PURPOSEPRODUCTPERFORMANCEPEOPLE25358_AIT_Report_WT.indd 18/23/12 8:32 AM Headquarters: Cleveland, Ohio, USAOperating Facilities: More than 500 in the United States, Canada, Mexico, Puerto Rico, Australia and New Zealand E-Commerce: www.Applied.comDistribution Centers: 9Stock Keeping Units (SKUs) Available to Customers: More than 4 millionProduct Manufacturers: More than 2,000Stock Ticker Symbol: AIT, listed on the New York Stock ExchangeEmployee Associates: Approximately 4,900Data current as of August 1, 2012This report contains statements that are forward-looking, as that term is defined by the Securities and Exchange Commission in its rules, regulations and releases. Applied intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors, including those identified on page 12 of this report and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. 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.PURPOSEPRODUCTPERFORMANCEPEOPLEApplied Industrial Technologies is a leading industrial distributor that offers more than four million parts to serve the needs of MRO and OEM customers in virtually every industry. 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 and inventory management solutions that provide added value to its customers.Applied at a Glance25358_AIT_Report_WT.indd 28/23/12 8:32 AM Fiscal 2012 was a successful year on multiple fronts for Applied Industrial Technologies. Our business performance resulted from sound operating discipline and a focus on operational excellence, including:2012 Financial Highlights:• Record sales of $2.4 billion – an increase of 7.3% • Record net income of $108.8 million, or $2.54 per share – an EPS increase of 13.4% • Operating margin of 7.1% – solid improvement over last year’s 6.8%• Cash generated from operations of $90.4 million – adding to our financial strength and flexibility• Return of $64.8 million to shareholders in dividends and share repurchases – providing enhanced shareholder value• Improved after-tax return on assets of 11.8% – evidence of our continued focus on asset managementWhen combined with results from prior years and viewed over time, these achievements equate to:• 10 consecutive quarters of growth – upon which we can build • Excellent cash generation – to support our growth initiatives• Ongoing reinforcement of our Four Cornerstones – Margin Enhancement, Asset Management, Cost Control and Profitable Sales GrowthOur Financial Highlights provide a snapshot of our noteworthy achievements; however, there’s much more to our story. Throughout Applied, we have a shared belief that we can and will profitably grow our business. The future we envision for the Company is made possible by our strong foundation and financial position, by our dedicated associates, by our best-in-class suppliers, and, of course, by our strong customer base. We are confident and committed to expanding our value-add, extending our reach, and enhancing our technology to serve our customers and generate shareholder value.BENJAMIN J. MONDICSNEIL A. SCHRIMSHERTo Our Shareholders:1Applied Industrial Technologies, Inc. and Subsidiaries25358_AIT_Report_WT.indd 18/28/12 4:23 PM Customers:
Expanding Our Value-Add
At every level of the organization, our associates are
committed to our customers’ success. Simply stated, we
keep industry running – productively – and our efforts and
performance are regularly acknowledged. For the twelfth
consecutive year, we earned Supplier of the Year status from
Vulcan Materials Company for our strong execution in the
areas of product quality, service, support, ease of transaction
and value. And, just recently, Applied was named the
recipient of Excellence, Innovation, and Sustainability awards
from Eastman Chemical Company. This marks the first time
in Eastman Chemical history that one company was selected
to receive all three awards in a single year.
While our Company is proud of these past achievements
and our associates have earned well-deserved recognition
for their hard work and dedication, we are not satisfied.
We are committed to expanding our product offering, fully
Naturally, our success is greatly aided by the partnerships
with our suppliers. We represent leading manufacturers
with the highest quality brands – delivering innovative
solutions for our customers’ needs. Across our collective
supply chain, we are committed to expanding our value-add
and to generating success for our customers.
Acquisitions:
Extending Our Reach
Strategic acquisitions continue to play an important role
in our overall growth strategy, as demonstrated in fiscal
2012. In August 2011, we entered the Montreal market
with the acquisition of Chaines-Plus. In February 2012, we
purchased two additional Quebec distributors – Solutions
Industrielles Chicoutimi and Spécialités Industrielles
Harvey – as part of our continuing strategy to expand in
Eastern Canada. Together, these businesses distribute
bearings, power transmission products, fluid power, and
electrical components, in addition to providing various
leveraging our service capabilities and delivering value-added
repair services.
solutions to our existing customers – and to new customers.
