied Industrial Technologies Retirement
Savings Plan (section 401(k) plan). We 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 $26.8 million during fiscal
2008, $10.2 million during 2007 and $37.9 million during 2006. Cash
was primarily used for acquisitions in fiscal 2008 and fiscal 2006,
whereas it was primarily used for capital expenditures in fiscal 2007.
In fiscal 2008, we acquired two Mexican distributors for $28.7 million,
of which $22.1 million was paid at closing, net of cash acquired. In
fiscal 2006, we acquired two U.S. distributors for $28.6 million, of
which $27.7 million was paid at closing, net of cash acquired. Capital
expenditures consisted primarily of information technology equipment,
and buildings and improvements.
Applied Industrial Technologies, Inc. and Subsidiaries 11
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Exclusive of the impact of any acquisitions subsequent to June 30,
2008, for fiscal 2009, our capital expenditures are expected to be
in the $10.0 million to $12.0 million range, consisting primarily of
additional information system technology equipment and infrastructure
investments. Depreciation for fiscal 2009 is expected to be in the
range of $12.5 million to $13.5 million.
Cash used in financing activities was $103.5 million during fiscal
2008, $48.4 million during 2007 and $53.8 million during 2006.
The increase in cash used in financing activities is primarily due
to repayment of $50.0 million long-term debt in December 2007.
We increased our quarterly dividend to $0.15 per share in fiscal
2008 which accounted for approximately $4.8 million of this
increase. The amount of the dividend paid is based on judgment,
financial performance and payout guidelines consistent with other
industrial companies.
Comparing fiscal 2007 and fiscal 2006, we repurchased fewer shares,
accounting for a reduction of $20.8 million of cash used. Partially
offsetting this was $12.5 million in lower excess tax benefits from
share-based compensation due to fewer 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 in fiscal 2007
versus fiscal 2006. Over the last three fiscal years, we repurchased 1.1
million, 1.4 million and 2.4 million shares of the Company’s common
stock at an average price per share of $29.02, $24.26 and $23.05,
respectively.
The following table shows the Company’s approximate obligations and
commitments to make future payments under contractual obligations
as of June 30, 2008 (in thousands):
Total
$ 68,100
Period Less
Than 1 yr.
$ 20,700
Period
1-3 yrs.
$ 24,300
Period
4-5 yrs.
$ 13,000
Period
over 5 yrs.
$ 10,100
5,000
2,000
3,000
42,600
25,000
3,200
8,300
8,700
22,400
25,000
$ 140,700
$ 25,900
$ 60,600
$ 21,700
$ 32,500
Operating leases
Interest payments
on debt
Planned funding
of postretirement
obligations
Long-term debt
Total Contractual
Cash Obligations
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 table
above excludes the liability for unrecognized income tax benefits as
the Company is unable to make a reasonable estimate regarding the
timing of cash settlements with the respective taxing authorities.
At June 30, 2008, the Company has a gross liability for unrecognized
income tax benefits of $2,498, including interest and penalties
of $494.
The Board of Directors has authorized the repurchase of shares
of the Company’s stock. These purchases may be made in open
market and negotiated transactions, from time to time, depending
upon market conditions. At June 30, 2008, we had authorization to
purchase an additional 1,065,100 shares.
12 Applied Industrial Technologies, Inc. and Subsidiaries
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 credit facilities
available for borrowings as required.
See Note 5 to the consolidated financial statements for details
regarding the outstanding debt amounts as of June 30, 2008 and
2007. The average borrowings totaled $47.1 million during fiscal
2008 and $75.0 million during fiscal 2007. In fiscal 2008, we paid off
$50.0 million of debt that matured in December 2007. The Company’s
remaining 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
8.4%, 6.8% and 6.7% in fiscal 2008, 2007 and 2006, respectively.
The increase in the weighted average interest rate reflects the impact
of the strengthening of the Canadian dollar. We terminated certain
interest rate swap agreements for favorable settlements in prior
years. The settlement gains were amortized as a reduction in interest
expense of $0.8 million per year through December 2007.
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, 2008,
we had no variable rate debt or interest rate swaps outstanding.
See Note 6 to the consolidated financial statements for additional
discussion on our derivative activities.
The Company’s working capital at June 30, 2008 was $409.2 million
compared to $365.5 million at June 30, 2007. The current ratio was
3.1 at June 30, 2008 and 2.6 at June 30, 2007. The increase in
working capital at June 30, 2008 was primarily due to strong operating
cash flows.
The Company has a five-year committed revolving credit agreement
which 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, 2008. Unused lines under this facility, net
of outstanding letters of credit totaling $144.9 million, are available to
fund future acquisitions or other capital and operating requirements.
We also have an uncommitted long-term financing shelf facility
which 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, 2008.
The aggregate annual maturity of outstanding debt is $25.0 million
due 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.
SUBSEQUENT EVENT
On July 14, 2008, Applied entered into an agreement to acquire
certain assets of Fluid Power Resource, LLC, including seven fluid
power businesses for cash consideration of $169.0 million. The
Company intends to fund the acquisition by drawing down its existing
revolving credit facility and from its available cash. These businesses
employ 455 people and for the year ended December 31, 2007 had
sales of approximately $244.0 million. Results of operations acquired
will be included in the Company’s results of operations from the date
of closing.
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, 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 $150.1 million as reflected on our consolidated balance sheet at
June 30, 2008. 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.
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.
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 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 covering 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.
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.
Pension and Other Postemployment Benefit Plans
The measurement of liabilities related to pension plans and other post-
employment 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.
Changes to these assumptions could result in a material change to the
Company’s pension obligation causing a related increase or decrease
in reported net operating results in the period of change in the estimate.
A 1% decrease in the discount rate would result in an additional liability
of $3.3 million and additional expense of $0.3 million. A 1% increase
in the discount rate would result in a decrease in the liability of $2.9
million and a decrease in expense of $0.3 million. A 1% decrease in
the salary scale would result in a decrease in the liability and expense
of $1.3 million and $0.3 million, respectively. A 1% increase in the
salary scale would increase the liability and expense by $1.5 million
and $0.3 million, respectively. A 1% change in the return on assets is
not material since most of the plans are non-qualified and unfunded.
