2010 annual report
F o r w a r d
k i n g A c
t i o n
M o v i n g
T a
APPLIED® aT a gLance
Applied Industrial Technologies is one of North America’s largest industrial distributors serving
Maintenance Repair Operations (MRO), Original Equipment Manufacturing (OEM), and Government
markets with a diverse range of high quality products, including bearings, power transmission
components, fl uid power components and systems, industrial rubber products, linear motion components,
tools, safety products, and general maintenance and mill supply products. We also provide customized
shop services for mechanical, fabricated rubber and fl uid power products, as well as services to meet
storeroom management and maintenance training needs.
Headquarters: Cleveland, Ohio, USA
Operating Facilities: 455 in 48 U.S. states, 6 Canadian provinces, Puerto Rico and 13 Mexican states
E-Commerce: www.Applied.com
Distribution Centers: 7
Stock Keeping Units (SKUs) Available to Customers: More than 4 million
Product Manufacturers: More than 2,000
Stock Ticker Symbol: AIT, listed on the New York Stock Exchange
Employee Associates: 4,468
Data current as of June 30, 2010
This report contains statements that are forward-looking, as that term is defi ned 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 identifi ed on pages 10 and 11 of this report and in our Annual Report on Form 10-K for the fi scal
year ended June 30, 2010. 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.
LeTTer To oUr sHareHoLDers
BENJAMIN J. MONDICS, DAVID L. PUGH
Dear Shareholder:
Fiscal 2010 was a year that started with the month of July
With the economic recovery we experienced in the last half
2009 same-store sales down over 20% from the previous
of fi scal 2010, we are encouraged about our future. We are
July, and a year that fi nished with the month of June 2010
proud to have emerged from this very challenging period
same-store sales up over 20% from the previous June. Riding
with our good stable management team, a strong foundation
the wave of such a contrast proved to be an exercise in both
in place, our core values intact, and with confi dence that
patience and stamina. In between those two months, the
economic improvement can continue. Today, our mindset is
mettle of our management team was tested, and we’re
centered on taking action and moving forward.
pleased to report that we measured up quite well.
The very diffi cult industrial economy in North America, what
some call the Great Recession, continued through the fi rst half
of our fi scal year. In the face of the challenges and uncertainty
of a weakened industrial environment, we remained
disciplined and dedicated to skillfully balancing our Four
Cornerstones – Profi table Sales Growth, Margin Enhancement,
Asset Management and Cost Control. This focus, combined
with confi dence in our future, allowed us to manage through
adversity in order to be well-positioned when the industrial
economy exhibited signs of improvement.
2010 FInancIaL HIgHLIgHTs
• Achieved net sales of $1.89 billion
• Increased net income by 56%
• Generated a record $184.3 million in
cash provided from operations
• Posted a gross profi t of 27.2% and an
operating margin of 5.8%
• Returned $25.4 million to shareholders
in the form of quarterly dividends
(CONTINUED ON NEXT PAGE)
Applied Industrial Technologies, Inc. and Subsidiaries
1
Gross profit margin rose slightly in fiscal 2010 to 27.2%,
and our operating margin of 5.8% showed improvement
compared to last year’s 3.8% which included the goodwill
impairment charge.
We resumed our stock buyback program in February and
expect to make modest buybacks on a regular basis into
the foreseeable future. Our strong cash position has also
allowed us to maintain our cash dividend throughout this
challenging business environment. Dividends for the year
totaled $25.4 million or $0.60 per share. In July 2010, we
announced a quarterly dividend increase of $0.02. Applied
is committed to increasing shareholder value by investing
in our core business, by repurchasing shares in the open
market, and by paying a competitive dividend. This dividend
increase signals our confidence in Applied’s cash generation
abilities in both expanding and declining economies.
Another benefit of our healthy cash position is the
opportunity to pay off our existing debt. We expect to
repay $50 million of our outstanding debt in September
2010 and the remaining $25 million in November 2010.
Improved year-end results for our Fluid Power Businesses
reflect the positive effects of our Fluid Power Resource (FPR)
acquisition. The recession manifested itself shortly after
we completed the acquisition of FPR in August of 2008.
Applied’s Canadian and Mexican businesses - while they
typically lag by three to six months behind our U.S. operations
- are also seeing an upswing, although our Canadian
operations are still feeling the effects of sluggish activity.
Year In revIew
Over the course of the year, we saw steady
improvement in three key economic indicators -
Industrial Production, Manufacturing Capacity
Utilization, and the ISM Manufacturing
Index. Though it has recently moderated,
the ISM is approaching the one-year mark
of being in expansionary territory. As
manufacturing plants resume production,
we expect demand for maintenance and
repair parts to increase commensurately.
Fiscal 2010 net sales of $1.89 billion came within 1.6% of last
year’s $1.92 billion, an excellent performance considering the
continuing impact of the recession on our business. Net income
improved 56% to $65.9 million, or $1.54 per share, from $42.3
million, or $0.99, in fiscal 2009. Cash provided from operations
resulted in a record $184.3 million during fiscal 2010. Our SD&A
as a percent of sales improved each quarter throughout the year
ending at 20.4% in the fourth quarter, compared to 22.2%
in the fourth quarter of last year, as we continued to control
costs. Our debt-to-equity ratio is 13.5%, and the current ratio
(current assets to current liabilities) remains strong at 2.3 to 1.
Our balance sheet has shown good improvement as our
efforts to reduce inventories helped us generate strong cash
flow. In fiscal 2010, we undertook an inventory management
program with a targeted reduction in our excess bearing and
drive product inventories. We are pleased to report that we
exceeded our target and by year end we had reduced overall
inventories by 32.0% or $81.4 million. Improved inventory
management, as part of our asset management effort,
is an example of the process gains we have made during
the recession that will be beneficial to our business going
forward. Our focus has been on reducing excess inventory and,
therefore, the reductions have not affected our on-time delivery
performance nor have they impacted our customer service.
Lower inventory levels generated LIFO layer liquidation
benefits throughout the year which improved our gross
profit percentage. In executing our inventory management
program, we expected there would be negative impacts
on our gross profit percentage from lower supplier
purchasing incentives. LIFO benefits during fiscal
2010 totaled $23.5 million, far exceeding the negative
impact from lower supplier purchasing incentives.
2
Applied Industrial Technologies, Inc. and Subsidiaries
TakIng acTIon
Today, we have more growth opportunities,
a broader product portfolio and abundant
resources to take action.
While we exercised tight cost control and strong asset
management throughout the recession, we also continued
to make investments in our business. Investments in
training, particularly sales training, are focused on helping
to grow our business. Information technology is another
targeted area for investment that will help us to improve
the operational side of our business. We are making
incremental improvements in our current information
technology systems, and we believe these systems can
continue to serve us well in the near-term. At the same time,
we are examining the benefits and the need for utilizing a
commercial ERP package for the majority of our business.
Fiscal 2010 was also a year in which we worked hard to
further develop specific industry opportunities targeted
for growth. The petrochem, coal and metal mining, and
power generation industries are targeted as industries
where we believe we can improve our market penetration.
We are pleased to report that Government sales improved
during the latter half of our fiscal year. Our efforts in the
growing government sector are a good long-term play
for us, and we feel we’re making progress in penetrating
sales opportunities at the federal, state and local levels.
Like most companies in the industrial sector, we were
challenged to make the most of available opportunities.
To that end, we worked to broaden our customer base
with geographic expansion where appropriate. This led
to the opening of several new locations in fiscal 2010,
including one within the New York City market. We
engaged in a number of acquisition discussions and in-
depth analyses throughout the year; however, a disconnect
in valuation between buyer and seller was prevalent in
the marketplace. We still believe that growth through
acquisitions is central to our overall corporate strategy, but
we are committed to completing only those acquisitions
that result in long-term value for our shareholders.
Recent improvements in the economy have bolstered the
acquisition environment. Already into fiscal 2011, we have
announced two acquisitions: UZ Engineered Products, a
Cleveland, Ohio distributor of products for maintenance,
repair and operational needs with a strong presence in
the government business sector, and SCS Supply Group, a
distributor of bearings, power transmission and industrial
components with eight locations throughout southern
Ontario. Applied has a well-considered strategy for
identifying acquisition targets and developing opportunities
that fit our geographic footprint, product lines, and industry
processes and that support the future growth of our business.
We’ve also been hard at work on product additions
that expand our capabilities and diversify our offerings,
particularly within our general maintenance product line.
More than 10,000 new products have been added to our
offering to support customer janitorial/sanitation needs.
We also enhanced our tool offering and expanded our
safety supplies with new, innovative products. Additions
to our power transmission line during the year also served
to strengthen our core product offering. Together, these
efforts have presented some nice opportunities for us.
At Applied, we strive to continually provide industrial
products that are green, energy efficient and/or
environmentally preferred. To us, being an eco-friendly
distributor means actively advising our customers on how
to reduce their overall environmental impact. It means
conducting energy audits of products such as motors,
belting and gearing. We don’t just help customers make
a one-time purchase of a product; we pass on valuable
product and systems knowledge to help customers make
better choices for the long-term. As this knowledge
ripples throughout the customer’s operation, it can make a
significant impact - - operationally and environmentally.
In recognition of our operational strengths and the help we
provide our industrial partners, we received several honors
during fiscal 2010. For the second consecutive year, Applied
received the Vulcan Materials Platinum Alliance Supplier award
in recognition of our high marks in product quality, customer
service, technical support, ease of transactions, and value
added. We were also named to GI Jobs magazine’s “Top
100 Military-Friendly Employers” list for 2010. In December,
Applied was named to Selling Power magazine’s annual
list of “The 50 Best Companies to Sell For” in the U.S. We
maintained our number three ranking in the service company
category after making our debut within the standings in 2008.
In addition, we are especially proud that Applied continues
to be recognized by the Employers’ Resource Council (ERC)
as a NorthCoast 99 award recipient – an award that honors
the best workplaces for top talent in Northeast Ohio.
Applied Industrial Technologies, Inc. and Subsidiaries
3
MovIng ForwarD
We are proud of the determined efforts that
propelled us through this recent economic crisis.
We can confi dently say, with both relief and
anticipation, that the future is looking brighter.
As we make our way along the path of economic recovery,
we will require continued patience and the ability to
adapt to changes that have occurred within the industrial
landscape. Our focus at present is on recapturing “lost”
sales due to the recession and, as these sales volumes
return to our organization, recapturing our peak operating
margins from prior to the downturn. We remain
encouraged by the broad-scale activity in the industries
we serve as 29 of the top 30 customer industries we
sell to are in positive growth territory for our fi scal 2010
fourth quarter as compared to last year’s fourth quarter;
however, at the time of this letter, we are still seeing relative
weakness in mining and construction-related industries.
We remain confi dent that growth will continue to
return to the industrial sector and that our actions over
the past two years will help us take advantage of new
opportunities. Our focus has shifted to making sure we
fully capitalize on any upside opportunities in this recovering
market while preserving productivity gains we’ve made
during the recession. We’re exploring new opportunities
and platforms while being attentive to each of our
Four Cornerstones in order to keep balanced and drive
continuous improvement through this period of recovery.
As we made the turn into fi scal 2011, we were pleased
to reinstate the suspended benefi ts our associates
so patiently endured throughout the recession. We
welcomed back our 401(k) match, associate merit
increases, full profi t sharing and, for our impacted
associates, the return to full work weeks.
We have prevailed through this very challenging period due
to the perseverance and loyalty of our associates as well as
the support and trust of our customers, our suppliers and
our shareholders. We thank each of you and we remain
committed to demonstrating our value and accelerating
our fi nancial performance in an improving economy.
David L. Pugh
Benjamin J. Mondics
Chairman & Chief Executive Offi cer
President & Chief Operating Offi cer
August 13, 2010
Net Sales
(Dollars in Billions)
Net Income Per Share
Shareholders’ Equity
(Dollars)
(Dollars in Millions)
$2.5
$2.0
$1.90
$2.09
$2.01
$1.92 $1.89
$1.5
$1.0
$0.5
$0.0
06
07
08
09
10
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
$2.19
$1.93
$1.57
$1.54
$0.99
*
06
07
08
09
10
* The goodwill impairment charge in fi scal 2009
reduced net income per share by $0.54.
$600
$500
$400
$300
$200
$100
$0
$555.0
$502.1
$508.1
$451.0
$414.8
06
07
08
09
10
4
Applied Industrial Technologies, Inc. and Subsidiaries
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
With more than 4,400 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. Applied is an authorized distributor for more
than 2,000 manufacturers, and we offer access to approximately 4 million
stock keeping units (“SKUs”). A large portion of our business is selling
replacement parts to manufacturers and other industrial concerns for repair
or maintenance of machinery and equipment. We have a long tradition of
growth dating back to 1923, the year our business was founded in
Cleveland, Ohio. At June 30, 2010, business was conducted in the United
States, Canada, Mexico and Puerto Rico from 455 facilities.
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 certain commonly used
comparative metrics analyzing sales, such as changes in product mix
and volume.
Our fiscal 2010 sales came in at $1.89 billion, a decrease of $29.9 million or
1.6% compared to the prior year. Net sales from acquired businesses added
$25.3 million to the current year. Our operating margin increased to 5.8%
compared to the prior year’s 3.8%. Gross margin increased slightly to
27.2% from 27.0% in the prior year. LIFO benefits recorded during the year
totaled $23.5 million which provided an overall benefit in our gross profit
percent of 1.2%. These benefits offset lower point-of-sale pricing as well as
reduced supplier purchasing incentives. Our earnings per share was $1.54
versus $0.99 in fiscal year 2009, an increase of 55.6%. Fiscal year 2009
included a non-cash goodwill impairment charge which decreased earnings
per share by $0.54.
Our consolidated balance sheet remains strong. Shareholders’ equity is
$555.0 million, up from $508.1 million at June 30, 2009. Working capital
decreased $21.5 million from June 30, 2009 to $347.5 million at June 30,
2010 as all of our long-term debt is now classified as current. Our strong
cash flow from operations led to an increase in cash of $148.1 million.
Improved sales volume, particularly in the second half of the year, increased
receivables by $47.6 million. Offsetting these increases in current assets
was a decline of $81.4 million in inventory due to our inventory
management program. Our current ratio remains strong at 2.3 to 1 versus
3.4 to 1 in fiscal year 2009.