Across our collective supply chain, we are committed to expanding
our value-add and generating success for our customers.
Net Sales
(Dollars in Billions)
Net Income Per Share
(Dollars)
Shareholders’ Equity
(Dollars in Millions)
2
Applied Industrial Technologies, Inc. and Subsidiaries
* The goodwill impairment charge in fiscal 2009
reduced net income per share by $0.54.
25358_AIT_Report_WT.indd 2
8/23/12 8:33 AM
$1.5 $1.5 $1.7 $1.9 $2.0 $2.1 $1.9 $1.9 $2.2 $2.4 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 03 04 05 06 07 08 09 10 11 12 $307.9 $339.5 $393.3 $414.8 $451.0 $502.1 $508.1 $555.0 $633.6 $672.1 $0 $100 $200 $300 $400 $500 $600 $700 $800 03 04 05 06 07 08 09 10 11 12 $0.46 $0.71 $1.20 $1.57 $1.93 $2.19 $0.99 $1.54 $2.24 $2.54 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 03 04 05 06 07 08 09 10 11 12
We are a committed,
strategic acquirer focused
on clear priorities around
our core industrial
distribution business.
Technology:
Enhancing Our Capabilities
With hundreds of service centers and plans for future
acquisitions, our need for an enhanced, unified information
technology system became increasingly apparent. In
October 2010 we embarked on a multi-year journey – an
ERP initiative – to transform our company’s technology
platforms and enhance our business information and
transaction systems. This initiative supports our current
operations and provides a strong foundation for our
Most recently, in April 2012, we announced our expansion
acquisition strategy.
into Australia and New Zealand with the definitive
agreement to acquire the distribution businesses of
SKF. We completed the acquisition effective August 1,
2012, subsequent to our year end. As one of the largest
bearing suppliers in these markets, the SKF Distribution
business provides an excellent foundation for growth.
Both geographies present attractive markets, growing
economies, and many common global customers. The
business offers broad geographic coverage of Australia and
New Zealand, with 37 locations reaching targeted vertical
markets such as mining, steel, pulp and paper, agriculture,
construction, and food and beverage. Furthermore,
we have significant growth prospects by extending
complementary product lines and solutions to these
valued customers.
By completing this acquisition, we increase our footprint
to more than 500 facilities across North America, Australia
and New Zealand. Looking forward, acquisitions will
continue to provide an excellent opportunity to extend
our reach and serve our customers. We are a committed,
With our phased ERP roll-out, we have had two successful
launches in Western Canada, and our teams are busy
building and planning for our first U.S. deployments in
the fourth quarter of the 2012 calendar year. We are
encouraged by our progress to date and are confident
in our ability to execute across our U.S., Mexico and
Eastern Canadian locations. The common ERP system
will help standardize and simplify our processes, amplify
our operational excellence initiatives and generate value
throughout our business enterprise.
Applied has strong
capabilities, great potential
and room to grow.
Long-Range Strategy:
Translating Potential Into Results
strategic acquirer focused on clear priorities around our
We remain proud of our past achievements, and we are
core industrial distribution business. With our strong
encouraged – and energized – by the realm of future
financial position and proven integration capabilities, we
opportunities. We are especially excited about the shared
are confident that we will generate sustained, long-term
belief among our management, our associates and our
value for our shareholders.
suppliers that we can do even more to generate profitable
growth. Applied has strong capabilities, great potential
and room to grow.