In fiscal 2007, we adopted 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 in fiscal 2007, 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.
Applied Industrial Technologies, Inc. and Subsidiaries 13
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued
Income Taxes
As of June 30, 2008, the Company had recognized $35.1 million of net
deferred tax assets. This figure includes a valuation allowance of $1.0
million recorded as a result of recent changes in U.S. federal income
tax regulations which resulted in limitations to the deductibility of
certain expenses. Management believes that sufficient income will be
earned in the future to realize its other 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.
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.
In accordance with FIN 48, the Company recognized an immaterial
cumulative effect adjustment decreasing its liability for unrecognized
tax benefits, interest, and penalties and increasing the July 1, 2007
balance of retained earnings. See Note 7 for more information on
income taxes.
NEW ACCOUNTING PRONOUNCEMENTS
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 in the United States, and expands
disclosures about fair value measurements. The provisions of SFAS
157 apply under other accounting pronouncements that require or
permit fair value measurements; it does not expand the use of fair
value in any new circumstances. The provisions of this statement are
to be applied prospectively as of the beginning of the fiscal year in
which this statement is initially applied, with any transition adjustment
recognized as a cumulative-effect adjustment to the opening balance
of retained earnings. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. At its February 6, 2008 meeting, the FASB
agreed to defer for one year the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually). The impact of SFAS 157 on
our consolidated financial statements is not expected to be material.
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 that are not currently
required to be measured at fair value. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The impact of SFAS 159 on
our consolidated financial statements is not expected to be material.
In December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS 141(R)”), which replaces SFAS 141. SFAS
141(R) requires most assets acquired and liabilities assumed in a
business combination, contingent consideration, and certain acquired
contingencies to be measured at their fair values as of the date of
acquisition. SFAS 141(R) also requires that acquisition related costs
and restructuring costs be recognized separately from the business
combination. SFAS 141(R) is effective for fiscal years beginning after
December 15, 2008 and, therefore, will be effective for the Company
for business combinations entered into after July 1, 2009.
14 Applied Industrial Technologies, Inc. and Subsidiaries
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 2008, we acquired two Mexican based distributors of industrial
and fluid power products for a combined purchase price of $28.7
million. 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.
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.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES
LITIGATION REFORM ACT
including Management’s
This Annual Report to Shareholders,
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
“guidance,” “expect,” “expectation,” “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 those statements should
not be regarded as a representation by the Company or any other
person that the results expressed in the statements will be achieved.
In addition, the Company assumes no obligation publicly to update
or revise any forward-looking statements, whether because of new
information or events, or otherwise, except as may be required by law.
Important risk factors include, but are not limited to, the following: risks
relating to the operations levels of our customers and the economic
factors that affect them; 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 within the Company; the volatility of
our stock price and the resulting impact on our consolidated 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 throughout our “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, 2008.
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 and foreign currency
exchange risks. The Company is primarily affected by market risk
exposure through the effect of changes in exchange rates and changes
in interest rates.
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. For the year ended June 30,
2008, a uniform 10% strengthening of the U.S. dollar relative to
foreign currencies that affect the Company would have resulted
in a $1.3 million decrease in net income. A uniform 10% weakening
of the U.S. dollar would have resulted in a $0.7 million increase in
net income.
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, 2008. The Company’s
outstanding debt is currently at fixed interest rates at June 30, 2008
and scheduled for repayment in November 2010.
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 Expense (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.
2008
$ 2,089,456
1,520,173
569,283
416,459
152,824
4,939
(4,057)
227
1,109
151,715
56,259
$ 95,456
$ 2.23
$ 2.19
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
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 $6,119 and $6,134
Inventories
Other current assets
Total current assets
Property – at cost
Land
Buildings
Equipment
Less accumulated depreciation
Property – net
Goodwill
Other intangibles
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 (11,923 and 11,097 shares)
Accumulated other comprehensive income (loss)
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See notes to consolidated financial statements.
2008
2007
$ 101,830
245,119
210,723
48,525
606,197
10,639
71,142
108,162
189,943
124,946
64,997
64,685
19,164
43,728
$ 798,771
$ 109,822
56,172
31,017
197,011
25,000
37,746
36,939
296,696
10,000
133,078
543,692
(190,944)
6,249
502,075
$ 798,771
$ 119,665
248,698
199,886
32,284
600,533
10,850
69,938
106,006
186,794
119,006
67,788
57,550
8,712
42,786
$ 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
Applied Industrial Technologies, Inc. and Subsidiaries 17
2008
2007
2006
$ 95,456
$ 86,022
$ 72,299
12,776
(5,809)
3,376
1,663
2,595
(1,214)
(395)
812
8,306
(1,484)
(13,950)
11,881
(3,710)
110,303
(8,410)
1,372
(22,105)
2,304
(26,839)
(50,000)
(33,224)
(25,728)
3,761
1,664
(103,527)
2,228
(17,835)
119,665
$ 101,830
13,489
(6,424)
2,927
1,045
1,462
(334)
(791)
13,128
1,000
2,978
732
1,953
(294)
(791)
1,921
8,937
(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
(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
$ 60,049
$ 4,763
$ 42,857
$ 5,488
$ 31,337
$ 5,290
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
Year Ended June 30,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation
Deferred income taxes
Share-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
Other operating liabilities
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 $2,355 and $968 in 2008 and 2006, respectively
Other
Net Cash used in Investing Activities
Cash Flows from Financing Activities
Long-term debt repayment
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
(Decrease) increase 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, 2008, 2007 and 2006
Shares of
Common Stock
Outstanding
Common
Stock
Additional
Paid-in
Capital
Income
Retained
for Use in
the Business
Unearned
Restricted
Accumulated
Other
Treasury
Total
Shares - Common Stock Comprehensive Shareholders’
at Cost Compensation (Loss) Income
Equity
45,002
$ 10,000 $ 103,240
$ 354,521 $ (72,660)
$ (825)
$ (989)
72,299
$ 393,287
72,299
Balance at July 1, 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
Net income
Unrealized gain on cash flow hedge, net of income
tax of $414
Unrealized gain on investment securities available for
sale, net of income tax of $50
Pension and postemployment adjustment, net of income
tax of $293
Foreign currency translation adjustment, net of income
tax of $912
Total comprehensive income
Cash dividends – $.60 per share
Purchases of common stock for treasury
Treasury shares issued for:
Exercise of stock options
Deferred compensation plans
Compensation expense – stock options and
appreciation rights
(2,379)
348
1,088
21
(13)
4,892
11,279
269
2,658
320
(825)
313
44,067
10,000
122,146
(1,401)
5
366
78
1
47
796
1,613
2,494
433
40
43,116
10,000
127,569
598
72
542
4,573
(17,973)
(54,778)
3,583
(6,945)
193
(360)
(130,967)
408,847
86,022
825
0
4,796
(93)
110
(301)
2,703
(20,970)
(33,988)
65
4,157
1,046
(116)
(159,803)
473,899
95,456
(7,897)
0
(682)
645
82
478
5,726
(1,145)
315
26
(25,728)
(33,224)
2,330
402
65
(649)
1,800
410
2,999
377
(77)
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
95,456
645
82
478
5,726
102,387
(25,728)
(33,224)
4,130
812
2,999
377
(661)
Amortization of restricted common stock compensation
Other
(22)
Balance at June 30, 2008
42,290
$ 10,000 $ 133,078
$ 543,692 $ (190,944)
$ 0
$ 6,249
$ 502,075
See notes to consolidated financial statements.