Applied monitors several economic indices that have been key indicators for
industrial economic activity. These include the Manufacturing Capacity
Utilization (“MCU”) index published by the Federal Reserve Board and the
Manufacturing Index published by the Institute for Supply Management
(“ISM”). Historically, our performance correlates well with the MCU, which
measures productivity and calculates a ratio of actual manufacturing output
versus potential full capacity output. When manufacturing plants are
running at a high rate of capacity, they tend to wear out machinery and
require replacement parts. Our sales tend to lag the MCU on the upswing
by up to six months and move closer in alignment with the declines.
These indices showed an improving economy throughout our fiscal 2010,
although their improvements have moderated somewhat during our fourth
quarter. The MCU was 71.6 in June, up from its most recent trough of 65.2
in June of 2009. The ISM was 56.2 in June, down from its year-long high of
60.4 in April. Our sales per day run rate improved sequentially throughout
the year with overall sales increasing 7.6% and 23.0% in the third and
fourth quarters compared to the year ago quarters. We believe that the
recovery of the U.S. industrial economy will continue but will settle into a
slower pace of percentage growth for the second half of the calendar year.
YEAR ENDED JUNE 30, 2010 vs. 2009
Net sales in fiscal 2010 were $1.89 billion, which was 1.6% below the prior
year. Net incremental sales from companies acquired in the prior year
contributed approximately $25.3 million. Our same-store sales declined
2.9% for the full fiscal year. While our quarterly sales per day run rate
compared to the prior year periods declined 19.5% and 11.2% for the first
and second quarters, our sales per day run rate compared to the prior year
periods increased in the third and fourth quarters by 7.6% and 23.0%,
respectively. Currency translation increased fiscal year sales by
approximately $11.7 million or 0.6%. In local currency, while our Canadian
business was down 6.4% from overall fiscal 2009 levels, it improved in the
fourth quarter by 9.5% versus the prior year quarter. Net sales from our
Mexican operations were up 3.4% in local currency in fiscal 2010. The
number of selling days in fiscal 2010 was the same as in fiscal 2009.
Within the Service Center Based Distribution segment, net sales decreased
$60.5 million or 3.8% compared to fiscal year 2009, attributed to declines
in our same-store business. Within the Fluid Power Businesses segment, net
sales increased $30.5 million or 9.4%, including $23.1 million in
incremental sales from acquisitions. Sales to customers in high-tech
industries led the recovery in this segment.
The sales product mix for fiscal 2010 was 71.7% industrial products and
28.3% fluid power products compared to 74.0% industrial and 26.0% fluid
power in the prior year. The shift in mix to fluid power products in fiscal
2010 was driven by incremental sales from the fiscal 2009 FPR acquisition
and strong increases in sales to customers in high-tech industries.
At June 30, 2010, we had a total of 455 operating facilities in the U.S.,
Canada and Mexico versus 464 at June 30, 2009. The net reduction in
operating facilities represents four new locations offset by the merger or
closure of locations.
Our gross profit margin increased to 27.2% in fiscal 2010 from 27.0% in
fiscal 2009. LIFO benefits recorded during the year totaled $23.5 million
which provided an overall benefit in our gross profit percent of 1.2%. These
benefits more than offset lower point-of-sale pricing and reduced supplier
purchasing incentives.
The Company uses the LIFO method of valuing U.S. inventories. In fiscal
2010, we undertook an inventory management program which resulted in a
significant decrease of inventory from the June 30, 2009 levels. The annual
current cost reduction in U.S. bearings and drives products inventory was
$101.4 million (previously estimated at $83.0 million per our quarterly
report on Form 10-Q for the quarter ended March 31, 2010). These
inventory reductions were targeted to reduce excess quantities of certain
products within our system and therefore had no negative impact on
customer service or order fulfillment.
Reductions in the levels of inventory purchases in the current year have
resulted in significant reductions in supplier purchase incentives which flow
through the income statement as inventory is sold to customers. This has
negatively impacted gross profit margins. Reductions in our inventory levels
Applied Industrial Technologies, Inc. and Subsidiaries 5
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)
have also resulted in the liquidation of LIFO inventory quantities carried at
lower costs prevailing in prior years. The impact of these liquidations had a
positive impact on our gross profit margins.
The LIFO benefit recorded in fiscal 2010 was $23.5 million which reduced
our cost of goods sold and equated to $0.33 of earnings per share. The
overall LIFO reserves were reduced by the same amounts. Due to the
additional inventory reductions above our third quarter estimate, we
generated actual fourth quarter LIFO benefits of $16.2 million. This was
$13.7 million above our estimate at March 31, 2010. Total full year LIFO
benefits of $23.5 million were recorded as follows: $0.7 million in the first
quarter, $1.8 million in the second quarter, $4.8 million in the third quarter
and $16.2 million in the fourth quarter.
If inventory levels had remained constant with the June 30, 2009 levels,
instead of recording the benefit as described above, the Company would
have recorded LIFO expense of $19.2 million in fiscal 2010. The overall
impact of LIFO layer liquidations during the fiscal year resulted in an
improvement in gross profit of $42.7 million. LIFO layer liquidations
recorded for the prior fiscal year increased gross profit by $4.4 million.
Supplier purchasing incentives which flowed into the income statement as
inventory was sold decreased $8.0 million from 2009. We expect the
overall gross profit margin to be lower in fiscal 2011 as the LIFO benefit is
not expected to recur at this level, and we anticipate supplier purchasing
incentives may not recover to levels experienced in fiscal 2009 and prior.
Selling, distribution and administration expenses (“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 decreased $5.2 million or 1.3% during fiscal 2010
compared to the prior year, and as a percent of sales remained flat at 21.4%
in both years. Acquisitions added $6.9 million of SD&A compared to the
prior year, including additional amortization expense of $1.4 million.
Associate compensation and benefits, including amounts tied to financial
performance, were down $2.7 million year-over-year, as company-wide
reductions in workforce and deferral of replacements for normal associate
attrition were largely offset by increases in variable compensation. Other
SD&A costs were down $9.0 million (excluding the impact of additional
SD&A from companies acquired and not included in the full prior period),
primarily reflecting cost cutting measures, and lower bad debt and
depreciation expenses, partially offset by unfavorable foreign currency
translation of approximately $2.2 million.
Operating income increased 51.8% to $110.1 million during fiscal 2010
from $72.5 million during 2009. As a percent of sales, operating income
increased to 5.8% in fiscal 2010 from 3.8% in 2009. The $37.6 million
increase in operating income during fiscal 2010 primarily reflects the impact
of a $36.6 million goodwill impairment charge recognized in fiscal 2009.
The favorable impact of the LIFO benefits in fiscal 2010 offset lower point-
of-sale pricing and lower supplier purchasing incentives. Operating income
of both of our segments increased. Operating income as a percentage of
sales for the Service Center Based Distribution segment increased to 5.0% in
fiscal 2010 from 4.7% in fiscal 2009, reflecting the impact of reduced
discretionary spending. The Fluid Power Businesses segment operating
income increased to 7.5% in fiscal 2010 from 5.8% in fiscal 2009 due to
6 Applied Industrial Technologies, Inc. and Subsidiaries
improved sales volume largely to customers in the high-tech industries, cost
reduction measures and lower bad debt expense in the current year.
Interest expense, net, increased $1.0 million during fiscal 2010 compared
with the prior year. Lower interest rates on invested cash led to a reduction
in interest income of approximately $0.8 million.
Other (income) expense, net, represents certain non-operating items of
income and expense. This was $0.4 million of income in fiscal 2010
compared to expense of $2.3 million in fiscal 2009. The prior year included
$1.7 million in unrealized losses on investments held by non-qualified
deferred compensation trusts. The market value of these investments
recovered somewhat this year resulting in a $1.0 million unrealized gain.
Income tax expense as a percentage of income before taxes was 37.2% for
fiscal 2010 and 35.8% for 2009. The lower effective tax rate in fiscal 2009
was primarily due to the reversal of a valuation allowance. We expect our
overall tax rate for fiscal 2011 to be in the range of 37.0% to 37.5%.
As a result of the factors addressed above, net income for fiscal 2010
increased $23.6 million or 55.9% from the prior year. Net income per share
increased at a comparable rate.
The number of Company associates was 4,468 at June 30, 2010 and 4,729
at June 30, 2009. The net associate reduction year-over-year is attributable
primarily to the economic slowdown and reflects the impact of company-
wide reductions in workforce and deferral of replacements for normal
associate attrition.
YEAR ENDED JUNE 30, 2009 vs. 2008
Net sales in fiscal 2009 were $1.9 billion or 8.0% below the prior year. Net
sales from companies acquired since the prior year contributed
approximately $160.6 million. Our same-store sales declined 14.6% due to
the slowing industrial economy. Currency translation accounted for
approximately $32.4 million of the decline or 1.5%. In local currency, our
Canadian business was up 0.5% from fiscal 2008 levels. Net sales from our
Mexican operations more than doubled to $50.6 million, driven primarily by
newly acquired businesses. The number of selling days in fiscal 2009 was
the same as in fiscal 2008.
Within the Service Center Based Distribution segment, net sales decreased
$268.7 million or 14.4% compared to fiscal year 2008. Net sales from
acquired businesses contributed $21.1 million, while our same-store sales
declined $289.8 million or 15.5%. Within the Fluid Power Businesses
segment, net sales increased $102.4 million or 45.7%. This increase was
primarily due to our U.S. and Mexican acquisitions in this segment which
added $139.5 million to net sales. Same-store sales declined in our Fluid
Power Businesses segment by 16.6%.
The sales product mix for fiscal 2009 was 74.0% industrial products and
26.0% fluid power products compared to 80.0% industrial and 20.0% fluid
power in the prior year. Acquisitions in fiscal 2009 were primarily in our
Fluid Power Businesses segment, accounting for the shift in product mix.
At June 30, 2009, we had a total of 464 operating facilities in the U.S.,
Canada and Mexico versus 459 at June 30, 2008. The net increase in
facilities reflected 20 new facilities from acquisitions and 2 newly opened
locations, offset by 17 mergers/closures of locations during fiscal 2009.
Our gross profit margin declined to 27.0% in fiscal 2009 from 27.2% in
fiscal 2008. LIFO inventory layer liquidations resulted in a $4.4 million
positive impact during fiscal 2009, which helped offset a reduction in U.S.
point-of-sale margin.
SD&A decreased $5.5 million or 1.3% during fiscal 2009 compared to
2008 and increased as a percent of sales to 21.4% in 2009 from 19.9%
in 2008. Acquisitions added $44.0 million of SD&A compared to the
prior year, including additional amortization expense of $8.1 million.
Healthcare costs and severance expense increased $5.8 million.
Associate compensation and benefits, including amounts tied to financial
performance, were $38.5 million lower in 2009 versus 2008. During the
latter half of fiscal 2009, we reduced staff and hours worked, resulting in
an additional reduction of wage and benefit costs of $4.4 million.
Foreign currency translation and reduced discretionary spending
accounted for the majority of the remaining decrease.
During the fourth quarter of fiscal 2009, we performed an interim goodwill
impairment test based on current and expected market conditions, including
reduced operating results and a worsening economic outlook. As a result of
this test, the Company determined that all of the goodwill associated with
the Fluid Power Businesses segment was impaired as of June 30, 2009.
Accordingly, the Company recognized an impairment charge of $36.6 million
for goodwill in the fourth quarter of fiscal 2009, which decreased net income
by $23.0 million and earnings per share by $0.54.
Operating income decreased 52.6% to $72.5 million during fiscal 2009 from
$152.8 million during 2008. As a percent of sales, operating income
decreased to 3.8% in fiscal 2009 from 7.3% in 2008. The $80.3 million
decrease in operating income during fiscal 2009 primarily reflected the
impact of sales declining at a greater rate than SD&A expenses and the
goodwill impairment charge of $36.6 million.
Operating income of both of our segments declined in fiscal 2009.
Operating income as a percentage of sales for the Service Center Based
Distribution segment declined from 6.7% in fiscal 2008 to 4.7% in fiscal
2009 and for the Fluid Power Businesses segment from 7.7% to 5.8%.
Again, these changes reflected the impact of sales declining at a greater rate
than SD&A expenses.
Interest expense, net, increased $3.5 million during fiscal 2009 compared
with 2008. Lower invested cash balances and lower interest rates on
invested cash led to a reduction in interest income of approximately
$2.9 million. Interest expense increased $0.6 million due to higher
average borrowings.
Other (income) expense, net, increased $2.0 million due primarily to
fluctuations of $1.9 million in foreign currency transaction losses and $1.4
million in market value in investments held by deferred compensation trusts.
These losses were partially offset by fluctuations of $1.2 million related to
foreign currency gains on our cross-currency swap.
Income tax expense as a percentage of income before taxes was 35.8% for
fiscal 2009 and 37.1% for 2008. The decrease in the effective tax rate was
primarily due to the reversal of a valuation allowance as the related deferred
tax asset was expected to be utilized. This reduction was partially offset by
higher effective state and local tax rates and foreign income taxes.
As a result of the factors addressed above, net income for fiscal 2009
decreased $53.2 million or 55.7% from the prior year. Net income per share
decreased 54.8% to $0.99 in fiscal 2009 from $2.19 in 2008.
The number of Company associates was 4,729 at June 30, 2009 and 4,831
at June 30, 2008. The acquisition of FPR added more than 400 associates in
August 2008; the net decline year-over-year represented the impact of these
additions offset by company-wide reductions in workforce. Additionally,
during the latter half of fiscal 2009, we took measures to further reduce
compensation costs including reducing scheduled work hours. The number
of associates adjusted to reflect an equivalent full-time work status (“full-
time equivalent”) at June 30, 2009 was about 10% lower than the same
measure at December 31, 2008.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operations depend primarily upon generating operating
income, controlling investment in inventories and receivables, and managing
the timing of payments to suppliers.
We generated $184.3 million of cash from operating activities during
fiscal 2010, $81.3 million during 2009 and $110.3 million during 2008.