25358_AIT_Report_WT.indd 3
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Applied Industrial Technologies, Inc. and Subsidiaries
3
Long-Range Strategy: Translating Potential Into Results (continued)
As a leadership team, we have developed a long-range strategic plan
to accelerate profitable growth. Our plan includes numerous growth
opportunities across our business, and implementation is underway, including:
• Leveraging sales capabilities and existing CRM (Customer Relationship
Management) processes to expand our value-add and reach new customers
• Strengthening our position in attractive vertical markets while growing in
our core segments
• Expanding our products and solutions; growing our core bearings and
power transmission business at a rate greater than the market, along
with focused product expansion via logical extensions and enhanced local
capabilities
• Building on our fluid power market leadership via strengthened product
offerings and value-added services for OEM and MRO customers
• Enhancing our operational excellence by capturing the full benefits of our
ERP system and driving continuous improvement with customers, suppliers
and throughout our operations
• Accelerating strategic acquisitions by leveraging our cash generation and
strong financial position to extend into new markets
Today, nearly 90 years since our founding, we are well-positioned and
committed to realizing our potential – a potential that builds upon a proud
past and the dedication of our associates around the globe.
As we look ahead, we see a bright future with excellent opportunities for
growth and increased profitability – organically, via acquisition, and through
our technology investments. We are in exciting times, and we firmly believe
our best days are ahead.
Thank you for your ongoing investment and support of Applied.
Neil A. Schrimsher
Chief Executive Officer
August 15, 2012
Benjamin J. Mondics
President & Chief Operating Officer
Celebrating
90 Years
of Strength in
Distribution
In January 2013, Applied
Industrial Technologies
will celebrate its 90th
anniversary. The Company
was founded in 1923 by
Joseph M. Bruening as
The Ohio Ball Bearing
Company, a distributor
of bearings to customers
in Cleveland, Ohio. Over
the years, the Company
grew to become a regional
distributor of bearings,
then an international
distributor of a wide range
of industrial technologies
and components. Today,
nearly 90 years since our
beginning, customers
served by Applied
benefit from our years of
accumulated experience,
expertise and exceptional
ability to improve our
customers’ operations.
Join us as we kick-off a
year-long celebration of
our strength in distribution.
We thank all of you, our
stakeholders, for making
it possible.
4
Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 4
8/28/12 4:22 PM
OVERVIEW
Industrial production increased 0.4% in June after having declined
With more than 4,600 associates across North America, Applied
0.2% in May. In the manufacturing sector, outputs advanced
Industrial Technologies (“Applied,” the “Company,” “We,” “Us”
0.7% in June, reversing a decline of 0.7% in May and increased at
or “Our”) is a leading industrial distributor serving MRO and OEM
an annual rate of 1.4% in the second quarter. In June, capacity
customers in virtually every industry. 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 and inventory
management solutions that provide added value to its customers.
We have a long tradition of growth dating back to 1923, the year
our business was founded in Cleveland, Ohio. At June 30, 2012,
business was conducted in the United States, Canada, Mexico
and Puerto Rico from 476 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 2012 sales were $2.4 billion, an increase of $162.6
acquired businesses added $16.6 million or 0.7% to the current
year. Gross margin of 27.6% compares to 27.7% in the prior
year. Our operating margin increased to 7.1% compared to the
prior year’s 6.8%. Our earnings per share was $2.54 versus $2.24
in fiscal year 2011, an increase of 13.4%.
Our consolidated balance sheet remains strong. Shareholders’
equity is $672.1 million, up from $633.6 million at June 30, 2011.
Working capital increased $31.4 million from June 30, 2011 to
$435.6 million at June 30, 2012. Our current ratio remains strong
at 2.9 to 1, consistent with the June 30, 2011 level.
utilization for manufacturing moved up 0.4% to 77.7%, a rate
13.9 percentage points above its trough in June of 2009 and was
still 1.1 percentage points below its long-run average. The ISM PMI
registered 49.7 in June, the first time this indicator dropped below
50 (its expansionary threshold) since July 2009. We remain
optimistic about the U.S. industrial economy for our fiscal 2013.
YEAR ENDED JUNE 30, 2012 vs. 2011
The following table is included to aid in review of Applied’s
statements of consolidated income.
Change in
Year Ended June 30,
$'s Versus
As a % of Net Sales
Prior Period
2012
2011 % Increase
100.0 % 100.0 %
27.6 %
27.7 %
7.1 %
4.6 %
6.8 %
4.4 %
7.3 %
6.7 %
5.1 %
11.7 %
12.4 %
Net Sales
Gross Profit
Operating Income
Net Income
Net sales in fiscal 2012 were $2.4 billion, which was $162.6 million
or 7.3% above the prior year, driven by improvements in the
industrial economy as well as a continued focus on profitable sales
growth. Incremental net sales from companies acquired since the
prior year period contributed approximately $16.6 million or 0.7%.