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 and Mexican subsidiaries are included
in the consolidated financial statements for the 12 months ended May 31. Prior to June 30, 2006, the Company was considered the primary beneficiary for
iSource Performance Materials, LLC (iSource), a certified minority-owned distributor, and included their accounts in the consolidated financial statements.
Effective June 30, 2006, the Company ended its venture with iSource and stopped including its operating results and balances 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 exchange rates. Translation
gains and losses are included as components of accumulated other comprehensive income (loss) 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.
Marketable Securities
The primary marketable security investments of the Company, included in other assets, are classified as trading securities and reported at fair value,
based on quoted market prices. These marketable securities (money market and mutual funds) totaled $10,527 and $10,925 at June 30, 2008 and 2007,
respectively. Unrealized gains and losses are recorded in other expense (income), net in the statements of consolidated income and reflect changes in the
fair value of the investment during the period.
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, 2008, 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
20 Applied Industrial Technologies, Inc. and Subsidiaries
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 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 generally 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.” Accrued incentives expected
to be settled as a credit against purchases are reported on the consolidated balance sheet as an offset to amounts due to the related supplier.
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, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and
equipment is depreciated over three to eight years. The carrying values of property and equipment are reviewed for impairment when events or changes in
circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows. 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 customer relationships, exclusive supplier distribution agreements, trade names, and
non-competition agreements apart from goodwill. Customer relationship intangibles are amortized using the sum-of-the years digits method over estimated
useful lives consistent with assumptions used in the determination of their value. Amortization of all other intangible assets is computed using the straight-
line method over the estimated period of benefit. Amortization of intangible assets 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, 2008 was 12 years for customer relationships, 11 years for exclusive supplier distribution agreements, 11 years for trade names, and 8 years for
non-competition agreements.
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 covering workers’ compensation, business, automobile,
general product liability and other claims. The Company accrues estimated losses including those incurred but not reported 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.
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 charges 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. Internal delivery costs in selling, distribution and administrative expenses were approximately $17,000,
$16,000 and $15,500 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.
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.
Effective July 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax return. Income tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods.
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
2008
$ 95,456
42,797
755
43,552
$ 2.23
$ 2.19
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
Options to acquire and stock appreciation rights relating to 255, 460, and 301 shares of common stock were outstanding at June 30, 2008, 2007 and
2006, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.
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 Income (Loss)
Accumulated other comprehensive income (loss) is comprised of the following:
June 30,
Unrealized loss on cash flow hedge, net of taxes
Unrealized gain on investment securities available for sale, net of taxes
Foreign currency translation, net of taxes
Pension liability, net of taxes
Total accumulated other comprehensive income (loss)
2008
$ (19)
338
15,966
(10,036)
$ 6,249
2007
$ (664)
256
10,240
(10,514)
$ (682)
New Accounting Pronouncements
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 in the United States, and expands disclosures about fair value measurements. The
provisions of SFAS 157 apply under other accounting pronouncements that require or permit fair value measurements; it does not expand the use of fair
value in any new circumstances. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement
is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. At its February 6, 2008 meeting, the FASB agreed to defer for one year the effective date of
SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually). The impact of SFAS 157 on the Company’s consolidated financial statements is not expected to be material.
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 that are not currently required to be measured at fair value.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. The impact of SFAS 159 on the Company’s consolidated financial statements is not
expected to be material.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS 141. SFAS 141(R) requires most
assets acquired and liabilities assumed in a business combination, contingent consideration, and certain acquired contingencies to be measured at their
fair values as of the date of acquisition. SFAS 141(R) also requires that acquisition related costs and restructuring costs be recognized separately from the
business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and, therefore, will be effective for the Company for
business combinations entered into after July 1, 2009.
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
2008, the Company acquired two Mexican based distributors for a combined purchase price of $28,703. VYCMEX S.A. de C.V., a distributor of fluid power
products, was acquired in December 2007 and Suministros Industriales Enol, S.A. de C.V., an industrial products distributor, was acquired in May 2008. The
purchase price allocations are considered preliminary as reflected in the financial statements; and will be finalized as we obtain more information regarding
asset valuations. 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.
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 based on the Company’s consolidation policy. 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
2008
$ 305,377
55,441
360,818
150,095
$ 210,723
2007
$ 294,897
46,333
341,230
141,344
$ 199,886
Reductions in certain U.S. inventories during fiscal 2008 and 2006 resulted in the liquidation of LIFO inventory quantities carried at lower costs prevailing
in prior years. The effect of the liquidations increased gross profit by $626 and $1,647, net income by $383 and $1,013, and diluted net income per share by
$0.01 and $0.02, respectively. There were no LIFO layer liquidations during fiscal 2007.