Cash provided by operating activities increased in fiscal 2010 primarily
due to the inventory management program. Increases in sales volume
increased our investment in receivables in the fourth quarter, but also
increased associated payables and liabilities. Net cash used by investing
activities was primarily used for capital expenditures in fiscal 2010, whereas
it was primarily used for acquisitions in fiscal 2009 and 2008. Capital
expenditures for all years presented consist primarily of information
technology equipment and building improvements.
For fiscal 2011, our capital expenditures are expected to be in the $8.0
million to $9.5 million range, consisting primarily of additional
information system technology equipment needed to maintain our current
technology platform and infrastructure investments. We are reviewing
additional investments in our information technology platforms, including
examining the benefits and need for utilizing a commercial ERP package
for the majority of our business to ensure our technology platforms
continue to meet our needs into the future. Assuming capital
expenditures at a level to maintain our current technology platforms,
depreciation for fiscal 2011 is expected to be in the range of $11.0
million to $12.0 million.
Cash used in financing activities in fiscal 2010 was primarily due to the
payment of $25.4 million in dividends, repayment of $5.0 million on our
revolving credit facility and $3.9 million to purchase treasury shares.
In fiscal 2010, 2009 and 2008, we repurchased 159,900, 68,000 and 1.1
million shares of the Company’s common stock, respectively, at an average
price per share of $24.57, $17.80, and $29.02, respectively.
The following table shows the approximate value of the Company’s
contractual obligations and other commitments to make future payments as
of June 30, 2010 (in thousands):
Period Less
Than 1 yr
Total
Period
1-3 yrs
Period
4-5 yrs
Period
Over 5 yrs
Other
Operating leases
$ 84,600
$ 21,500
$ 35,900
$ 17,400
$ 9,800
Interest payments
on long-term debt
Planned funding of
postretirement
obligations
Unrecognized
income tax benefit
liabilities, including
interest and
penalties
Long-term debt
Total Contractual
Cash Obligations
1,400
1,400
58,700
1,900
2,000
6,600
48,200
2,400
75,000
75,000
$ 2,400
$ 222,100
$ 99,800
$ 37,900
$ 24,000
$ 58,000
$ 2,400
Applied Industrial Technologies, Inc. and Subsidiaries 7
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)
Purchase orders for inventory and other goods and services are not
included in our estimates as we are unable to aggregate the amount of
such purchase orders that represent enforceable and legally binding
agreements specifying all significant terms. The previous table includes the
gross liability for unrecognized income tax benefits including interest and
penalties in the “Other” column as the Company is unable to make a
reasonable estimate regarding the timing of cash settlements with the
respective taxing authorities.
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, 2010, we had authorization to purchase an
additional 837,200 shares.
Capital resources are obtained from income retained in the business,
borrowings under the Company’s credit facilities, and operating lease
arrangements.
See the Debt note to the consolidated financial statements for details
regarding outstanding debt as of June 30, 2010 and 2009. The average
borrowings totaled $76.1 million during fiscal 2010 and $105.0 million
during fiscal 2009. 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 have $50.0 million of
borrowings outstanding under this facility at June 30, 2010, all of which is
classified as current, as it is our intention to repay it in fiscal 2011. It is the
Company’s intention to maintain a balance of at least $50.0 million
outstanding on the revolving credit facility, utilizing the one-month LIBOR
borrowing option through September 19, 2010 per the terms of the interest
rate swap agreement described in the Risk Management Activities note to
the consolidated financial statements. Unused lines under this facility, net of
outstanding letters of credit, total $93.9 million and are available to fund
future acquisitions or other capital and operating requirements. Borrowings
under this agreement carry variable interest rates tied to either LIBOR, prime,
or the bank’s cost of funds. We also have an uncommitted long-term
financing shelf facility which expires in February 2013, which enables us to
borrow up to $100.0 million with terms of up to fifteen years. We had no
outstanding borrowings under this facility at June 30, 2010.
The weighted-average interest rate on borrowings under our debt
agreements, including the effects of interest rate swaps, was 5.8%, 4.4%,
and 8.4% in fiscal 2010, 2009 and 2008, respectively. The increase in the
weighted-average interest rate primarily reflects the impact of lower
amounts outstanding on the revolving credit agreement.
We manage interest rate risk through the use of a combination of fixed-rate
long-term debt, variable-rate borrowings under a committed revolving credit
agreement and interest rate swaps. At June 30, 2010, we had $50.0 million
of variable rate debt outstanding which was effectively converted to fixed-
rate debt under the terms of an interest rate swap agreement. The
Company’s private placement 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 was affected by changes in the exchange rates of U.S. and
Canadian dollars. See the Risk Management Activities note to the
consolidated financial statements for additional discussion on our
derivative activities.
8 Applied Industrial Technologies, Inc. and Subsidiaries
The Company’s working capital at June 30, 2010 was $347.5 compared to
$369.0 million at June 30, 2009. The current ratio was 2.3 to 1 at June 30,
2010 and 3.4 to 1 at June 30, 2009.
The revolving credit facility, private placement debt and uncommitted shelf
facility contain restrictive covenants regarding liquidity, net worth,
financial ratios, and other covenants. At June 30, 2010, 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, 2010, the
Company was in compliance with all covenants and expects to remain in
compliance during the terms of the agreements.
Management expects that our existing cash, cash equivalents, funds
available under the revolving credit facility, cash provided from operations,
and the use of operating leases will be sufficient to finance normal working
capital needs, payment of dividends, acquisitions, investments in properties,
facilities and equipment, and the purchase of additional Company common
stock. Management also believes that additional long-term debt and line of
credit financing could be obtained based on the Company’s credit standing
and financial strength, however at higher rates than the Company is
currently paying.
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
Inventories are valued at the lower of cost or market, using the last-in, first-
out (“LIFO”) method for U.S. inventories, and the average cost method for
foreign inventories. We adopted the link chain dollar value LIFO method for
accounting for U.S. inventories in fiscal 1974. Approximately half of our
domestic inventory dollars relate to LIFO layers added in the 1970s. The
excess of current cost over LIFO cost is $143.2 million as reflected in our
consolidated balance sheet at June 30, 2010. 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. See the Inventories note to the consolidated financial statements
for further information.
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.
Most of the products we hold in inventory have 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. Accounts are written
off against the allowance when it becomes evident collection will not occur.
As of June 30, 2010 and 2009, our allowance for doubtful accounts was
2.5% and 3.1% of gross receivables, respectively. Our provision for losses
on accounts receivable was $2.5 million, $4.5 million and $2.6 million in
fiscal 2010, 2009 and 2008, respectively.
Goodwill and Intangibles
Goodwill is recognized as the amount by which the cost of an acquired
entity exceeds the net amount assigned to assets acquired and liabilities
assumed. As part of acquisition accounting, we also recognize acquired
intangible assets such as customer relationships, vendor relationships, trade
names, and non-competition agreements apart from goodwill. Intangibles
are evaluated for impairment when changes in conditions indicate carrying
value may not be recoverable. We evaluate goodwill for impairment at least
annually. This evaluation requires significant judgment by management,
including estimated future operating results, estimated future cash flows, the
long-term rate of growth of our business, and determination of an
appropriate discount rate. While we use available information to prepare
the estimates and evaluations, actual results could differ significantly. For
example, a worsening of economic conditions beyond those assumed in an
impairment analysis could impact the estimates of future growth and result
in an impairment charge in a future period. Any resulting impairment charge
could be viewed as having a material adverse impact on our financial
condition and results of operations.
As of June 30, 2010, all goodwill remaining on our consolidated financial
statements is related to the Service Center Based Distribution segment. We
believe the fair value of this segment is well in excess of its carrying value.
Over the course of our second, third and fourth quarters of fiscal 2009, the
U.S. and global economy was increasingly and severely affected by dramatic
deterioration in financial institutions and markets and their corresponding
impact on the U.S. and global economies, industrial production and
customer demand. As the business and industrial economies steadily
worsened throughout our second, third and fourth quarters of fiscal 2009,
we made revisions to our internal operating plans and financial forecasts.
As we experienced an acceleration in the rate of decline in our sales
throughout this period, we took actions to reduce operating costs including
reductions in our workforce during our fiscal 2009 third and fourth quarters.
With each quarter we gained a better understanding of the full impact of the
unfolding financial crisis on our business, including FPR which was acquired
on August 29, 2008, and revised our outlook accordingly.
During the fourth quarter of fiscal 2009, the Company performed an interim
goodwill impairment test since our then current operating results and
expected future market conditions had deteriorated from when we
performed our annual goodwill impairment testing during our fiscal 2009
third quarter. We utilized information from our annual financial planning
process completed in the fiscal 2009 fourth quarter, reviewed external
economic forecasts published in the fiscal 2009 fourth quarter, considered
continuing declines in key economic indices that correlate with our business,
and considered the continuing declines in sales and operating results
experienced in the fiscal 2009 third and fourth quarters compared to our
previous forecasts and projections. We deemed the business climate to have
dramatically changed and adjusted our longer term outlook for recovery of
operating results to reflect our belief it would take longer and be more
gradual than initially forecast.
As a result of this fiscal 2009 fourth quarter test, the Company determined
that all of the goodwill associated with the Fluid Power Businesses segment
was impaired as of June 30, 2009 (previously during the annual impairment
testing during our fiscal 2009 third quarter we concluded that there was no
goodwill impairment). Virtually all of the goodwill in the Fluid Power
Businesses segment related to the FPR acquisition in August 2008.
Actual sales and cash flow operating results for the FPR companies
deteriorated throughout fiscal 2009. Sales for the second, third and fourth
quarters of fiscal 2009 were 18%, 38% and 44%, respectively, below what
was originally projected from the acquisition date. Cash flow operating
results for the second, third and fourth quarters of fiscal 2009 were 24%,
78% and 82%, respectively, below what was originally projected from the
acquisition date. The FPR fiscal 2009 fourth quarter sales and cash flow
operating results were also 28% and 77%, respectively, below what we had
forecasted for that quarter as part of our annual impairment testing
performed in our fiscal 2009 third quarter.
These continued declines in our operations factored into our decisions to
revise downward our Fluid Power Businesses internal financial forecast
during our fiscal 2009 fourth quarter as compared to the forecast developed
in our third quarter (as part of our annual impairment test).
The end result of the Fluid Power Businesses internal financial forecasts
developed in our fiscal 2009 third quarter showed a return to operating
results at levels consistent with those achieved prior to the economic
downturn within a four-year time frame whereas the forecasts developed in
our fiscal 2009 fourth quarter did not have this occurring until after a five-
year time frame. The changes made in our forecasts from our fiscal 2009
third to our fiscal fourth quarters were due to continuing declines in our
operations and expectations for future overall financial recovery and had a
significant negative impact on our calculated estimate of fair value.
For our annual impairment test performed in our fiscal 2009 third quarter,
our Fluid Power Businesses estimate of fair value exceeded their carrying
value and therefore no impairment charge was needed. During our fiscal
2009 fourth quarter, our interim impairment testing showed that the Fluid
Power Businesses revised estimate of fair value was no longer in excess of
their carrying value.
Therefore, in accordance with ASC 350, Intangibles – Goodwill and Other,
the Company recognized an impairment charge of $36.6 million for goodwill
Applied Industrial Technologies, Inc. and Subsidiaries 9
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)
in the fourth quarter of fiscal 2009, which decreased net income by $23.0
million and earnings per share by $0.54.
In addition, the Company performed an impairment analysis of its intangible
assets in the fourth quarter of fiscal 2009 and noted no further impairment.
for a purchase price of $166.9 million. Also in fiscal 2009, we acquired an
industrial distributor for $5.5 million. In fiscal 2008, we acquired two
distributors of industrial and fluid power products based in Mexico for a
combined purchase price of $28.7 million.
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. 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% point change would have the
following effects:
Effect of change in:
Discount rate on liability
Discount rate on expense
Salary scale on liability
Salary scale on expense
One-Percentage Point
Increase
Decrease
$ (2,878)
$ 3,382
(137)
1,500
283
156
(1,400)
(258)
A 1% change in the return on assets is not material since most of the plans
are non-qualified and unfunded.
Income Taxes
As of June 30, 2010, the Company had recognized $54.1 million of net
deferred tax assets. This includes a $1.0 million valuation allowance
recorded related to limitations in the deductibility of certain expenses.
Management believes that sufficient income will be earned in the future to
realize its deferred income tax assets. The realization of these deferred tax
assets can be impacted by changes to tax laws, statutory tax rates and
future taxable income levels.
OTHER MATTERS
We have acquired other distributors in two of the past three fiscal years. On
August 29, 2008, Applied completed the acquisition of certain assets of FPR
10 Applied Industrial Technologies, Inc. and Subsidiaries
Results of operations of acquisitions are included in the accompanying
consolidated financial statements from their respective acquisition dates.
Pro forma disclosures related to the FPR acquisition are included in the
Business Combinations note to the consolidated financial statements.
The results of operations for the other acquisitions are not material for all
years presented.
CAUTIONARY STATEMENT UNDER PRIVATE
SECURITIES LITIGATION REFORM ACT
This Annual Report to Shareholders, including Management’s Discussion and
Analysis, contains statements that are forward-looking based on
management’s current expectations about the future. Forward-looking
statements are often identified by qualifiers, such as “guidance,” “expect,”
“believe,” “plan,” “intend,” “will,” “should,” “could,” “would,”
“anticipate,” “estimate,” “forecast,” “may,” and derivative or similar words
or expressions. Similarly, descriptions of objectives, strategies, plans, or
goals are also forward-looking statements. These statements may discuss,
among other things, expected growth, future sales, future cash flows, future
capital expenditures, future performance, and the anticipation and
expectations of the Company and its management as to future occurrences
and trends. The Company intends that the forward-looking statements be
subject to the safe harbors established in the Private Securities Litigation
Reform Act of 1995 and by the Securities and Exchange Commission in its
rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking
statements. All forward-looking statements are based on current
expectations regarding important risk factors, many of which are outside the
Company’s control. Accordingly, actual results may differ materially from
those expressed in the forward-looking statements, and the making of those
statements should not be regarded as a representation by the Company or
any other person that the results expressed in the statements will be
achieved. In addition, the Company assumes no obligation publicly to
update or revise any forward-looking statements, whether because of new
information or events, or otherwise, except as may be required by law.