Currency translation decreased fiscal year sales by approximately
$1.8 million or 0.1%. In local currency, net sales from our
million or 7.3% compared to the prior year. Net sales from
Selling, Distribution & Administrative
20.5 %
20.9 %
Applied monitors several economic indices that have been key
Canadian operations were up 12.2% from fiscal 2011, including
indicators for industrial economic activity in the United States.
2.8% from acquisitions. In local currency, net sales from our
These include the Industrial Production and Manufacturing
Mexican operations were up 25.9%. The number of selling days in
Capacity Utilization (MCU) indices published by the Federal
fiscal 2012 was the same as in fiscal 2011.
Reserve Board and the Purchasing Managers Index (PMI)
published by the Institute for Supply Management (ISM).
Historically, our performance correlates well with the MCU
which measures productivity and calculates a ratio of actual
manufacturing output versus potential full capacity output.
When manufacturing plants are running at a high rate of
capacity, they tend to wear out machinery and require
replacement parts. Our sales tend to lag the MCU by up
to six months.
Net sales of our Service Center Based Distribution segment increased
$133.8 million, or 7.6%, compared to fiscal year 2011 led by
improvements in the industrial economy as well as a continued focus on
profitable sales growth, with acquisitions adding $16.6 million or 0.9%.
Net sales of our Fluid Power Businesses segment increased $28.8 million
or 6.5%, also driven by improvements in the industrial economy as well
as a continued focus on profitable sales growth.
The sales product mix for fiscal 2012 was 70.8% industrial products
and 29.2% fluid power products compared to 70.5% industrial and
29.5% fluid power in the prior year.
At June 30, 2012, we had a total of 476 operating facilities in the U.S.,
Canada and Mexico versus 474 at June 30, 2011.
1
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Industrial production increased 0.4% in June after having declined
With more than 4,600 associates across North America, Applied
0.2% in May. In the manufacturing sector, outputs advanced
Industrial Technologies (“Applied,” the “Company,” “We,” “Us”
0.7% in June, reversing a decline of 0.7% in May and increased at
or “Our”) is a leading industrial distributor serving MRO and OEM
an annual rate of 1.4% in the second quarter. In June, capacity
customers in virtually every industry. 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 and inventory
management solutions that provide added value to its customers.
We have a long tradition of growth dating back to 1923, the year
our business was founded in Cleveland, Ohio. At June 30, 2012,
business was conducted in the United States, Canada, Mexico
and Puerto Rico from 476 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 2012 sales were $2.4 billion, an increase of $162.6
utilization for manufacturing moved up 0.4% to 77.7%, a rate
13.9 percentage points above its trough in June of 2009 and was
still 1.1 percentage points below its long-run average. The ISM PMI
registered 49.7 in June, the first time this indicator dropped below
50 (its expansionary threshold) since July 2009. We remain
optimistic about the U.S. industrial economy for our fiscal 2013.
YEAR ENDED JUNE 30, 2012 vs. 2011
The following table is included to aid in review of Applied’s
statements of consolidated income.
Year Ended June 30,
As a % of Net Sales
Change in
$'s Versus
Prior Period
2012
2011 % Increase
Net Sales
Gross Profit
100.0 % 100.0 %
27.6 %
27.7 %
million or 7.3% compared to the prior year. Net sales from
Selling, Distribution & Administrative
20.5 %
20.9 %
acquired businesses added $16.6 million or 0.7% to the current
year. Gross margin of 27.6% compares to 27.7% in the prior
year. Our operating margin increased to 7.1% compared to the
prior year’s 6.8%. Our earnings per share was $2.54 versus $2.24
in fiscal year 2011, an increase of 13.4%.
Our consolidated balance sheet remains strong. Shareholders’
equity is $672.1 million, up from $633.6 million at June 30, 2011.
Working capital increased $31.4 million from June 30, 2011 to
$435.6 million at June 30, 2012. Our current ratio remains strong
at 2.9 to 1, consistent with the June 30, 2011 level.