NOTE 4: GOODWILL AND OTHER INTANGIBLES
The changes in the carrying amount of goodwill for the years ended June 30, 2008 and 2007, are as follows:
Balance at July 1, 2006
Other, primarily currency translation
Balance at June 30, 2007
Goodwill acquired during the year
Other, primarily currency translation
Balance at June 30, 2008
Service Center Based
Distribution Segment
$ 56,963
341
57,304
3,486
657
$ 61,447
Fluid Power
Businesses Segment
$ 259
(13)
246
2,692
300
$ 3,238
Total
$ 57,222
328
57,550
6,178
957
$ 64,685
The Company’s other intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of
the following:
June 30, 2008
Customer relationships
Exclusive supplier distribution agreements
Trade names
Non-competition agreements
June 30, 2007
Customer relationships
Exclusive supplier distribution agreements
Trade names
Non-competition agreements
Amount (a)
$ 11,824
4,731
4,240
2,441
$ 23,236
Amount (a)
$ 8,347
1,071
924
657
$ 10,999
(a) Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
Accumulated
Amortization
$ 2,716
575
278
503
$ 4,072
Accumulated
Amortization
$ 1,477
311
144
355
$ 2,287
Net
Book Value
$ 9,108
4,156
3,962
1,938
$ 19,164
Net
Book Value
$ 6,870
760
780
302
$ 8,712
Applied Industrial Technologies, Inc. and Subsidiaries 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
During fiscal 2008, the Company recorded intangible assets of $3,210 for customer relationships, $3,440 for exclusive supplier distribution agreements,
$3,200 for trade names and $1,740 for non-competition agreements in connection with the acquisition of two Mexican distributors of industrial and fluid
power products (see Note 2).
During fiscal 2006, the Company recorded intangible assets of $4,890 for customer relationships, $290 for exclusive supplier distribution agreements, $750
for trade names and $200 for non-competition agreements in connection with the acquisition of two U.S. distributors of industrial and fluid power products
(see Note 2).
Amortization expense for other intangible assets totaled $1,663, $1,045, and $732 in fiscal 2008, 2007 and 2006, respectively. Amortization of other
intangible assets at June 30, 2008 is expected to be $3,100 for 2009, $2,800 for 2010, $2,600 for 2011, $2,300 for 2012 and $2,000 for 2013.
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, paid off in December 2007
Total long-term debt
Less: Payable within one year
Total long-term debt less current portion
2008
$ 25,000
25,000
$ 25,000
2007
$ 25,000
50,395
75,395
50,395
$ 25,000
Based upon current market rates for debt of similar maturities, the Company’s long-term debt had an estimated fair value of $26,336 and $76,995 as of
June 30, 2008 and 2007, respectively.
The Company has a revolving credit facility with a group of banks expiring in June 2012. 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 of $5,105 to secure certain insurance obligations, totaled $144,895 at June 30, 2008 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, 2008.
The Company has an 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 agreement expires in March 2010. There were no
borrowings at June 30, 2008.
The revolving credit facility, private placement debt and uncommitted shelf facility contain restrictive covenants regarding liquidity, tangible net worth,
financial ratios, and other covenants. At June 30, 2008, 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, 2008, 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 currency exchange rates and interest 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.
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 $10,479 and $9,372 at June 30, 2008 and 2007, respectively. These liabilities were recorded in other liabilities
and the related unrealized losses are included in accumulated other comprehensive income (loss), (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 $2,620 and $2,343 at June 30, 2008 and 2007, respectively. Changes in the fair value of this derivative instrument are recorded in the statements
of consolidated income as a component of other expense (income), net.
24 Applied Industrial Technologies, Inc. and Subsidiaries
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
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
2008
$ 136,179
15,536
$ 151,715
2007
$ 119,275
14,555
$ 133,830
2006
$ 100,462
12,637
$ 113,099
2008
2007
2006
$ 49,532
7,025
5,511
62,068
(5,028)
(346)
(435)
(5,809)
$ 56,259
$ 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
The exercise of non-qualified stock options and stock appreciation rights during fiscal 2008, 2007 and 2006 resulted in $3,140, $2,860 and $16,155,
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 2008 and 2007 resulted in $577 and $1,025, 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
Valuation allowance
Foreign income taxes
Deductible dividend
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
Expenses and reserves not currently deductible
Goodwill and other intangibles
Net operating loss carryforwards (expiring in years 2014 - 2021)
Other
Total deferred tax assets
Less: Valuation allowance
Deferred tax assets net of valuation allowance
Deferred tax liabilities:
Currency translation
Inventories
Depreciation and differences in property bases
Other
Total deferred tax liabilities
Net deferred tax assets
2008
35.0%
2.8
.7
(.9)
(.5)
37.1%
2007
35.0%
2.3
(.8)
(.5)
(.3)
35.7%
2006
35.0%
2.4
(.7)
(.6)
36.1%
2008
2007
$ 33,248
7,523
451
880
42,102
(1,019)
41,083
(4,024)
(1,813)
(124)
(52)
(6,013)
$ 35,070
$ 30,171
7,454
563
438
932
39,558
39,558
(3,113)
(4,061)
(1,471)
(8,645)
$ 30,913
Applied Industrial Technologies, Inc. and Subsidiaries 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
At June 30, 2008 and 2007, $9,288 and $7,710, respectively, of the net deferred tax assets were included in other current assets and $25,782 and
$19,597, respectively, were included in other assets in the accompanying consolidated balance sheets. Valuation allowances are provided against deferred
tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. Recent changes in U.S. tax regulations
resulted in limitations to the deductibility of certain expenses. Management believes it is not likely the Company will be able to utilize certain expenses and
has established a valuation allowance against them. The net deferred tax asset is the amount management believes is more likely than not of being realized.
The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future income levels.
No provision has been made for income taxes on undistributed earnings of non-U.S. subsidiaries of approximately $62.0 million at June 30, 2008, 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.
Unrecognized Income Tax Benefits
The Company and its subsidiaries file income tax returns in the U.S. federal, various state and local and foreign jurisdictions. Effective July 1, 2007, the
Company adopted FIN 48. As a result of adopting FIN 48, the Company reduced its liability by approximately $65 for “unrecognized tax benefits,” defined as
the aggregate tax effect of differences between tax return positions and the benefits recognized in the financial statements. In accordance with FIN 48, such
amount was accounted for as an increase to the beginning balance of retained earnings.