Important risk factors include, but are not limited to, the following: risks
relating to the operations levels of our customers and the economic factors
that affect them; the impact of economic conditions on the collectability of
trade receivables; reduced demand for our products in targeted markets due
to reasons including consolidation in customer industries and the transfer of
manufacturing capacity to foreign countries; changes in customer
preferences for products and services of the nature and brands sold by us;
changes in customer procurement policies and practices; changes in the
prices for products and services relative to the cost of providing them; loss of
key supplier authorizations, lack of product availability, or changes in
supplier distribution programs; the potential for product shortages if
suppliers are unable to fulfill in a timely manner increased demand in the
economic recovery; competitive pressures; the cost of products and energy
and other operating costs; our reliance on information systems; our ability to
retain and attract qualified sales and customer service personnel; our ability
to identify and complete acquisitions, integrate them effectively, and realize
their anticipated benefits; disruption of operations at our headquarters or
distribution centers; risks and uncertainties associated with our foreign
operations, including volatile economic conditions, political instability,
cultural and legal differences, and currency exchange fluctuations; risks
related to legal proceedings to which we are a party; the variability and
timing of new business opportunities including acquisitions, alliances,
customer relationships, and supplier authorizations; the incurrence of debt
and contingent liabilities in connection with acquisitions; our ability to
access capital markets as needed on reasonable terms; the potential for
goodwill and intangible asset impairment; changes in accounting policies
and practices; organizational changes within the Company; the volatility of
our stock price and the resulting impact on our consolidated financial
statements; adverse regulation and legislation, including potential changes
in tax regulations (e.g., those affecting the use of the LIFO inventory
accounting method and the taxation of foreign-sourced income); and the
occurrence of extraordinary events (including prolonged labor disputes,
natural events and acts of God, terrorist acts, fires, floods, and accidents).
Other factors and unanticipated events could also adversely affect our
business, financial condition or results of operations. We discuss certain of
these matters more fully 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, 2010.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company has evaluated its exposure to various market risk factors,
including its primary market risk exposures through the effects of changes in
exchange rates and changes in interest rates. We occasionally utilize
derivative instruments as part of our overall financial risk management
policy, but do not use derivative instruments for speculative or trading
purposes. A summary of our primary market risk exposures follows.
Interest Rate Risk
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 facility and interest rate swaps. At June 30, 2010, the
Company had $50.0 million outstanding in variable rate borrowings under
its committed revolving credit facility. In conjunction with this facility, on
September 19, 2008, the Company entered into a two-year interest rate
swap agreement to effectively convert $50.0 million of variable-rate debt to
fixed-rate debt at a fixed rate of 3.3%. In the current borrowing
environment, we believe any borrowings beyond the amounts available
under the revolving credit facility would carry interest rates higher than our
current borrowing rates under that facility.
The Company also had $25.0 million of debt outstanding at fixed interest
rates at June 30, 2010, which is scheduled for repayment in November
2010.
Foreign Currency Rate Risk
Since we operate throughout North America and 13.2% of our fiscal year
2010 net sales were generated outside the United States, foreign currency
exchange rates can impact our financial position, results of operations and
competitive position. The financial statements of foreign subsidiaries are
translated into their U.S. dollar equivalents at end-of-period exchange rates
for assets and liabilities, while income and expenses are translated at
average monthly exchange rates. Translation gains and losses are included
as components of accumulated other comprehensive loss in consolidated
shareholders’ equity. Transaction gains and losses arising from fluctuations
in currency exchange rates on transactions denominated in currencies other
than the functional currency are recognized in the consolidated statements
of income as a component of other (income) expense, net.
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
businesses are not hedged.
The Canadian and Mexican foreign exchange rates to the U.S. dollar
increased by approximately 5% and 2%, respectively, since the beginning
of the fiscal year. In the twelve months ended June 30, 2010, we
experienced foreign currency translation gains, totaling $3.0 million, net
of income tax, which were included in accumulated other comprehensive
loss. We utilize a sensitivity analysis to measure the potential impact on
earnings based on a hypothetical 10% change in foreign currency rates.
A 10% strengthening from the levels at June 30, 2010 of the U.S. dollar
relative to foreign currencies that affect the Company would have
resulted in a $1.0 million decrease in net income for the year ended June
30, 2010. A 10% weakening from the levels at June 30, 2010 of the
U.S. dollar would have resulted in a $0.9 million increase in net income
for the year ended June 30, 2010.
Applied Industrial Technologies, Inc. and Subsidiaries 11
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
Goodwill Impairment
Operating Income
Interest Expense
Interest Income
Other (Income) Expense, 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.
2010
$ 1,893,208
1,377,486
515,722
405,672
110,050
5,738
(280)
(425)
5,033
105,017
39,114
65,903
1.56
1.54
$
$
$
2009
$ 1,923,148
1,403,138
520,010
410,912
36,605
72,493
5,523
(1,099)
2,255
6,679
65,814
23,554
42,260
1.00
0.99
$
$
$
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
$
$
$
12
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 $6,379 and $6,464
Inventories
Other current assets
Total current assets
Property - at cost
Land
Buildings
Equipment
Total Property - at cost
Less accumulated depreciation
Property - net
Intangibles, net
Goodwill
Deferred tax assets
Other assets
Total Assets
Liabilities
Current liabilities
Accounts payable
Short-term debt
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 (11,837 and 11,929 shares)
Accumulated other comprehensive loss
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
See notes to consolidated financial statements.
2010
2009
$ 175,777
246,402
173,253
23,428
618,860
10,569
73,099
113,593
197,261
138,790
58,471
85,916
63,405
48,493
$ 27,642
198,792
254,690
44,470
525,594
10,577
72,481
110,951
194,009
131,274
62,735
95,832
63,108
46,650
16,375
$ 891,520
15,409
$ 809,328
$ 94,529
75,000
50,107
51,696
271,332
48,560
16,589
336,481
10,000
143,185
601,370
(193,468)
(6,048)
555,039
$ 891,520
$ 80,655
5,000
34,695
36,206
156,556
75,000
43,186
26,484
301,226
10,000
136,895
560,574
(191,518)
(7,849)
508,102
$ 809,328
Applied Industrial Technologies, Inc. and Subsidiaries
13
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:
Goodwill impairment
Deferred income taxes
Depreciation
Amortization of intangibles
Provision for losses on accounts receivable
Amortization of stock options and appreciation rights
Unrealized foreign exchange transaction losses
Treasury shares contributed to employee benefit, deferred compensation
and other share-based compensation plans
Gain on sale of property
Amortization of gain on interest rate swap terminations
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 $185 and $2,355 in 2009
and 2008, respectively
Other
Net Cash used in Investing Activities
Cash Flows from Financing Activities
Net short-term (repayments) borrowings under revolving credit facility
Borrowings under revolving credit facility classified as long-term
Long-term debt repayment
Purchases of treasury shares
Dividends paid
Excess tax benefits from share-based compensation
Exercise of stock options and appreciation rights
Other
Net Cash (used in) provided by Financing Activities
Effect of Exchange Rate Changes on Cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes
Interest
See notes to consolidated financial statements.
14
Applied Industrial Technologies, Inc. and Subsidiaries
2010
2009
2008
$ 65,903
$ 42,260
$ 95,456
2,408
11,465
10,151
2,508
3,020
(4)
2,361
(198)
(48,578)
83,497
17,408
13,566
20,817
184,324
(7,216)
532
36,605
(16,648)
12,736
9,655
4,540
3,702
806
800
(320)
63,929
(20,581)
6,858
(38,124)
(24,918)
81,300
(6,988)
757
(100)
(172,199)
(6,784)
(178,430)
(5,000)
(3,929)
(25,416)
2,492
1,339
(30,514)
1,109
148,135
27,642
$ 175,777
5,000
50,000
(1,210)
(25,378)
802
408
(1,120)
28,502
(5,560)
(74,188)
101,830
$ 27,642
(5,809)
12,776
1,663
2,595
2,999
1,189
(1,214)
(395)
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
$ 31,179
5,195
$ 43,081
5,265
$ 60,049
4,763
STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(In thousands, except per share amounts)
Foreign currency translation adjustment, net of income tax of $(3,793)
(13,033)
For the Years Ended June 30, 2010, 2009 and 2008
Balance at July 1, 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
Reclassification of pension and postemployment expense into income,
net of income tax of $611
Pension and postemployment adjustment, net of income tax of $(318)
Foreign currency translation adjustment, net of income tax of $912
Total comprehensive income
Cash dividends - $0.60 per share
Purchases of common stock for treasury
Treasury shares issued for:
Exercise of stock options and appreciation rights
Deferred compensation plans
Compensation expense - stock options and appreciation rights
Amortization of restricted common stock compensation
Other
Balance at June 30, 2008
Net income
Unrealized loss on cash flow hedges, net of income tax of $(457)
Reclassification of interest expense into income, net of
income tax of $264
Unrealized loss on investment securities available for sale, net of
income tax of $(105)
Reclassification of pension and postemployment expense into income,
net of income tax of $691
Pension and postemployment adjustment, net of
income tax of $(1,154)
Total comprehensive income
Cash dividends - $0.60 per share
Purchases of common stock for treasury
Treasury shares issued for:
Exercise of stock options and appreciation rights
Deferred compensation plans
Compensation expense - stock options and appreciation rights
Amortization of restricted common stock compensation
Other
Balance at June 30, 2009
Net income
Unrealized loss on cash flow hedges, net of income tax of $(365)
Reclassification of interest expense into income, net of
income tax of $535
Unrealized loss on investment securities available for sale, net of
income tax of $(19)
Reclassification of pension and postemployment expense into income,
net of income tax of $677
Pension and postemployment adjustment, net of
income tax of $(1,467)
Foreign currency translation adjustment, net of income tax of $(32)
Total comprehensive income
Cash dividends - $0.60 per share
Purchases of common stock for treasury
Treasury shares issued for:
Exercise of stock options and appreciation rights
Deferred compensation plans
Compensation expense - stock options and appreciation rights
Amortization of other share-based compensation
Other
Balance at June 30, 2010
See notes to consolidated financial statements.
Shares of
Common Stock
Outstanding
Additional
Paid-in
Common
Capital
Stock
43,116 $ 10,000 $ 127,569
Income
Treasury
Retained
Shares-
for Use in
the Business
at Cost
$ 473,899 $ (159,803)
95,456
(25,728)
(1,145)
315
26
(22)
42,290
10,000
1,800
410
2,999
377
(77)
133,078
(33,224)
2,330
402
65
543,692
42,260
(649)
(190,944)
Accumulated
Other
Comprehensive
(Loss) Income
(682)
$
645
82
998
(520)
5,726
6,249
(569)
437
(177)
Total
Shareholders'
Equity
$ 450,983
95,456
645
82
998
(520)
5,726
102,387
(25,728)
(33,224)
4,130
812
2,999
377
(661)
502,075
42,260
(569)
437
(177)
1,127
1,127
(1,883)
(1,883)
(68)
73
18
(29)
42,284
10,000
(25,378)
(1,210)
1,007
300
(671)
(191,518)
560,574
65,903
47
110
3,701
391
(432)
136,895
(7,849)
(738)
873
(27)
(13,033)
28,162
(25,378)
(1,210)
1,054
410
3,701
391
(1,103)
508,102
65,903
(738)
873
(27)
(160)
(25,416)
(3,929)
214
11
1,499
68
3,020
2,106
420
(403)
42,376 $ 10,000 $ 143,185 $ 601,370 $ (193,468)
1,372
187
309
27
1,104
1,104
(2,393)
(2,393)
2,982
$ (6,048)
2,982
67,704
(25,416)
(3,929)
2,871
255
3,020
2,106
326
$ 555,039
Applied Industrial Technologies, Inc. and Subsidiaries
15
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” or “Applied”) is one of North America’s largest industrial distributors serving
Maintenance Repair Operations (“MRO”), Original Equipment Manufacturing (“OEM”) and Government markets in a wide range of industries. Industrial
products include bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion 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. In addition, Applied provides engineering, design and systems integration for industrial and fluid power applications, as
well as customized mechanical, fabricated rubber and fluid power shop services. Applied also offers maintenance training plus solutions to meet inventory
and storeroom management needs that help provide enhanced value to its customers. Although the Company does not generally manufacture the products
it sells, it does assemble and repair certain products and systems.
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 twelve months ended May 31.
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 (loss) income in consolidated shareholders’ equity. Gains and losses
resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income)
expense, net.
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 fair value.
Marketable Securities
The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified compensation
plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and reported at fair value, based on quoted
market prices. Unrealized gains and losses are recorded in other (income) expense, net in the statements of consolidated income and reflect changes in the
fair value of the investments during the period.
Concentration of Credit Risk
The Company has a broad customer base representing many diverse industries across North America. As such, the Company does not believe that a
significant concentration of credit risk exists in its accounts receivable.
The Company’s cash and cash equivalents include deposits with commercial banks and investments in money market funds. While Applied monitors the
creditworthiness of these commercial banks and institutions, a crisis in the U.S., Canadian or Mexican financial systems could limit access to funds and/or
result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company 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 greater credit risks, trends within the entire customer pool and changes in the overall aging of accounts
receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. 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
Inventories are valued at the lower of cost or market, using the last-in, first-out (“LIFO”) method for U.S. inventories and the average cost method for
foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2010,
approximately half of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on
16 Applied Industrial Technologies, Inc. and Subsidiaries
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.
The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the recoverable cost of such
inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory as well as
assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as
general market conditions, future 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. 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. 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 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, would be measured based upon the difference between the
carrying amount and the fair value of the assets.
Goodwill and 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. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed.
These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or
disposition of a significant portion of a reporting unit. The Company utilizes discounted cash flow models and market multiples for comparable businesses
to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management, including estimated future operating
results, estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company
uses available information to prepare the estimates and evaluations, actual results could differ significantly.
The Company recognizes acquired intangible assets such as customer relationships, trade names, vendor relationships, 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 as of June 30, 2010 was 18 years for customer
relationships, 14 years for vendor relationships, 14 years for trade names, and 6 years for non-competition agreements. Intangible assets are reviewed for
impairment when changes in conditions indicate carrying value may not be recoverable.
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, adjusted as necessary based upon management’s reasoned judgment.