Operating Income
Net Income
7.1 %
4.6 %
6.8 %
4.4 %
Net sales in fiscal 2012 were $2.4 billion, which was $162.6 million
or 7.3% above the prior year, driven by improvements in the
industrial economy as well as a continued focus on profitable sales
growth. Incremental net sales from companies acquired since the
prior year period contributed approximately $16.6 million or 0.7%.
Currency translation decreased fiscal year sales by approximately
$1.8 million or 0.1%. In local currency, net sales from our
7.3 %
6.7 %
5.1 %
11.7 %
12.4 %
Applied monitors several economic indices that have been key
Canadian operations were up 12.2% from fiscal 2011, including
indicators for industrial economic activity in the United States.
2.8% from acquisitions. In local currency, net sales from our
These include the Industrial Production and Manufacturing
Mexican operations were up 25.9%. The number of selling days in
Capacity Utilization (MCU) indices published by the Federal
fiscal 2012 was the same as in fiscal 2011.
Reserve Board and the Purchasing Managers Index (PMI)
published by the Institute for Supply Management (ISM).
Historically, our performance correlates well with the MCU
which measures productivity and calculates a ratio of actual
manufacturing output versus potential full capacity output.
When manufacturing plants are running at a high rate of
capacity, they tend to wear out machinery and require
replacement parts. Our sales tend to lag the MCU by up
to six months.
Net sales of our Service Center Based Distribution segment increased
$133.8 million, or 7.6%, compared to fiscal year 2011 led by
improvements in the industrial economy as well as a continued focus on
profitable sales growth, with acquisitions adding $16.6 million or 0.9%.
Net sales of our Fluid Power Businesses segment increased $28.8 million
or 6.5%, also driven by improvements in the industrial economy as well
as a continued focus on profitable sales growth.
The sales product mix for fiscal 2012 was 70.8% industrial products
and 29.2% fluid power products compared to 70.5% industrial and
29.5% fluid power in the prior year.
At June 30, 2012, we had a total of 476 operating facilities in the U.S.,
Canada and Mexico versus 474 at June 30, 2011.
1
Applied Industrial Technologies, Inc. and Subsidiaries
5
25358_AIT_Report_WT.indd 5
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YEAR ENDED JUNE 30, 2011 vs. 2010
The following table is included to aid in review of Applied’s
statements of consolidated income.
Change in
Year Ended June 30,
$'s Versus
As a % of Net Sales
Prior Period
2011
2010 % Increase
100.0 % 100.0 %
27.7 %
27.2 %
6.8 %
4.4 %
5.8 %
3.5 %
16.9 %
18.9 %
14.0 %
37.0 %
46.8 %
Net Sales
Gross Profit
Operating Income
Net Income
Net sales in fiscal 2011 were $2.2 billion, which was
$319.6 million or 16.9% above the prior year driven by
selling products at a higher gross profit margin led to an
approximate 0.9% improvement in gross profit margins. Other
positive impacts on margins were an increase of approximately
0.4% from businesses acquired during the fiscal year and an
increase of approximately 0.2% due to lower scrap expense.
SD&A increased $56.7 million or 14.0% during fiscal 2011
compared to fiscal year 2010, and as a percent of sales decreased
to 20.9% from 21.4% in fiscal 2010. Associate compensation
and benefits, including amounts tied to financial performance,
increased $27.4 million. Acquisitions added $18.4 million of
amortization expense of $1.4 million. Incremental expenses
associated with the development of a new ERP platform totaled
$8.6 million. Foreign currency translation had an unfavorable
impact of $3.1 million in fiscal 2011.
Operating income increased 37.0% to $150.8 million during
Selling, Distribution & Administrative
20.9 %
21.4 %
SD&A compared to fiscal year 2010, including additional
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Our gross profit margin was 27.6% in fiscal 2012 versus 27.7%
expenses as a percent of sales helped offset the reduction in
in fiscal 2011. Positive impacts as a result of higher supplier
gross profit. Management continues to seek opportunities to
purchasing incentives offset the impact of lower LIFO layer
take advantage of economies of scale to improve the SD&A
liquidation benefits recognized in the current year ($3.4 million of
expenses in this segment.