The following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year ended June 30, 2008:
Unrecognized tax benefits at July 1, 2007
Additions
Current year tax positions
Prior year tax positions
Expirations of statutes of limitations
Settlements
Unrecognized tax benefits at June 30, 2008
2008
$ 1,903
369
(31)
(216)
(21)
$ 2,004
Included in the balance of unrecognized tax benefits at June 30, 2008, are $1,124 of tax benefits that, if recognized, would affect the effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company accrued
$97 during the year for interest and penalties related to unrecognized benefits and, as of June 30, 2008 has recognized a liability for penalties and interest
of $494. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
The Company is subject to U.S. federal jurisdiction income tax examinations for the tax years 2005 through 2008. In addition, the Company is subject to
foreign, state and local income tax examinations for the tax years 2003 through 2008.
Effective with the adoption of FIN 48, the majority of the Company’s unrecognized tax benefits are classified as noncurrent liabilities since payment of
cash is not expected within one year. Prior to the adoption of FIN 48, the Company classified unrecognized tax benefits in current liabilities.
NOTE 8: SHAREHOLDERS’ EQUITY
Share-Based Incentive Plans
Following its approval by the Company’s shareholders in October 2007, the 2007 Long-Term Performance Plan (the “2007 Plan”) replaced the 1997 Long-
Term Performance Plan. The 2007 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 may determine to officers, other key associates and members of the Board of Directors. Grants are generally made by the two
committees at regularly scheduled meetings. The aggregate number of shares of common stock which may be awarded under the 2007 Plan is 2,000. Shares
available for future grants at June 30, 2008 were 1,963.
Stock Option and Stock 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.
SARs 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, 2008, 2007 and 2006 was $2,999, $2,494 and
$2,658, 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 share-based awards requires management to select a fair value model and make certain estimates and assumptions.
26 Applied Industrial Technologies, Inc. and Subsidiaries
The weighted average assumptions used for SARs and stock option grants issued in fiscal 2008, 2007 and 2006 are:
Expected life, in years
Risk free interest rate
Dividend yield
Volatility
2008
5.3
4.4%
2.2%
45.9%
2007
5.1
4.8%
2.2%
46.7%
2006
7.2
4.3%
1.4%
42.3%
The expected life is based upon historical exercise experience of the officers, other key associates and members of the Board of Directors currently
awarded share-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 SARs and stock option exercises. SARs are redeemable solely
in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. A
summary of stock option and SARs activity is presented below:
(Share amounts in thousands)
2008
Outstanding, beginning of year
Granted
Exercised
Outstanding, end of year
Exercisable at end of year
Weighted average fair value of SARs and stock options granted during year
2007
Outstanding, beginning of year
Granted
Exercised
Outstanding, end of year
Exercisable at end of year
Weighted average fair value of SARs and stock 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 stock options granted during year
Weighted Average
Exercise Price
Shares
2,384
263
(452)
2,195
1,596
2,486
319
(421)
2,384
1,533
4,302
306
(2,103)
(19)
2,486
1,381
$ 13.15
25.32
10.43
$ 15.17
$ 12.61
$ 9.79
$ 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
The weighted average remaining contractual terms for SARs/stock options outstanding and exercisable at June 30, 2008 were 5.6 and 4.7 years,
respectively. The aggregate intrinsic values of SARs/stock options outstanding and exercisable at June 30, 2008 were $20,107 and $18,528, respectively.
The aggregate intrinsic value of the SARs/stock options exercised during fiscal 2008, 2007 and 2006 was $9,356, $7,887 and $41,966, respectively.
A summary of the status of the Company’s nonvested stock options and SARs at June 30, 2008, all of which are expected to vest is presented below:
(Share amounts in thousands)
2008
Nonvested, beginning of year
Granted
Vested
Nonvested, end of year
Weighted Average
Grant-Date
Fair Value
$ 6.77
9.79
6.19
$ 8.64
Shares
851
263
(515)
599
As of June 30, 2008, unrecognized compensation cost related to stock options and SARs amounted to $2,356. That cost is expected to be recognized
over a weighted average period of 2.5 years. The total fair value of shares vested during fiscal 2008, 2007 and 2006 was $3,190, $2,116 and $2,388,
respectively.
Applied Industrial Technologies, Inc. and Subsidiaries 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
(In thousands, except per share amounts)
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, 2008 and 2007, the Company had 14 and 43 shares of unvested restricted stock outstanding at weighted average prices of $23.94 and $13.77,
respectively. During fiscal 2008, 11 shares of restricted stock were granted at an average grant price of $24.31 per share. Unamortized compensation related
to unvested restricted stock awards aggregated $375 and $349 at June 30, 2008 and 2007, respectively. The unamortized compensation cost related to
restricted stock is expected to be amortized over the remaining vesting period of 1.2 years.
Long-Term Performance Grants
The Executive Organization and Compensation 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 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 in the plan.
Payouts are made in cash, common stock, or a combination thereof, as determined at the end of the performance period.
During fiscal 2008, 2007 and 2006, the Company recorded $493, $549 and $540, respectively, of compensation expense for achievement relative to
the total shareholder return-based goals of the Company’s performance grants. At June 30, 2008, and 2007, the Company had accrued $762 and $1,174,
respectively, for compensation relative to these goals. At June 30, 2008, potential compensation expense related to the outstanding performance grants was
$2,274. This compensation expense is expected to be recognized over the remaining performance period of 1.6 years.
Shareholders’ Rights
The Company previously had a shareholder rights plan which expired in January 2008. No rights were issued under the plan.
Treasury Shares
At June 30, 2008, 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 2008, 2007 and 2006). 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. Effective July 1, 2007, the match is based on achieving pre-determined quarterly net
income levels and continues to be made in cash which is then used to purchase Company stock in the open market.
The Company’s expense for contributions to the above plan was $12,442, $11,548 and $11,365 during fiscal 2008, 2007 and 2006, 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 which, except for the Qualified Defined Benefit Retirement Plan, are unfunded:
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 rate used in
determining the benefit obligation was 6.0% at June 30, 2008 and 2007.
Retiree Health Care Benefits
The Company provides health care benefits to eligible retired associates who 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
28 Applied Industrial Technologies, Inc. and Subsidiaries
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.