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 actual sales returns and the amount of
reserves established for anticipated sales returns based on historical rates. Sales tax collected from customers is excluded from net sales in the
accompanying statements of consolidated income.
Applied Industrial Technologies, Inc. and Subsidiaries 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
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 $14,400,
$15,400 and $17,000 for the fiscal years ended June 30, 2010, 2009 and 2008, respectively.
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. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with the Income Taxes topic of the
Accounting Standards Codification (“ASC”).
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.
NOTE 2: BUSINESS COMBINATIONS
Results of operations of acquired businesses are included in the accompanying consolidated financial statements from their respective acquisition dates
based on the Company’s consolidation policy.
Fluid Power Resource Acquisition
On August 29, 2008, Applied completed the acquisition of certain assets of Fluid Power Resource, LLC and the following fluid power distribution
businesses: Bay Advanced Technologies, Carolina Fluid Components, DTS Fluid Power, Fluid Tech, Hughes HiTech, Hydro Air, and Power Systems
(collectively “FPR”). Applied acquired certain assets and assumed certain specified liabilities of FPR for an aggregate cash purchase price of $166,000
(originally funded with existing cash balances and $104,000 of borrowings through the Company’s committed revolving credit facility).
The acquired businesses included 19 locations and the associated assembled workforce. This acquisition is part of the Fluid Power Businesses segment
whose base business is distributing fluid power components, assembling fluid power systems, performing equipment repair, and offering technical advice to
customers. This acquisition increased the Company’s capabilities in the following areas: fluid power system integration; manifold design, machining, and
assembly; and the integration of hydraulics with electronics.
The excess of the purchase price over the estimated fair values was assigned to goodwill and is expected to be deductible for tax purposes. The goodwill
was written off as part of an impairment charge in the fourth quarter of fiscal 2009.
The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Property, plant and equipment
Intangibles
Goodwill (subsequently written off as part of impairment charge in fourth quarter 2009)
Other assets
Total assets acquired
Accounts payable
Other accrued liabilities
Net assets acquired
Purchase price
Direct acquisition costs
Acquisition cost
$
100
26,500
28,700
300
4,900
86,000
34,000
200
180,700
10,600
3,200
$ 166,900
$ 166,000
900
$ 166,900
Total intangible assets acquired had original weighted-average useful lives of 17 years and included customer relationships of $51,900 (19-year weighted-
average useful life), trade names of $22,000 (15-year weighted-average useful life), vendor relationships of $9,600 (15-year weighted-average useful life)
and non-competition agreements of $2,500 (5-year weighted-average useful life).
18 Applied Industrial Technologies, Inc. and Subsidiaries
The table below presents summarized unaudited pro forma results of operations as if FPR had been acquired effective at the beginning of the fiscal years
ended June 30, 2009 and 2008, respectively. No pro forma results are presented for fiscal year 2010 as the results of the acquired company are included in
the actual results.
(unaudited)
Net sales
Income before income taxes
Net income
Net income per share - diluted
Other Acquisitions
2009
$ 1,962,882
66,357
42,601
$
1.00
2008
$ 2,336,336
155,857
98,049
$
2.25
On December 5, 2008, the Company acquired certain assets of Cincinnati Transmission Company, an industrial distributor, for $5,535 (of which $4,700
was paid during the second quarter of fiscal 2009). Tangible assets acquired totaled $900 and intangibles, including goodwill, totaled $4,635 as of
June 30, 2009 and are considered part of our Service Center Based Distribution segment.
In fiscal 2008, the Company acquired two distributors based in Mexico 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 (included in our Fluid Power Businesses segment) and Suministros Industriales Enol, S.A. de C.V., an
industrial products distributor, was acquired in May 2008 (included in our Service Center Based Distribution segment).
The Company acquired these distributors to complement and extend its business over a broader geographic area. The results of operations for these
acquisitions are not material for any year 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
2010
$ 268,021
48,403
316,424
143,171
$ 173,253
2009
$ 367,836
53,742
421,578
166,888
$ 254,690
In fiscal 2010, the Company undertook an inventory management program which resulted in a significant decrease of certain U.S. inventories from the June
30, 2009 levels. These reductions resulted in the liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. As a result, a LIFO
benefit reduced cost of goods sold by $23,500 for the year ended June 30, 2010, equating to a $0.33 earnings per share benefit. The LIFO reserves were
reduced by the same amounts. If inventory levels had remained constant with the June 30, 2009 levels, instead of recording this benefit, the Company
would have recorded LIFO expense of $19,200 for the year ended June 30, 2010. Therefore, the overall impact of LIFO layer liquidations in fiscal 2010
increased gross profit by $42,700. LIFO layer liquidations also increased gross profit in fiscal year 2009 by $4,419 and 2008 by $626.
NOTE 4: GOODWILL AND INTANGIBLES
During the fourth quarter of fiscal 2009, the Company performed an interim goodwill impairment test since operating results and expected future market
conditions had deteriorated from the annual goodwill impairment testing performed during the third quarter of fiscal 2009. The fair value of the Fluid
Power Businesses segment was estimated based on discounted cash flows. The Company utilized information from the annual financial planning process
completed in the fourth quarter of fiscal 2009, reviewed external economic forecasts published in the fourth quarter of fiscal 2009, considered continuing
declines in key economic indices that correlate with the business, and considered the continuing declines in sales and operating results experienced in the
third and fourth quarters of fiscal 2009 compared to previous forecasts and projections. The Company deemed the business climate to have dramatically
changed and adjusted the longer term outlook for recovery of operating results to reflect management’s belief that it would take longer and be more
gradual than initially forecast. As a result of this interim test, the Company determined that all of the goodwill associated with the Fluid Power Businesses
segment was impaired as of June 30, 2009. Virtually all of the goodwill in the Fluid Power Businesses segment related to the FPR acquisition in August
2008. Therefore, in accordance with the Intangibles – Goodwill and Other topic of the ASC, the Company recognized an impairment charge of $36,605 for
goodwill in the fourth quarter of fiscal 2009, which decreased net income by $23,000 and earnings per share by $0.54. In addition, the Company
performed an impairment analysis of its intangible assets and noted no further impairment.
Applied Industrial Technologies, Inc. and Subsidiaries 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
The changes in the carrying amount of goodwill by reportable segment for the years ended June 30, 2010 and 2009 are as follows:
Balance at July 1, 2008
Goodwill acquired during the year
Other, including currency translation
Goodwill impairment
Balance at June 30, 2009
Other, including currency translation
Balance at June 30, 2010
Service Center Based
Distribution Segment
Fluid Power
Businesses Segment
$ 61,447
2,382
(721)
63,108
297
$ 63,405
$ 3,238
34,000
(633)
(36,605)
0
0
$
Total
$ 64,685
36,382
(1,354)
(36,605)
63,108
297
$ 63,405
At June 30, 2010, accumulated goodwill impairment losses subsequent to fiscal year 2002, totaled $36,605 and related to the Fluid Power Businesses
Segment.
The Company’s intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
June 30, 2010
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Intangibles
June 30, 2009
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Intangibles
Amount
$ 65,324
25,648
13,842
4,394
$109,208
Amount
$ 65,077
25,576
13,750
4,425
$ 108,828
Accumulated
Amortization
$ 15,328
3,777
2,511
1,676
$ 23,292
Accumulated
Amortization
$ 8,693
1,879
1,442
982
$ 12,996
Net
Book Value
$ 49,996
21,871
11,331
2,718
$ 85,916
Net
Book Value
$ 56,384
23,697
12,308
3,443
$ 95,832
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During fiscal 2009, the Company recorded intangible assets of $53,600 for customer relationships, $22,080 for trade names, $10,015 for vendor
relationships, and $2,576 for non-competition agreements.
Amortization expense for intangible assets totaled $10,151, $9,655 and $1,663 in fiscal 2010, 2009 and 2008, respectively, and is included in selling,
distribution and administrative expenses in the statements of consolidated income. Amortization expense based on the Company’s intangible assets as of
June 30, 2010 is estimated to be $9,900 for 2011, $9,300 for 2012, $8,800 for 2013, $7,600 for 2014 and $7,100 for 2015.
NOTE 5: DEBT
The Company’s outstanding borrowings consist of:
June 30,
7.98% Private placement debt, due at maturity in November 2010
Revolving credit facility
Total outstanding debt
Less: Payable within one year
Long-term portion of outstanding debt
2010
$ 25,000
50,000
75,000
75,000
$
0
2009
$ 25,000
55,000
80,000
5,000
$ 75,000
Based upon current market rates for debt of similar maturities, the Company’s outstanding debt approximates fair value as of June 30, 2010 and 2009.
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. Fees on this facility range from 0.07% to 0.15% per year on the average amount of the total revolving credit commitments during the year. As
of June 30, 2010, the Company had $50,000 outstanding on this revolving credit facility, which is classified as current as it is the Company’s intention to
repay it in fiscal 2011. Borrowings under this agreement carry variable interest rates tied to either LIBOR, prime, or the bank’s cost of funds at the
Company’s discretion. At June 30, 2010, the weighted-average interest rate for the outstanding borrowings under this agreement along with the interest
20 Applied Industrial Technologies, Inc. and Subsidiaries
rate swap agreement was 3.3%. It is the Company’s intention to maintain a balance of at least $50,000 outstanding utilizing the one-month LIBOR
borrowing option through September 19, 2010, the date on which the related cash flow hedge ends (described in Note 6, “Risk Management Activities”).
Unused lines under this facility, net of outstanding letters of credit of $6,104 to secure certain insurance obligations, totaled $93,896 at June 30, 2010 and
are available to fund future acquisitions or other capital and operating requirements.
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 with terms of up to fifteen years. The agreement expires in February 2013. There were no borrowings under this
agreement at June 30, 2010.
The revolving credit facility, private placement debt and uncommitted shelf facility contain restrictive covenants regarding liquidity, net worth, financial
ratios, and other covenants. At June 30, 2010, 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, 2010, 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. Derivative instruments are recorded on the consolidated
balance sheets at their fair value and changes in fair value are recorded each period in current earnings or comprehensive income. The Company does
not hold or issue derivative financial instruments for trading purposes. The criteria for designating a derivative as a hedge includes the assessment of the
instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, and the probability that the underlying
transaction will occur.
Foreign Currency Exchange Rate Risk
In November 2000, the Company entered into two 10-year cross-currency swap agreements to manage its foreign currency risk exposure on private
placement borrowings related to its wholly-owned Canadian subsidiary. The cross-currency swaps effectively convert $25,000 of debt, and the associated
interest payments, from 7.98% fixed-rate U.S. dollar denominated debt to 7.75% fixed-rate Canadian dollar denominated debt. The terms of the two
cross-currency swaps mirror the terms of the private placement borrowings. One of the cross-currency swaps with a notional amount of $20,000 is
designated as a cash flow hedge. There was no ineffectiveness of this cross-currency swap during fiscal years 2010 and 2009. The unrealized losses on
this swap are included in accumulated other comprehensive loss and the corresponding fair value is included in other current liabilities at June 30, 2010
and other liabilities at June 30, 2009 in the consolidated balance sheets.
The other cross-currency swap with a notional amount of $5,000 is not designated as a hedging instrument under the hedge accounting provisions.
Accordingly, the Company records the fair value of this contract as of the end of its reporting period to its consolidated balance sheets with changes in fair
value recorded in the Company’s statements of consolidated income. The balance sheet classification for the fair value of this contract is other current
liabilities at June 30, 2010 and other liabilities at June 30, 2009. The income statement classification for the fair value of this swap is to other (income)
expense, net for both unrealized gains and losses.
Interest Rate Risk
Effective September 19, 2008, the Company entered into a two-year agreement for a $50,000 interest rate swap to effectively convert $50,000 of its
variable-rate debt to fixed-rate debt at a fixed rate of 3.3%. This instrument has been designated as a cash flow hedge, the objective of which is to
eliminate the variability of cash flows in interest payments attributable to changes in the benchmark one-month LIBOR interest rate. There was no
ineffectiveness of this interest rate swap contract during fiscal years 2010 or 2009. The unrealized loss on this interest rate swap is included in
accumulated other comprehensive loss and the corresponding fair value is included in other current liabilities as of June 30, 2010 and in other liabilities at
June 30, 2009 in the consolidated balance sheets. Based upon market valuations at June 30, 2010, approximately $200 (net of tax) is expected to be
reclassified into the statement of consolidated income over the next three months, as cash flow payments are made in accordance with the interest rate
swap agreements.
The following table summarizes the fair value of derivative instruments as recorded in the consolidated balance sheets as of June 30:
Derivatives designated as hedging instruments:
Cross-currency swap
Interest rate swap
Total derivatives designated as hedging instruments
Derivative not designated as a hedging instrument - cross-currency swap
Total Derivatives
2010
$ 8,728
316
9,044
2,182
$ 11,226
2009
$ 6,689
1,381
8,070
1,672
$ 9,742
All derivative instruments shown in the table above were classified as other current liabilities at June 30, 2010 and as other liabilities at June 30, 2009 in
the consolidated balance sheets.
Applied Industrial Technologies, Inc. and Subsidiaries 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
The following table summarizes the effects of derivative instruments on income and other comprehensive income (“OCI”) for the years ended June 30,
2010 and 2009 (amounts presented exclude any income tax effects):
Derivatives in Cash Flow Hedging
Relationships
Amount of Gain (Loss) Recognized in OCI on
Derivatives (Effective Portion)
Cross-currency swap
Interest rate swap
Total
2010
$ (2,039)
(343)
$ (2,382)
2009
$ 3,790
(1,381)
$ 2,409
Derivative Not Designated
as Hedging Instrument
Amount of Loss (Gain) Recognized on Derivative,
Included in Other (Income) Expense, net
Cross-currency swap
2010
$ 510
2009
$ (947)
Amount of Loss Reclassified from Accumulated
OCI into Income (Effective Portion),
Included in Interest Expense
2010
$ (1,408)
$ (1,408)
2009
$ (701)
$ (701)
NOTE 7: FAIR VALUE MEASUREMENTS
Financial assets and liabilities measured at fair value on a recurring basis are as follows at June 30, 2010 and 2009:
Fair Value Measurements
Quoted Prices in Active
Markets for Identical
Instruments
Level 1
Recorded Value
Significant Other
Observable Inputs
Level 2
Significant
Unobservable Inputs
Level 3
2010
2009
2010
2009
2010
2009
2010
2009
Assets:
Marketable securities
$ 8,592
$ 8,211
$ 8,592
$ 8,211
Liabilities:
Cross-currency swaps
Interest rate swap
Total Liabilities
$ 10,910
$ 8,361
316
1,381
$ 11,226
$ 9,742
$10,910
316
$11,226
$ 8,361
1,381
$ 9,742
Marketable securities in the previous table are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are included in
other assets in the consolidated balance sheets. The fair values were derived using quoted market prices.