LIFO layer liquidation benefits in fiscal 2012 versus $12.3 million
in fiscal 2011).
Interest expense, net, decreased $1.7 million during fiscal 2012
compared with the prior year. We repaid all of our outstanding
Selling, distribution and administrative expenses (SD&A) consist of
debt in fiscal 2011 which lowered interest expense.
associate compensation, benefits and other expenses associated
with selling, purchasing, warehousing, supply chain
management, and providing marketing and distribution of the
Company’s products, as well as costs associated with a variety of
administrative functions such as human resources, information
technology, treasury, accounting, legal, and facility related
expenses. SD&A increased $23.7 million or 5.1% during fiscal
2012 compared to the prior year, and as a percent of sales
decreased to 20.5% from 20.9% in fiscal 2011. Enterprise
Resource Planning (ERP) project cash expenses were $18.3 million
($9.8 million above the prior year period). SD&A of businesses
acquired since the prior year period added $5.6 million. Effective
December 31, 2011, the Executive Organization and
Compensation Committee of the Board of Directors froze
participant benefits (credited service and final average earnings)
and entry into the Supplemental Executive Retirement Benefits
Plan (SERP) which constituted a plan curtailment. As a result, we
recognized $3.1 million in prior service costs upon curtailment of
the plan in the second quarter of fiscal 2012. We also incurred
one-time expenses associated with our CEO transition of $1.4
million in fiscal 2012. The translation impact of our foreign
subsidiaries into U.S. dollars had an unfavorable impact of $0.5
million on SD&A in the year.
Operating income increased 11.7% to $168.4 million during
fiscal 2012 from $150.8 million during 2011. As a percent of
sales, operating income increased to 7.1% in the current year
from 6.8% in 2011. The $17.6 million increase in operating
income during fiscal 2012 primarily reflects higher sales levels and
the impact of leverage on increased sales as we kept our SD&A to
20.5% of sales in 2012 versus 20.9% in fiscal 2011.
Operating income as a percentage of sales for the Service Center
Based Distribution segment increased to 7.1% in fiscal 2012 from
6.5% in fiscal 2011, this increase is attributable to improved
gross profit margins (representing 0.4% of the improvement) and
higher sales levels without a commensurate increase in SD&A
(representing 0.2% of the improvement).
The Fluid Power Businesses segment operating income decreased
slightly to 9.2% in fiscal 2012 from 9.5% in fiscal 2011. This
reduction is attributable to lower net gross profit margins
primarily from one vertical market within one of our Fluid Power
Businesses (representing 0.5% of the reduction). Lower SD&A
6
Applied Industrial Technologies, Inc. and Subsidiaries
2
Other expense (income), net, represents certain non-operating
items of income and expense. This was $1.6 million of expense
in fiscal 2012 compared to income of $3.8 million of income in
fiscal 2011. Current year expense primarily consists of foreign
currency transaction losses of $1.6 million. Fiscal 2011 included
$2.0 million of unrealized gains on investments held by non-
qualified deferred compensation trusts and recognition of a
$1.7 million gain from death benefits received under two life
insurance policies.
Income tax expense as a percent of income before taxes was
improvements in the industrial economy. Incremental net sales
fiscal 2011 from $110.1 million during 2010. As a percent of
34.8% for fiscal 2012 and 36.7% for fiscal 2011. The impact of
from companies acquired in fiscal 2011 contributed
lower effective tax rates and higher income in foreign jurisdictions
approximately $40.8 million or 1.8%. Currency translation
sales, operating income increased to 6.8% in fiscal 2011 from
5.8% in 2010. The $40.7 million increase in operating income
favorably reduced our rate when compared to the U.S. federal
statutory rate by 1.8%. Further reducing our rate compared to
the U.S. federal statutory rate is a permanent dividend deduction
benefit of 0.5%. These reductions compared to the U.S. federal
increased fiscal year 2012 sales by approximately $16.3 million or
during fiscal 2011 primarily reflects higher sales levels, improved
0.7%. In local currency, net sales from our Canadian operations
gross profit margins and the impact of leverage on increased
were up 23.1% from fiscal 2010, including 8.4% from
sales as we kept our SD&A to 20.9% of sales in 2011 versus
acquisitions. In local currency, net sales from our Mexican
21.4% in fiscal 2010.
rate were offset by the impact of state and local taxes which
operations were up 17.9%. The number of selling days in fiscal
Operating income as a percentage of sales for the Service Center
increased the rate by 2.5%.