On June 30, 2007, the Company prospectively adopted 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. Adoption of SFAS 158 did not
change amounts recognized in the consolidated income statement as net periodic benefit cost, nor did it affect retirement plan funding requirements. The
Company uses a June 30 measurement date for all plans.
The changes in benefit obligations, plan assets and funded status for the postemployment plans described above were as follows:
Pension Benefits
2008
2007
Retiree Health Care Benefits
2007
2008
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 (loss) gain on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Fair value of plan assets at June 30
Funded status at June 30
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost
Current liabilities
Noncurrent liabilities
Net amount recognized
Amounts recognized in accumulated other
comprehensive loss (income) consist of:
Net actuarial loss (gain)
Prior service cost
Total amounts recognized in accumulated
other comprehensive loss (income)
$ 42,210
2,090
2,413
(4,655)
249
269
$ 42,576
$ 5,893
(249)
4,541
(4,655)
$ 5,530
$ (37,046)
$ (2,953)
(34,093)
$ (37,046)
$ 35,071
1,685
2,032
(855)
1,404
2,873
$ 42,210
$ 5,254
731
763
(855)
$ 5,893
$ (36,317)
$ 873
(4,541)
(32,649)
$ (36,317)
$ 12,834
4,330
$ 12,813
4,716
$ 17,164
$ 17,529
$ 4,173
49
271
31
(207)
419
(812)
$ 3,924
$ 176
31
(207)
$ 0
$ (3,924)
$ (270)
(3,654)
$ (3,924)
$ (1,465)
490
$ (975)
$ 3,981
56
222
28
(223)
141
(32)
$ 4,173
$ 194
29
(223)
$ 0
$ (4,173)
$ (270)
(3,903)
$ (4,173)
$
(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
2008
6.0%
8.0%
5.5%
2007
6.0%
8.0%
5.5%
Retiree Health Care Benefits
2007
2008
6.0%
N/A
N/A
6.0%
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
2008
$ 42,576
35,385
2007
$ 37,191
28,963
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
2008
$ 2,090
2,413
(466)
962
635
$ 5,634
2008
$ 49
271
(107)
119
$ 332
Pension Benefits
2007
$ 1,685
2,032
(415)
804
658
$ 4,764
2006
$
1,450
1,601
(381)
784
627
$ 4,081
Retiree Health Care Benefits
2007
$ 56
222
(109)
49
$ 218
2006
$ 55
253
28
49
$ 385
The estimated net loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net
periodic benefit cost over the next fiscal year are $917 and $688, respectively. The estimated net gain and prior service cost for the retiree health care
benefits that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are ($126) and
$119, respectively.
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for post-retirement benefits other than pensions were
8% and 10% as of June 30, 2008 and June 30, 2007, respectively, decreasing to 5% by 201 and
201 ,2 respectively. A one-percentage point change in the
assumed health care cost trend rates would have had the following effects as of June 30, 2008 and for the year then ended:
5
Effect on total service and interest cost components of periodic expense
Effect on post-retirement benefit obligation
One-Percentage
Point Increase
$ 53
541
One-Percentage
Point Decrease
$ (43)
(449)
Applied Industrial Technologies, Inc.’s Qualified Defined Benefit Retirement Plan weighted average asset allocation and target allocation are as follows:
Asset Category:
Equity securities
Debt securities
Other
Total
Target
Allocation
2009
40-70%
20-50%
0-20%
100%
Percentage of Pension Plan
Assets at Fiscal Year End
2007
2008
57%
39%
4%
100%
61%
33%
6%
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.
Cash Flows
Employer Contributions
The Company expects to contribute $3,000 to its pension benefit plans and $200 to its retiree health care benefit plans in 2009.
30 Applied Industrial Technologies, Inc. and Subsidiaries
Estimated Future Benefit Payments
The Company expects to make the following benefit payments, which reflect expected future service:
During Fiscal Years
2009
2010
2011
2012
2013
2014 through 2018
NOTE 10: LEASES
Pension Benefits Retiree Health Care Benefits
$ 3,100
1,800
6,100
4,100
4,300
14,600
$ 200
300
300
300
300
1,200
The Company leases its corporate headquarters facility along with many 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, 2008 are as follows:
During Fiscal Years
2009
2010
2011
2012
2013
Thereafter
Total minimum lease payments
$ 20,700
14,100
10,200
8,000
5,000
10,100
$ 68,100
Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment were $29,000 in fiscal 2008,
$28,300 in 2007 and $26,700 in 2006.
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, 2008
Net sales
Operating income
Assets used in the business
Depreciation
Capital expenditures
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
Service Center
Based Distribution
$ 1,865,663
124,271
712,546
11,441
7,550
$ 1,806,284
122,684
715,864
12,166
10,074
$ 1,725,392
111,774
670,619
12,019
10,310
Fluid Power
Businesses
$ 223,793
17,320
86,225
1,335
860
$ 207,825
14,427
61,505
1,323
1,118
$ 175,388
11,849
60,052
1,109
747
Total
$ 2,089,456
141,591
798,771
12,776
8,410
$ 2,014,109
137,111
777,369
13,489
11,192
$ 1,900,780
123,623
730,671
13,128
11,057
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 (income) expense, net (a)
Total operating income
Interest expense, net
Other expense (income), net
Income before income taxes
2008
$ 141,591
2007
$ 137,111
2006
$ 123,623
1,663
(12,896)
152,824
882
227
$ 151,715
1,045
1,055
135,011
2,360
(1,179)
$ 133,830
732
7,299
115,592
3,210
(717)
$ 113,099
(a) The change in corporate and other (income) 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
2008
$ 1,670,464
418,992
$ 2,089,456
2007
$ 1,614,515
399,594
$ 2,014,109
2006
$ 1,554,589
346,191
$ 1,900,780
(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
Mexico
Total
Long-Lived Assets:
United States
Canada
Mexico
Total
2008
2007
2006
$ 1,686,066
194,594
20,120
$ 1,900,780
$ 1,839,410
222,121
27,925
$ 2,089,456
$ 107,384
19,455
22,007
$ 148,846
$ 1,778,993
211,446
23,670
$ 2,014,109
$ 111,357
19,440
3,253
$ 134,050
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 consolidated 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 believes the
likelihood is remote that the ultimate resolution of any of these matters will have, either individually or in the aggregate, 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 EXPENSE (INCOME), NET
Other expense (income), net consists of the following:
Year Ended June 30,
Unrealized loss on cross-currency swap
Unrealized loss (gain) on deferred compensation trusts
Other
Total other expense (income), net
2008
$ 277
327
(377)
$ 227
2007
$ 243
(1,397)
(25)
$ (1,179)
2006
$ 595
(869)
(443)
$ (717)
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 $2,900 at June 30, 2008.