Fair values for cross-currency and interest rate swaps shown in the previous table are derived based on valuation models using foreign currency exchange
rates and inputs readily available in the public swap markets for similar instruments adjusted for terms specific to these instruments. Since the inputs used
to value these instruments are observable and the counterparties are creditworthy, the Company has classified them as Level 2 inputs. These liabilities are
included in other current liabilities at June 30, 2010 and in other liabilities at June 30, 2009 in the consolidated balance sheets.
NOTE 8: 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 income taxes
22 Applied Industrial Technologies, Inc. and Subsidiaries
2010
$ 91,932
13,085
$105,017
2009
$ 54,916
10,898
$ 65,814
2008
$ 136,179
15,536
$ 151,715
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
2010
2009
2008
$ 28,342
$ 30,142
4,123
4,241
36,706
1,880
(311)
839
2,408
4,235
5,825
40,202
(14,492)
(769)
(1,387)
(16,648)
$ 49,532
7,025
5,511
62,068
(5,028)
(346)
(435)
(5,809)
$ 39,114
$ 23,554
$ 56,259
The exercise of non-qualified stock options and appreciation rights during fiscal 2010, 2009 and 2008 resulted in $1,466, $452 and $3,140, 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 2010, 2009 and 2008 resulted in $1,026, $422 and $577, 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 income tax rate:
Year Ended June 30,
Statutory income tax rate
Effects of:
State and local taxes
U.S. tax on foreign income, net
Foreign tax credit carryforwards
Valuation allowance
Foreign income taxes
Deductible dividend
Other, net
Effective income tax rate
2010
35.0%
2.2
.8
.5
(.7)
(.6)
2009
35.0%
3.2
6.4
(6.0)
(1.5)
(.4)
(1.2)
.3
2008
35.0%
2.8
.1
.7
(.9)
(.5)
(.1)
37.2%
35.8%
37.1%
Applied Industrial Technologies, Inc. and Subsidiaries 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
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 intangibles
Net operating loss carryforwards (expiring in years 2015-2025)
Foreign tax credits (expiring in years 2019 and 2020)
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
Total deferred tax liabilities
Net deferred tax assets
Net deferred tax assets are reflected in the accompanying consolidated balance sheets as follows:
June 30,
Deferred tax assets:
Other current assets
Deferred tax assets (long-term)
Deferred tax liabilities:
Other current liabilities
Other liabilities
Net deferred tax assets
2010
$ 34,963
8,442
11,334
843
4,086
939
60,607
(997)
59,610
(264)
(4,764)
(480)
(5,508)
$ 54,102
2010
$ 6,813
48,493
(349)
(855)
$ 54,102
2009
$ 33,751
7,220
12,588
370
3,954
1,452
59,335
(105)
59,230
(232)
(2,403)
(1,229)
(3,864)
$ 55,366
2009
$ 9,930
46,650
(926)
(288)
$ 55,366
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. The remaining 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 $51,600 at June 30, 2010, since it is the
Company’s intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. Determination of the net amount of the unrecognized tax
liability 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 U.S. federal, various state, local and foreign jurisdictions. The following is a reconciliation of
the Company’s total gross unrecognized income tax benefits for the years ended June 30:
Unrecognized Income Tax Benefits at beginning of the year
Current year tax positions
Prior year tax positions
Expirations of statutes of limitations
Settlements
2010
$ 1,860
130
46
(194)
2009
$ 2,004
183
(51)
(167)
(109)
2008
$ 1,903
369
(31)
(216)
(21)
Unrecognized Income Tax Benefits at end of year
$ 1,842
$ 1,860
$ 2,004
Included in the balance of unrecognized income tax benefits at June 30, 2010, 2009 and 2008 are $988, $984 and $1,124 respectively, of income tax
benefits that, if recognized, would affect the effective income tax rate.
24 Applied Industrial Technologies, Inc. and Subsidiaries
The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes. During 2010, 2009
and 2008, the Company recognized $22, $32 and $97, respectively, for interest and penalties related to unrecognized income tax benefits in its statements
of consolidated income. The Company had a liability for penalties and interest of $547 and $526 as of June 30, 2010 and 2009, respectively. The
Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months.
The Company is subject to U.S. federal income tax examinations for the tax years 2008 through 2010. In addition, the Company is subject to foreign, state
and local income tax examinations for the tax years 2007 through 2010.
The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected
within one year.
NOTE 9: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2010, 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.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is comprised of the following:
June 30,
Unrealized losses on cash flow hedges, net of taxes
Unrealized gains on investment securities available for sale, net of taxes
Foreign currency translation, net of taxes
Pension liability, net of taxes
Total accumulated other comprehensive loss
Net Income Per Share
The following is a computation of 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 potential common shares
Weighted-average common shares outstanding for dilutive computation
Net Income Per Share – Basic
Net Income Per Share – Diluted
$
2010
(16)
135
5,914
(12,081)
$ (6,048)
2010
$ 65,903
42,312
549
42,861
1.56
1.54
$
$
2009
$ 42,260
42,287
507
42,794
$
$
1.00
0.99
2009
$
(151)
161
2,933
(10,792)
$ (7,849)
2008
$ 95,456
42,797
755
43,552
$
$
2.23
2.19
Stock options and appreciation rights relating to the acquisition of 1,034, 1,208 and 255 shares of common stock were outstanding at June 30, 2010, 2009
and 2008, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.
Share-Based Incentive Plans
The 2007 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 (“the Committee”) may determine to officers, other key associates and members of the Board of Directors.
Grants are generally made by the Committee at regularly scheduled meetings. The aggregate compensation costs charged to expense under award programs
paid (or to be paid) with shares (including stock options, SARs, restricted stock, restricted stock units and performance shares) for the years ended June 30,
2010, 2009 and 2008 were: $5,126, $4,092, and $3,376, respectively. Such amounts are included in selling, distribution and administrative expenses in the
accompanying statements of consolidated income. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards
paid with shares. The aggregate unamortized compensation cost for award programs paid (or to be paid) with shares at June 30, 2010 to be recognized in
expense over the weighted-average remaining vesting period of 2.1 years is $5,657. 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, 2010 were 996.
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.
Applied Industrial Technologies, Inc. and Subsidiaries 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
Compensation expense related to stock options and SARs recorded for the years ended June 30, 2010, 2009 and 2008 was $3,020, $3,702 and
$2,999, 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.
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2010, 2009 and 2008 are:
Expected life, in years
Risk free interest rate
Dividend yield
Volatility
2010
5.5
2.4%
2.5%
52.2%
2009
5.5
2.9%
2.2%
48.4%
2008
5.3
4.4%
2.2%
45.9%
The expected life is based upon historical exercise experience of the officers, other key associates and members of the Board of Directors. 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)
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable at end of year
Weighted-average fair value of SARs and
options granted during the year
Shares
2,446
330
(375)
(1)
2,400
1,719
2010
Weighted-Average
Exercise Price
$17.06
21.28
13.50
20.99
$18.19
$15.85
$ 8.45
Shares
2,195
349
(97)
(1)
2,446
1,823
2009
Weighted-Average
Exercise Price
$ 15.17
26.51
8.26
20.99
$ 17.06
$ 14.08
$
10.31
Shares
2,384
263
(452)
2,195
1,596
2008
Weighted-Average
Exercise Price
$ 13.15
25.32
10.43
$ 15.17
$ 12.61
$
9.79
The weighted-average remaining contractual terms for SARs/stock options outstanding and exercisable at June 30, 2010 were 5.60 and 4.55 years,
respectively. The aggregate intrinsic values of SARs/stock options outstanding and exercisable at June 30, 2010 were $18,848. The aggregate
intrinsic value of the SARs/stock options exercised during fiscal 2010, 2009 and 2008 was $5,157, $1,453 and $9,356, respectively.
A summary of the status of the Company’s nonvested stock options and SARs at June 30, 2010, all of which are expected to vest, is presented below:
(Share amounts in thousands)
Nonvested, beginning of year
Granted
Vested
Nonvested, end of year
Weighted-Average
Grant-Date
Fair Value
$10.12
8.45
9.89
$ 9.41
Shares
623
330
(272)
681
As of June 30, 2010, unrecognized compensation cost related to stock options and SARs amounted to $2,028. That cost is expected to be recognized
over a weighted-average period of 2.3 years. The total fair value of shares vested during fiscal 2010, 2009 and 2008 was $2,673, $2,495 and
$3,190, respectively.
Performance Shares
Performance shares are a type of award under the 2007 Plan that are intended to provide incentives to achieve three-year goals. Performance shares
pay out in shares of Applied stock at the end of a three-year period provided the Company achieves the established goals. The number of Applied
shares payable will vary depending on the level of the goal achieved. Fiscal 2010 was the first year performance shares were granted. Because of
volatile market conditions at the beginning of fiscal 2010, the Committee set one-year goals for the 2010 grant tied to the Company’s earnings before
interest, tax, depreciation, and amortization (“EBITDA”). As the targeted goals were accomplished, the performance shares have been converted to
26 Applied Industrial Technologies, Inc. and Subsidiaries
156 restricted stock units (“RSUs”). These RSUs vest at the end of the original three-year performance share grant period, with dividend equivalents
paid on each RSU on a current basis.
Compensation cost is equal to the performance share grant date fair value of Applied shares (determined as the closing market price on the date of
grant) times the number of Applied shares issuable. Compensation costs are amortized to expense on a straight-line basis over the performance share
vesting period.
At June 30, 2010, 156 RSUs were expected to be issued under performance share awards. Shares are expected to be issued from treasury to satisfy
requirements of these awards upon vesting at June 30, 2012. Compensation costs of these shares total $3,229, with $1,076 charged to expense in
fiscal 2010 and $2,152 to be amortized over the weighted-average remaining vesting period of 2.0 years.
Restricted Stock and Restricted Stock Units
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 periods of one to four years. Beginning in fiscal 2010, the
Company began to grant RSUs. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest three years from the
award date, assuming continued employment with Applied. RSUs vest on a pro rata basis upon retirement during the three-year term. Applied pays
dividend equivalents on RSUs on a current basis. The aggregate fair market value of the restricted stock and RSUs (determined as the closing market
price of Applied shares on the date of grant) are considered unearned compensation at the time of grant and amortized over the vesting period. At
June 30, 2010 and 2009, the Company had 104 and 31 shares of unvested restricted stock and RSUs outstanding at weighted-average prices of
$21.41 and $17.19, respectively. During fiscal 2010, 103 shares of restricted stock and RSUs were granted at an average grant price of $21.40 per
share. The total fair value of restricted stock and RSUs expensed during 2010, 2009 and 2008 was $1,029, $392 and $375, respectively.
Unamortized compensation related to unvested restricted stock awards and RSUs aggregated $1,477 and $273 at June 30, 2010 and 2009,
respectively. The unamortized compensation cost related to restricted stock and RSUs is expected to be amortized over the weighted-average
remaining vesting period of 1.9 years.
Long-Term Performance Grants
In fiscal 2009 and 2008, the Executive Organization and Compensation Committee made annual awards of three-year performance grants to key
officers. A target payout was 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 by the Committee
at the end of the performance period. At June 30, 2010 and 2009, the Company had no liability recorded for the sales growth and return on sales
goals as the Company estimated there would be no payouts under these goals. During fiscal 2010, 2009 and 2008, the Company recorded $(231), $7
and $493, respectively, of compensation (income) expense for achievement relative to the total shareholder return-based goals of the Company’s
performance grants. At June 30, 2010 and 2009, the Company had accrued $538 and $769, respectively, for compensation expense relative to these
goals. At June 30, 2010, the maximum potential compensation expense related to the outstanding performance grants was $1,614. Any amounts
estimated to be earned up to the related potential would be recognized during the remaining performance period of one year.
NOTE 10: BENEFIT PLANS
Retirement Savings Plan
Substantially all U.S. associates participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect to contribute up to
50% of their compensation, subject to Internal Revenue Code maximums. 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 2010 and 2008 and 2.5% for fiscal 2009). The Company also partially matched 401(k) contributions by participants through December 31,
2008. The Company suspended the 401(k) match from January 1, 2009 to June 30, 2010. The Company’s expense for contributions to the above plan
was $4,891, $3,086 and $12,442 during fiscal 2010, 2009 and 2008, 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 beginning at
retirement and determinable at retirement based upon a percentage of the participant’s historical compensation.
Qualified Defined Benefit Retirement Plan
The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly associates at retirement. These associates do not
participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement.
Applied Industrial Technologies, Inc. and Subsidiaries 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
Salary Continuation Benefits
The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits for a period not in excess of 15 years.
The discount rate used in determining the benefit obligation was 4.25% and 6.0% at June 30, 2010 and 2009, respectively.
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 subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a
postretirement medical benefit plan which provides health care benefits to eligible retired associates at no cost to the individual.
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:
Change in benefit obligation:
Benefit obligation at beginning of the year
$ 45,466
$ 42,576
$ 4,353
$ 3,924
Pension Benefits
Retiree Health Care Benefits
2010
2009
2010
2009
Service cost
Interest cost
Plan participants’ contributions
Benefits paid
Amendments
Actuarial loss (gain) during year
Benefit obligation at end of year
Change in plan assets:
574
2,911
(1,801)
3,964
$ 51,114
2,139
2,518
(3,061)
1,749
(455)
$ 45,466
Fair value of plan assets at beginning of year
$
4,757
$
5,530
Actual gain (loss) on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized in the consolidated
balance sheets:
Other current liabilities
Postemployment benefits
Net amount recognized
Amounts recognized in accumulated
other comprehensive loss (income):
Net actuarial loss (gain)
Prior service cost
Total amounts recognized in accumulated
other comprehensive loss (income)
575
1,698
(1,801)
$
5,229
$ (45,885)
$ (1,698)
(44,187)
$ (45,885)
$ 15,670
4,368
(949)
3,237
(3,061)
$
4,757
$ (40,709)
$ (1,656)
(39,053)
$ (40,709)
$ 12,854
5,165
52
259
35
(226)
120
$ 4,593
$
191
35
(226)
$
0
$ (4,593)
$ (220)
(4,373)
$ (4,593)
$ (965)
413
41
228
35
(232)
190
167
$ 4,353
$
197
35
(232)
$
0
$ (4,353)
$ (220)
(4,133)
$ (4,353)
$ (1,171)
560
$ (611)
$ 20,038
$ 18,019
$
(552)
The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:
Projected benefit obligations
Accumulated benefit obligations
Fair value of plan assets
28 Applied Industrial Technologies, Inc. and Subsidiaries
Pension Benefits
2010
$ 51,114
39,363
5,229
2009
$ 45,466
38,229
4,757
The net postemployment benefit 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
Amortization of prior service cost
Net periodic postemployment benefit cost
2010
$ 574
2,911
(351)
924
797
$ 4,855
Pension Benefits
2009
$ 2,139
2,518
(436)
911
920
2008
$ 2,090
2,413
(466)
962
635
$ 6,052
$ 5,634
Retiree Health Care Benefits
2010
$ 52
259
(87)
148
$ 372
2009
$
41
228
(125)
119
$ 263
2008
$
49
271
(107)
119
$ 332
The estimated net loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive loss into net
periodic benefit cost over the next fiscal year are $1,263 and $710, respectively. The estimated net gain and prior service cost for the retiree health
care benefits that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $83 and
$139, respectively.
Assumptions
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 computes a weighted-average discount rate taking into account anticipated plan payments and
the associated interest rates from the Citigroup Pension Discount Yield Curve.
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
Retiree Health Care Benefits
2010
4.3%
7.5%
5.5%
2009
6.0%
8.0%
5.5%
2010
5.5%
N/A
N/A
2009
6.0%
N/A
N/A
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for postretirement benefits other than pensions were 8.5%
and 9% as of June 30, 2010 and 2009, respectively, decreasing to 5% by 2018. A one-percentage point change in the assumed health care cost trend
rates would have had the following effects as of June 30, 2010 and for the year then ended:
Effect on total service and interest cost components of periodic expense
Effect on postretirement benefit obligation
One-Percentage Point
Increase
$ 54
672
Decrease
$ (44)
(557)
Applied Industrial Technologies, Inc. and Subsidiaries 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
Plan Assets
The Company’s Qualified Defined Benefit Retirement Plan weighted-average asset allocation and target allocation are as follows:
Asset Class:
Equity securities
Debt securities
Other
Total
Target
Allocation
2011
40 – 70%
20 – 50%
0 – 20%
100%
Percentage of Pension Plan
Assets At Fiscal Year End
2010
2009
57%
38%
5%
100%
48%
47%
5%
100%
Equity securities do not include any Company 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.
The fair value of each major class of plan assets for the Company’s Qualified Benefit Retirement Plan are valued using quoted market prices in active
markets for identical instruments, or Level 1 in the fair value hierarchy. Following are the fair values as of June 30:
Asset Class:
Equity securities
Debt securities
Other
Total
Cash Flows
Employer Contributions
2010
2009
$ 2,987
1,977
265
$ 5,229
$ 2,283
2,236
238
$ 4,757
The Company expects to contribute $1,700 to its pension benefit plans and $250 to its retiree health care benefit plans in 2011. Contributions do not
equal estimated future payments as certain payments are made from plan assets.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next five years and in the
aggregate for the subsequent five years:
During Fiscal Years
Pension Benefits
Retiree Health Care Benefits
2011
2012
2013
2014
2015
2016 through 2020
$ 1,900
900
1,000
2,100
4,700
35,400
$ 300
200
300
300
200
1,400
30 Applied Industrial Technologies, Inc. and Subsidiaries
NOTE 11: LEASES
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, 2010 are as follows:
During Fiscal Years
2011
2012
2013
2014
2015
Thereafter
Total minimum lease payments
$ 21,500
20,000
15,900
10,100
7,300
9,800
$ 84,600
Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment were $30,700 in 2010, $30,900 in
2009, and $29,000 in 2008.
NOTE 12: SEGMENT AND GEOGRAPHIC 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 in the table below.
Segment Financial Information
Year Ended June 30, 2010
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation
Capital expenditures
Year Ended June 30, 2009
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation
Capital expenditures
Year Ended June 30, 2008
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation
Capital expenditures
Service Center
Based Distribution
Fluid Power
Businesses
$1,536,543
77,029
690,970
9,336
6,389
$ 1,596,998
75,411
611,255
10,876
5,537
$ 1,865,663
124,271
712,546
11,441
7,550
$ 356,665
26,794
200,550
2,129
827
$ 326,150
18,942
198,073
1,860
1,451
$ 223,793
17,320
86,225
1,335
860
Total
$ 1,893,208
103,823
891,520
11,465
7,216
$ 1,923,148
94,353
809,328
12,736
6,988
$ 2,089,456
141,591
798,771
12,776
8,410
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:
Goodwill impairment
Intangible amortization – Service Center Based Distribution
Intangible amortization – Fluid Power Businesses
Corporate and other income, net
Total operating income
Interest expense, net
Other (income) expense, net
Income before income taxes
2010
$ 103,823
1,890
8,261
(16,378)
110,050
5,458
(425)
$ 105,017
2009
$ 94,353
36,605
2,265
7,390
(24,400)
72,493
4,424
2,255
2008
$ 141,591
1,245
418
(12,896)
152,824
882
227
$ 65,814
$ 151,715
The change in corporate and other income, 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.
Product Category
Net sales by product category are as follows:
Year Ended June 30,
Industrial
Fluid power
Net sales
2010
$ 1,357,206
536,002
$ 1,893,208
2009
$ 1,422,518
500,630
$ 1,923,148
2008
$ 1,670,464
418,992
$ 2,089,456
The fluid power product category includes sales of hydraulic, pneumatic, lubrication and filtration components and systems, and repair services through the
Company’s Service Center Based Distribution segment as well as the Fluid Power Businesses segment.
Geographic Information
Net sales are presented in geographic areas based on the location of the company making the sale. Long-lived assets are based on physical locations and
are comprised of the net book value of property, goodwill and intangible assets. Information by geographic area is as follows:
Year Ended June 30,
Net Sales:
United States
Canada
Mexico
Total
June 30,
Long-Lived Assets:
United States
Canada
Mexico
Total
2010
2009
2008
$1,644,237
199,772
49,199
$1,893,208
$ 1,674,769
197,795
50,584
$ 1,923,148
$ 1,839,410
222,121
27,925
$ 2,089,456
2010
2009
$ 177,713
16,356
13,723
$ 207,792
$ 189,720
16,481
15,474
$ 221,675
NOTE 13: COMMITMENTS AND CONTINGENCIES
In connection with the construction and lease of its corporate headquarters facility, the Company has guaranteed repayment of a total of $4,700 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.
32 Applied Industrial Technologies, Inc. and Subsidiaries
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.
NOTE 14: OTHER (INCOME) EXPENSE, NET
Other (income) expense, net, consists of the following:
Year Ended June 30,
Unrealized (gain) loss on assets held in rabbi trust for a
nonqualified deferred compensation plan
Foreign currency transaction losses (gains)
Unrealized loss (gain) on cross-currency swap
Other, net
Total other (income) expense, net
2010
$ (1,012)
36
510
41
$ (425)
2009
$ 1,741
1,466
(947)
(5)
$ 2,255
2008
$ 327
(384)
277
7
$ 227
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 $3,200 at June 30, 2010.
NOTE 15: SUBSEQUENT EVENTS
In July and August 2010, the Company completed two acquisitions for an aggregate cash purchase price of approximately $32,000. One of the acquired
businesses is a distributor of industrial supply products for maintenance, repair, and operational needs, primarily in the government sector, throughout the
United States and Canada. The second acquired business is a distributor of bearings, power transmission, electrical, fluid power products and industrial
supplies in Canada.
Net sales for these businesses are approximately $40,000 annually. Results of operations for the acquired businesses will be included in the Company’s
results of operations from the dates 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, 2010 and 2009, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 2010. 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,
2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2010, in
conformity with accounting principles generally accepted in the United States of America.
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, 2010, 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 13, 2010 expressed an
unqualified opinion on the Company's internal control over financial reporting.
Cleveland, Ohio
August 13, 2010
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, 2010. 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, 2010.
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.
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
August 13, 2010
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, 2010, 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, 2010, 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,
2010 of the Company and our report dated August 13, 2010 expressed an unqualified opinion on those consolidated financial statements.
Cleveland, Ohio
August 13, 2010
36 Applied Industrial Technologies, Inc. and Subsidiaries
QUARTERLY OPERATING RESULTS AND MARKET DATA
(In thousands, except per share amounts)
(UNAUDITED)
Per Common Share
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net Sales
Gross Profit
Operating
Income (Loss)
Net Income
(Loss)
Net Income
(Loss)
Cash Dividend
$ 437,743
446,253
486,141
523,071
$ 1,893,208
$
543,906
502,412
451,647
425,183
$ 1,923,148
$
518,547
511,008
530,156
529,745
$ 2,089,456
$ 115,444
116,905
130,356
153,017
$ 515,722
$ 146,058
135,469
122,246
116,237
$ 520,010
$ 142,056
139,491
144,500
143,236
$ 569,283
$ 17,641
18,903
27,037
46,469
$ 110,050
$ 37,375
28,807
21,019
(14,708)
$ 72,493
$ 39,216
37,268
37,685
38,655
$ 152,824
$ 11,187
10,487
16,525
27,704
$ 65,903
$ 22,536
16,194
11,560
(8,030)
$ 42,260
$ 24,457
22,967
23,595
24,437
$ 95,456
$ 0.26
0.24
0.39
0.64
$ 1.54
$ 0.52
0.38
0.27
(0.19)
$ 0.99
$ 0.56
0.52
0.55
0.57
$ 2.19
$ 0.15
0.15
0.15
0.15
$ 0.60
$ 0.15
0.15
0.15
0.15
$ 0.60
$ 0.15
0.15
0.15
0.15
$ 0.60
On August 6, 2010 there were 6,062 shareholders of record including 4,034 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 6, 2010 was $28.57 per share.
The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of
rounding for each period.
The fiscal 2009 fourth quarter includes a goodwill impairment charge of $36,605, which decreased net income by $23,000 and earnings per share by $0.54.
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. In fiscal 2010, the Company undertook an inventory management
program which resulted in a significant decrease of certain U.S. inventories from the June 2009 levels. These reductions resulted in the liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years. As a result, a LIFO benefit of $23,500 reduced cost of goods sold in fiscal 2010, which was recorded in each quarter as follows: first quarter $710, second quarter $1,800,
third quarter $4,840 and fourth quarter $16,150.
The overall impact of LIFO layer liquidations for the years ended June 30, 2010, 2009 and 2008 increased gross profit by $42,700, $4,419 and $626, respectively. The overall 2010 layer liquidation
benefit of $42,700 also includes an amount of LIFO expense that would have been recorded if inventory levels had not decreased.
QUARTERLY VOLUME AND PRICE INFORMATION
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Shares Traded
Average Daily Volume
12,316,800
13,876,700
11,246,000
23,193,800
23,839,000
25,940,700
27,478,700
22,937,700
21,416,800
19,630,600
26,431,600
26,215,300
192,400
216,800
184,400
368,200
372,500
405,300
450,500
364,100
339,900
306,700
433,300
409,600
Price Range
High
$ 23.17
22.91
25.20
33.00
$ 31.29
26.78
20.49
23.95
$ 33.26
35.68
30.68
32.20
Low
$ 18.11
18.80
21.06
24.80
$ 22.92
14.12
14.63
16.25
$ 22.90
28.01
22.05
23.81
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
Depreciation
Amortization:
Intangible assets
Stock options and SARs (b)
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
Year-End Position - June 30
Working capital
Long-term debt (including long-term debt classifi ed as current)
Total assets
Shareholders' equity
Year-End Statistics - June 30
Current ratio
Operating facilities
Shareholders of record
Return on assets (c)
Return on equity (d)
Capital expenditures
EBITDA (e)
2010
2009 (a)
2008
2007
2006
2005
2004
2003
2002
2001
$ 1,893,208
11,465
$ 1,923,148
12,736
$ 2,089,456
12,776
$ 2,014,109
13,489
$ 1,900,780
13,128
$ 1,717,055
13,832
$ 1,517,004
14,381
$ 1,464,367
14,458
$ 1,446,569
15,294
$ 1,625,755
16,364
10,151
3,020
110,050
65,903
65,903
1.56
1.54
1.56
1.54
0.60
46,260
3,702
72,493
42,260
42,260
1.00
0.99
1.00
0.99
0.60
1,663
2,999
152,824
95,456
95,456
2.23
2.19
2.23
2.19
0.60
$ 347,528
75,000
891,520
555,039
$ 369,038
75,000
809,328
508,102
$
409,186
25,000
798,771
502,075
2.3
455
5,884
12.6%
12.4%
3.4
464
6,329
7.6%
8.4%
3.1
459
6,305
19.5%
20.0%
1,045
2,494
135,011
86,022
86,022
1.97
1.93
1.97
1.93
0.48
75,395
777,369
450,983
2.6
445
6,242
18.1%
19.9%
732
2,658
115,592
72,299
72,299
1.62
1.57
1.62
1.57
0.40
76,186
730,671
414,822
3.0
452
6,192
16.1%
17.9%
993
2,111
87,968
55,339
55,339
1.24
1.20
1.24
1.20
0.29
76,977
690,170
393,287
2.9
440
6,079
13.7%
15.1%
826
1,586
51,448
31,471
31,471
0.73
0.71
0.73
0.71
0.21
77,767
596,841
339,535
2.9
434
6,154
8.2%
9.7%
781
36,254
19,832
19,832
0.47
0.46
0.47
0.46
0.21
78,558
553,404
307,856
2.8
440
6,157
5.8%
6.5%
1,651
30,834
14,755
2,655
0.34
0.34
0.06
0.06
0.21
83,478
534,566
298,147
2.9
449
6,455
4.2%
4.8%
5,057
55,001
28,048
28,048
0.64
0.63
0.64
0.63
0.21
113,494
578,854
311,518
3.2
469
6,697
7.7%
9.2%
$ 365,523
$ 370,013
$ 345,806
$ 286,022
$ 259,359
$ 250,644
$ 279,001
$
7,216
134,686
$
6,988
135,191
$
8,410
170,262
$
11,192
152,039
$
11,057
132,110
$
9,208
104,904
$
14,383
68,241
$
12,794
51,493
$
10,050
47,779
$
11,731
76,422
(a) The goodwill impairment charge in fi scal 2009 reduced operating income by $36,605, net income by $23,000 and net income per share by $0.54.