NOTE 14: SUBSEQUENT EVENT
On July 14, 2008, the Company entered into an agreement to acquire certain assets of Fluid Power Resource, LLC, including seven fluid power businesses
for cash consideration of $169.0 million. The Company intends to fund the acquisition by drawing down its existing revolving credit facility and from its
available cash. These businesses employ 455 people and for the year ended December 31, 2007 had sales of approximately $244.0 million. Results of
operations acquired will be included in the Company’s results of operations from the date of closing.
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.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June
30, 2008 and 2007, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period
ended June 30, 2008. 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 the Company at June 30, 2008
and 2007, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2008, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 7 to the consolidated financial statements, effective July 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes. Also, as discussed in Note 9 to the consolidated financial statements, the Company 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 Company’s internal
control over financial reporting as of June 30, 2008, 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 15, 2008 expressed an unqualified opinion on the Company’s
internal control over financial reporting.
Cleveland, Ohio
August 15, 2008
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, 2008. 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, 2008.
The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which is included herein.
August 15, 2008
David L. Pugh
Chairman & Chief Executive Officer
Mark O. Eisele
Vice President – Chief Financial Officer & Treasurer
Benjamin J. Mondics
President & Chief Operating Officer
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.
Cleveland, Ohio
We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of June 30,
2008, 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, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on 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, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2008, 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, 2008 of the
Company and our report dated August 15, 2008 expressed an unqualified opinion on those consolidated financial statements and included an explanatory
paragraph regarding the Company’s adoption of a new accounting standard.
Cleveland, Ohio
August 15, 2008
36 Applied Industrial Technologies, Inc. and Subsidiaries
QUARTERLY OPERATING RESULTS AND MARKET DATA
Unaudited
(In thousands, except per share amounts)
2008 (A)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2007 (A)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2006 (A)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net
Sales
Gross
Profit
Operating
Income
Net
Income
Per Common Share (B)
Net
Income -
Diluted
Cash Price Range
Low
High
Dividend
$ 518,547
511,008
530,156
529,745
$ 2,089,456
$ 142,056
139,491
144,500
143,236
$ 569,283
$ 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
$ 39,216
37,268
37,685
38,655
$ 152,824
$ 33,377
28,929
34,105
38,600
$ 135,011
$ 27,802
25,214
32,085
30,491
$ 115,592
$ 24,457
22,967
23,595
24,437
$ 95,456
$ 21,117
18,568
21,697
24,640
$ 86,022
$ 16,850
15,294
19,990
20,165
$ 72,299
$ 0.56
0.52
0.55
0.57
$ 2.19
$ 0.47
0.42
0.49
0.56
$ 1.93
$ 0.36
0.33
0.43
0.44
$ 1.57
$ 33.26 $ 22.90
28.01
22.05
23.81
35.68
30.68
32.20
$ 25.50 $ 20.75
23.61
22.72
24.26
30.00
26.95
30.73
$ 25.03 $ 21.33
20.41
22.50
21.97
24.54
31.15
31.67
$ 0.15
0.15
0.15
0.15
$ 0.60
$ 0.12
0.12
0.12
0.12
$ 0.48
$ 0.08
0.10
0.10
0.12
$ 0.40
(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 years ended June 30,
2008 and 2006 resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these liquidations for the years ended June 30, 2008 and 2006 increased
gross profit by $626 and $1,647, net income by $383 and $1,013, and diluted net income per share by $0.01 and $0.02, respectively. There were no LIFO layer liquidations for fiscal 2007.
(B) On August 11, 2008 there were 6,311 shareholders of record including 4,073 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 11, 2008 was $30.76 per share.
Applied Industrial Technologies, Inc. and Subsidiaries 37
10 YEAR SUMMARY
(In thousands, except per share amounts and statistical data)
Consolidated Operations – Year Ended June 30
Net sales
Operating income
Income before cumulative effect of accounting change
Net income
Per share data
Income before cumulative effect of accounting change
Basic
Diluted
Net income
Basic
Diluted
Cash dividend
2008
2007
2006
2005
$ 2,089,456
152,824
95,456
95,456
$ 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
2.23
2.19
2.23
2.19
0.60
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
Year-End Position – June 30
Working capital
Long-term debt (including amounts classified as current)
Total assets
Shareholders’ equity
$ 409,186
25,000
798,771
502,075
$ 365,523
75,395
777,369
450,983
$ 370,013
76,186
730,671
414,822
$ 345,806
76,977
690,170
393,287
Year-End Statistics – June 30
Current ratio
Operating facilities
Shareholders of record
3.1
459
6,305
2.6
445
6,242
3.0
452
6,192
2.9
440
6,079
NET INCOME PER SHARE (Dollars)
(Dollars in Billions)
NET INCOME (Dollars in Millions)
08
07
06
05
04
03
02
01
00
99
$0.06
$0.71
$0.46
$0.63
$0.67
$0.41
$2.19
$1.93
$1.57
$1.20
08
07
06
05
04
03
02
01
00
99
$2.09
$2.01
$1.90
$1.72
$1.52
$1.46
$1.45
$1.63
$1.60
$1.56
08
07
06
05
04
03
02
01
00
99
$31.5
$19.8
$2.7
$28.0
$31.0
$19.9
$95.5
$86.0
$72.3
$55.3
38 Applied Industrial Technologies, Inc. and Subsidiaries
2004
2003
2002
2001
2000
2000
1999
$ 1,517,004
51,448
31,471
31,471
$ 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
0.73
0.71
0.73
0.71
0.21
$ 286,022
77,767
596,841
339,535
2.9
434
6,154
0.47
0.46
0.47
0.46
0.21
0.34
0.34
0.06
0.06
0.21
$ 259,359
78,558
553,404
307,856
$ 250,644
83,478
534,566
298,147
2.8
440
6,157
2.9
449
6,455
0.64
0.63
0.64
0.63
0.21
$ 279,001
113,494
578,854
311,518
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
SHAREHOLDERS’ EQUITY (Dollars in Millions)
DIVIDENDS PER SHARE (Dollars)
$502.1
$451.0
$414.8
$393.3
$339.5
08
07
06
05
04
03
02
01
00
99
$307.9
$298.1
$311.5
$299.3
$293.6
08
07
06
05
04
03
02
01
00
99
$0.21
$0.21
$0.21
$0.21
$0.21
$0.21
$0.60
$0.48
$0.40
$0.29
Applied Industrial Technologies, Inc. and Subsidiaries 39
DIRECTORS
WILLIAM G. BARES (3, 4) Age 67
Former Chairman and Chief Executive Officer
The Lubrizol Corporation (Specialty Chemical Products)
JOHN F. MEIER (4) Age 60
Chairman and Chief Executive Officer
Libbey Inc. (Tableware Products)
THOMAS A. COMMES (1, 3) Age 66
Former President and Chief Operating Officer
The Sherwin-Williams Company (Paints and Coatings)
PETER A. DORSMAN (2) Age 53
Senior Vice President, Global Operations
NCR Corporation
(Transaction and Data Warehousing Solutions)
L. THOMAS HILTZ (2) Age 62
Attorney
EDITH KELLY-GREEN (1) Age 55
Former Vice President and Chief Sourcing Officer
FedEx Express (Express Transportation)
J. MICHAEL MOORE (1) Age 65
President
Oak Grove Consulting Group, Inc.