(b) Prior to 2004, the Company did not record stock option expense as it was not required by Generally Accepted Accounting Principles.
(c) Return on Assets is calculated as earnings before income taxes divided by average assets.
(d) Return on Equity is based on net income divided by the average shareholders' equity (beginning of the year and end of the year divided by 2).
(e) EBITDA is calculated as operating income, plus depreciation and amortization of intangible assets and stock options and SARs.
Net Sales
(Dollars in Billions)
Net Income
(Dollars in Millions)
Net Income Per Share
(Dollars)
Shareholders’ Equity
(Dollars in Millions)
Dividends Per Share
(Dollars)
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
9
0
2
$
.
1
0
2
$
.
0
9
1
$
.
2
9
1
$
.
9
8
1
$
.
3
6
1
$
.
5
4
1
$
.
6
4
1
$
.
.
2
7
1
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5
1
$
.
01
02
03
04
05
06
07
08
09
10
$100
$80
$60
$40
$20
$0
.
5
5
9
0 $
6
8
$
.
.
3
2
7
$
.
3
5
5
$
.
9
5
6
$
.
*
3
2
4
$
.
0
8
2
$
.
5
1
3
$
8
.
9
1
$
7
.
2
$
01
02
03
04
05
06
07
08
09
10
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
9
1
2
$
.
3
9
1
$
.
7
5
1
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.
0
2
1
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.
4
5
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.
*
9
9
0
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.
3
6
.
0
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1
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.
0
6 $
4
.
0
$
6
0
.
0
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01
02
03
04
05
06
07
08
09
10
01
02
03
04
05
06
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01
02
03
04
05
06
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0
.
5
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1
.
2
0
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1
.
8
0
5
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0
.
1
5
4
$
8
.
4
1
4
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3
.
3
9
3
$
5
.
9
3
3
$
5
.
1
1
3
$
9
.
7
0
3
$
1
.
8
9
2
$
$600
$500
$400
$300
$200
$100
$0
0
6
.
$
0
6
.
$
0
6
.
$
8
4
.
$
0
4
.
$
9
2
.
$
1
2
.
$
1
2
.
$
1
2
.
$
1
2
.
$
$0.6
$0.6
$0.5
$0.5
$0.4
$0.4
$0.3
$0.3
$0.2
$0.2
$0.1
$0.1
$0.0
$0.0
38 Applied Industrial Technologies, Inc. and Subsidiaries
38 Applied Industrial Technologies, Inc. and Subsidiaries
* The goodwill impairment charge in fi scal 2009
* The goodwill impairment charge in fi scal 2009
reduced net income by $23.0 million.
reduced net income per share by $0.54.
Consolidated Operations - Year Ended June 30
2010
2009 (a)
2008
2007
2006
2005
2004
2003
2002
2001
$ 1,893,208
11,465
$ 1,923,148
12,736
$ 2,089,456
12,776
$ 2,014,109
13,489
$ 1,900,780
13,128
$ 1,717,055
13,832
$ 1,517,004
14,381
$ 1,464,367
14,458
$ 1,446,569
15,294
$ 1,625,755
16,364
Year-End Position - June 30
Working capital
Long-term debt (including long-term debt classifi ed as current)
$ 347,528
$ 369,038
$
10,151
3,020
110,050
65,903
65,903
1.56
1.54
1.56
1.54
0.60
75,000
891,520
555,039
2.3
455
5,884
12.6%
12.4%
46,260
3,702
72,493
42,260
42,260
1.00
0.99
1.00
0.99
0.60
75,000
809,328
508,102
3.4
464
6,329
7.6%
8.4%
1,663
2,999
152,824
95,456
95,456
2.23
2.19
2.23
2.19
0.60
409,186
25,000
798,771
502,075
3.1
459
6,305
19.5%
20.0%
1,045
2,494
135,011
86,022
86,022
1.97
1.93
1.97
1.93
0.48
732
2,658
115,592
72,299
72,299
1.62
1.57
1.62
1.57
0.40
993
2,111
87,968
55,339
55,339
1.24
1.20
1.24
1.20
0.29
826
1,586
51,448
31,471
31,471
0.73
0.71
0.73
0.71
0.21
781
36,254
19,832
19,832
0.47
0.46
0.47
0.46
0.21
1,651
30,834
14,755
2,655
0.34
0.34
0.06
0.06
0.21
5,057
55,001
28,048
28,048
0.64
0.63
0.64
0.63
0.21
$ 365,523
75,395
777,369
450,983
$ 370,013
76,186
730,671
414,822
$ 345,806
76,977
690,170
393,287
$ 286,022
77,767
596,841
339,535
$ 259,359
78,558
553,404
307,856
$ 250,644
83,478
534,566
298,147
$ 279,001
113,494
578,854
311,518
2.6
445
6,242
18.1%
19.9%
3.0
452
6,192
16.1%
17.9%
2.9
440
6,079
13.7%
15.1%
2.9
434
6,154
8.2%
9.7%
2.8
440
6,157
5.8%
6.5%
2.9
449
6,455
4.2%
4.8%
3.2
469
6,697
7.7%
9.2%
$
7,216
134,686
$
6,988
135,191
$
8,410
170,262
$
11,192
152,039
$
11,057
132,110
$
9,208
104,904
$
14,383
68,241
$
12,794
51,493
$
10,050
47,779
$
11,731
76,422
Income before cumulative effect of accounting change
Income before cumulative effect of accounting change
Net sales
Depreciation
Amortization:
Intangible assets
Stock options and SARs (b)
Operating income
Net income
Per share data:
Net income
Basic
Diluted
Basic
Diluted
Cash dividend
Year-End Statistics - June 30
Total assets
Shareholders' equity
Current ratio
Operating facilities
Shareholders of record
Return on assets (c)
Return on equity (d)
Capital expenditures
EBITDA (e)
(a) The goodwill impairment charge in fi scal 2009 reduced operating income by $36,605, net income by $23,000 and net income per share by $0.54.
(b) Prior to 2004, the Company did not record stock option expense as it was not required by Generally Accepted Accounting Principles.
(c) Return on Assets is calculated as earnings before income taxes divided by average assets.
(d) Return on Equity is based on net income divided by the average shareholders' equity (beginning of the year and end of the year divided by 2).
(e) EBITDA is calculated as operating income, plus depreciation and amortization of intangible assets and stock options and SARs.
Net Sales
(Dollars in Billions)
Net Income
(Dollars in Millions)
Net Income Per Share
(Dollars)
Shareholders’ Equity
(Dollars in Millions)
Dividends Per Share
(Dollars)
9
0
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3
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$100
$80
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9
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.
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4
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0
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01
02
03
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01
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$0.6
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10
Applied Industrial Technologies, Inc. and Subsidiaries
Applied Industrial Technologies, Inc. and Subsidiaries
39
39
DIrecTors
WILLIAM G. BARES (3, 4) Age 69
JOHN F. MEIER (4) Age 62
PETER C. WALLACE (4) Age 56
Former Chairman and Chief Executive Officer
Chairman and Chief Executive Officer
President and Chief Executive Officer
The Lubrizol Corporation (Specialty Chemical Products)
Libbey Inc. (Tableware Products)
Robbins & Myers, Inc. (Equipment Manufacturer)
THOMAS A. COMMES (1, 3) Age 68
J. MICHAEL MOORE (1) Age 67
Former President and Chief Operating Officer
President
The Sherwin-Williams Company (Paints and Coatings)
Oak Grove Consulting Group, Inc.
PETER A. DORSMAN (2,3) Age 55
Senior Vice President, Global Operations,
and Chief Operations Officer
(Management Consulting)
Former Chairman and Chief Executive Officer
Invetech Company (Industrial Distributor)
STEPHEN E. YATES (1) Age 62
Former Executive Vice President
and Chief Information Officer
KeyCorp (Financial Services)
Committees of The Board
(1) Audit Committee
NCR Corporation (Self-Service Technology Solutions)
DAVID L. PUGH (3) Age 61
(2) Corporate Governance Committee
L. THOMAS HILTZ (2) Age 64
Attorney
EDITH KELLY-GREEN (2) Age 57
Former Vice President and Chief Sourcing Officer
FedEx Express (Express Transportation)
oFFIcers
Chairman & Chief Executive Officer
Applied Industrial Technologies, Inc.
(3) Executive Committee
(4) Executive Organization and Compensation
JERRY SUE THORNTON, Ph.D. (1) Age 63
Committee
President
Cuyahoga Community College
(Two-Year Educational Institution)
DAVID L. PUGH Age 61
FRED D. BAUER Age 44
RICHARD C. SHAW Age 61
Chairman & Chief Executive Officer
Vice President – General Counsel & Secretary
Vice President – Communications and Learning
BENJAMIN J. MONDICS Age 52
President & Chief Operating Officer
THOMAS E. ARMOLD Age 55
MICHAEL L. COTICCHIA Age 47
DANIEL T. BREZOVEC Age 49
Vice President – Chief Administrative Officer
Corporate Controller
and Government Business
Vice President – Marketing and Strategic Accounts
MARK O. EISELE Age 53
TODD A. BARLETT Age 55
Vice President – Acquisitions and
Global Business Development
Vice President – Chief Financial Officer & Treasurer
JEFFREY A. RAMRAS Age 55
Vice President – Supply Chain Management
JODY A. CHABOWSKI Age 50
Assistant Controller
ALAN M. KRUPA Age 54
Assistant Treasurer
oTHer keY ManageMenT
IVAN J. BATISTA Age 37
General Director –
Rafael Benitez Carrillo, Inc. (Puerto Rico)
ROBERT E. CURLEY Age 50
Vice President – Southeast Area
BARBARA D. EMERY Age 51
Vice President – Human Resources
MARY E. KERPER Age 59
RONALD A. SOWINSKI Age 49
Vice President – Operational Excellence
President & Chief Operating Officer –
LONNY D. LAWRENCE Age 47
Applied Industrial Technologies Ltd. (Canada)
Vice President – Information Technology
MARK A. STONEBURNER Age 46
JOHN M. LEYO Age 59
Vice President – North Atlantic Area
SERGIO H. NEVÁREZ Age 52
Vice President – Enterprise Transformation
DONN G. VEENHUIS Age 61
Vice President – Western Area
THEODORE L. WOLICKI Age 56
Vice President – Central States Area
WARREN E. “BUD” HOFFNER Age 50
General Director – Applied Mexico
Vice President, General Manager – Fluid Power
40 Applied Industrial Technologies, Inc. and Subsidiaries
sHareHoLDer InForMaTIon
Applied Industrial Technologies, Inc. common stock is listed on the New York
Investor relations inquiries should be directed to:
Stock Exchange under the symbol AIT. The Company is identifi ed in most
MARK O. EISELE
fi nancial listings as “AppliedIndlTch.”
Vice President – Chief Financial Offi cer & Treasurer
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, 216/689-0236
MORGAN KEEGAN
Brent D. Rakers, 901/579-4427
SIDOTI & CO.
Joseph Mondillo, 212/894-3339
SOLEIL – GREAT LAKES REVIEW
Elliot Schlang, 216/767-1340
STEPHENS INC.
Matt Duncan, 501/377-3723
WELLS FARGO SECURITIES, LLC
Allison Poliniak-Cusic, 212/214-5062
SHAREHOLDER INQUIRIES
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 fi scal year ended June 30, 2010, including the fi nancial statements and
schedules thereto, is available at our website at www.Applied.com. It is
also available without charge upon written request to the Vice President –
Chief Financial Offi cer & Treasurer at the preceding address.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m., Tuesday, October 26,
2010, at the Corporate Headquarters of Applied Industrial Technologies, 1 Applied
Plaza, East 36th and Euclid Avenue, Cleveland, Ohio 44115.
Requests to transfer Applied Industrial Technologies, Inc. shares and all
correspondence regarding address change information, duplicate mailings,
missing certifi cates, 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 TRUST COMPANY, N.A.
250 Royall Street
Canton, MA 02021
800/988-5291
coMParIson oF FIve-Year cUMULaTIve ToTaL reTUrn
Applied Industrial Technologies, Inc., Standard & Poor’s 500, and Peer Group
(Performance Results from 7/1/05 through 6/30/2010)
$200.00
$150.00
$100.00
$50.00
$0.00
Applied Industrial Technologies, Inc.
Standard & Poor’s 500
Peer Group
2005
2006
2007
2008
2009
2010
Assumes $100 invested at the close of trading 6/30/05 in Applied Industrial
Technologies, Inc. common stock, Standard & Poor’s 500, and Peer Group.
Cumulative total return assumes reinvestment of dividends.
The returns of the companies in the Peer Group are weighted based on the
companies’ relative stock market capitalization.
Peer Group companies selected on a line-of-business basis include: DXP
Enterprises, Inc.; Fastenal Company; Genuine Parts Company; W. W. Grainger, Inc.;
Kaman Corporation; Lawson Products, Inc.; MSC Industrial Direct Co., Inc.; and
WESCO International, Inc.
Applied Industrial Technologies, Inc.
Standard & Poor’s 500
Peer Group
Source: Value Line, Inc.
2005
$100.00
100.00
100.00
2006
$114.74
108.63
131.35
2007
$141.92
131.00
151.83
2008
$118.68
113.81
132.03
2009
$99.66
83.98
113.54
2010
$131.44
96.10
152.37
Corporate Headquarters
1 Applied Plaza
Cleveland, Ohio 44115
216/426-4000
Applied.com