(Management Consulting)
Former Chairman and Chief Executive Officer
Invetech Company (Industrial Distributor)
DAVID L. PUGH (3) Age 59
Chairman & Chief Executive Officer
Applied Industrial Technologies, Inc.
JERRY SUE THORNTON, Ph.D. (2) Age 61
President
Cuyahoga Community College
(Two-Year Educational Institution)
PETER C. WALLACE (2) Age 54
President & Chief Executive Officer
Robbins & Myers, Inc. (Equipment Manufacturer)
STEPHEN E. YATES (4) Age 60
Executive Vice President & 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
OFFICERS
DAVID L. PUGH Age 59
Chairman & Chief Executive Officer
BENJAMIN J. MONDICS Age 50
President & Chief Operating Officer
THOMAS E. ARMOLD Age 53
Vice President – Marketing and Strategic Accounts
TODD A. BARLETT Age 53
Vice President –
Acquisitions and Global Business Development
FRED D. BAUER Age 42
Vice President – General Counsel & Secretary
OTHER KEY MANAGEMENT
IVAN J. BATISTA Age 35
General Director –
Rafael Benitez Carrillo, Inc. (Puerto Rico)
ROBERT E. CURLEY Age 48
Vice President – Southeast Area
BARBARA D. EMERY Age 49
Vice President – Human Resources
WARREN E. “BUD” HOFFNER Age 48
Vice President, General Manager– Fluid Power
40 Applied Industrial Technologies, Inc. and Subsidiaries
MICHAEL L. COTICCHIA Age 45
Vice President – Chief Administrative Officer
and Government Business
MARK O. EISELE Age 51
Vice President –
Chief Financial Officer & Treasurer
JAMES T. HOPPER Age 64
Vice President – Chief Information Officer
JEFFREY A. RAMRAS Age 53
Vice President – Supply Chain Management
RICHARD C. SHAW Age 59
Vice President –
Communications and Learning
DANIEL T. BREZOVEC Age 47
Corporate Controller
JODY A. CHABOWSKI Age 48
Assistant Controller
ALAN M. KRUPA Age 52
Assistant Treasurer
MARY E. KERPER Age 57
Vice President – Operational Excellence
LONNY D. LAWRENCE Age 45
Vice President – Information Technology
JOHN M. LEYO Age 57
Vice President – North Atlantic Area
SERGIO H. NEVÁREZ Age 50
General Director – Applied Mexico
RONALD A. SOWINSKI Age 47
President & Chief Operating Officer –
Applied Industrial Technologies Ltd. (Canada)
MARK A. STONEBURNER Age 44
Vice President – Midwest Area
DONN G. VEENHUIS Age 59
Vice President – Western Area
THEODORE L. WOLICKI Age 54
Vice President – Central States Area
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
CLEVELAND RESEARCH COMPANY
Adam Uhlman, 216/649-7241
KEYBANC CAPITAL MARKETS
Jeffrey D. Hammond, 216/443-2825
MORGAN KEEGAN
Brent D. Rakers, 901/579-4427
SOLEIL – GREAT LAKES REVIEW
Elliot Schlang, 216/767-1340
STEPHENS INC.
Matt Duncan, 501/377-3723
WACHOVIA CAPITAL MARKETS, LLC
Allison Poliniak, 212/214-5062
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
1 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, 2008, 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 2008, 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 2008 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 21, 2008, at the Corporate Headquarters of Applied Industrial
Technologies, 1 Applied Plaza, East 36th and Euclid Avenue, Cleveland,
Ohio 44115.
QUARTERLY VOLUME, PRICE AND DIVIDEND INFORMATION
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Shares Traded
Average Daily Volume
High
Low
Cash Dividend
Price Range
21,416,800
19,630,600
26,431,600
26,215,300
20,528,900
16,447,500
17,787,400
18,389,300
11,773,500
17,774,000
15,937,300
26,181,000
339,900
306,700
433,300
409,600
325,900
261,100
291,600
291,900
184,000
282,100
257,000
415,600
$ 33.26
35.68
30.68
32.20
$ 25.50
30.00
26.95
30.73
$ 25.03
24.54
31.15
31.67
$ 22.90
28.01
22.05
23.81
$ 20.75
23.61
22.72
24.26
$ 21.33
20.41
22.50
21.97
$ 0.15
0.15
0.15
0.15
$ 0.12
0.12
0.12
0.12
$ 0.08
0.10
0.10
0.12
Applied Industrial Technologies, Inc. and Subsidiaries 41
Applied Industrial Technologies
Corporate Headquarters
1 Applied Plaza
Cleveland, Ohio, 44115
216/426-4000
www.applied.com