2011 was the same as in fiscal 2010.
Based Distribution segment increased to 6.5% in fiscal 2011 from
In fiscal 2011, the impact of lower effective tax rates and higher
income in foreign jurisdictions favorably reduced our rate when
compared to the U.S. federal statutory rate by 1.0%. Further
reducing our rate compared to the U.S federal statutory rate is a
Net sales of our Service Center Based Distribution segment
5.0% in fiscal 2010, this increase is attributed to higher sales
increased $234.3 million, or 15.2%, compared to fiscal year 2010
levels without a commensurate increase in SD&A (representing
led by improvements in the industrial economy, with acquisitions
0.9% of the improvement) and improved gross profit margins
adding $40.8 million or 2.7%. Net sales of our Fluid Power
(representing 0.6% of the improvement).
permanent dividend deduction benefit of 0.5%. These
Businesses segment increased $85.4 million or 23.9%, driven by
The Fluid Power Businesses segment operating income increased
reductions compared to the U.S. federal rate were offset by the
impact of state and local taxes and by provision made for U.S.
income tax on a portion of undistributed earnings not considered
permanently reinvested in our Canadian subsidiaries which
increased the rate by 2.8% and 1.8%, respectively.
improvements in the industrial economy.
The sales product mix for fiscal 2011 was 70.5% industrial
to 9.5% in fiscal 2011 from 7.5% in fiscal 2010, attributed to
higher sales levels without a commensurate increase in SD&A
products and 29.5% fluid power products compared to 71.7%
(representing 1.5% of the improvement) and improved gross
industrial and 28.3% fluid power in the prior year.
profit margins (representing 0.5% of the improvement).
At June 30, 2011, we had a total of 474 operating facilities in the
Interest expense, net, decreased $3.8 million during fiscal 2011
We expect our income tax rate for fiscal 2013 to be in the range
U.S., Canada and Mexico versus 455 at June 30, 2010. The
compared with the prior year. We repaid all of our outstanding
of 34.0% to 35.0%.
increase in operating facilities represented 11 new locations due
debt in fiscal 2011 which lowered interest expense.
As a result of the factors addressed above, net income for fiscal
to acquisitions, the opening of 2 new locations, the impact of
Other expense (income), net, was $3.8 million of income in fiscal
2012 increased $12.0 million or 12.4% from the prior year. Net
redefining certain shop operations which added 11 locations, and
2011 compared to income of $0.4 million in fiscal 2010. Fiscal
income per share increased at a slightly higher rate of 13.4% due
the merger of 5 locations with other locations.
2011 included $2.0 million of unrealized gains on investments
to stock repurchases in fiscal 2012.
The number of Company associates was 4,664 at June 30, 2012
and 4,640 at June 30, 2011.
Our gross profit margin increased to 27.7% in fiscal 2011 from
held by non-qualified deferred compensation trusts and
27.2% in fiscal 2010. LIFO benefits had a negative 1.0% impact
recognition of a $1.7 million gain from death benefits received
on gross profit margin in fiscal 2011 versus fiscal 2010. LIFO
under two life insurance policies.
benefits recorded during fiscal year 2011 totaled $5.3 million
which provided an overall benefit in our gross profit percent of
0.2%. This compares to a LIFO benefit of $23.5 million in fiscal
2010 which added 1.2% to gross profit. Our focused efforts on
3
25358_AIT_Report_WT.indd 6
8/23/12 8:33 AM
Our gross profit margin was 27.6% in fiscal 2012 versus 27.7%
expenses as a percent of sales helped offset the reduction in
in fiscal 2011. Positive impacts as a result of higher supplier
gross profit. Management continues to seek opportunities to
purchasing incentives offset the impact of lower LIFO layer
take advantage of economies of scale to improve the SD&A
liquidation benefits recognized in the current year ($3.4 million of
expenses in this segment.
LIFO layer liquidation benefits in fiscal 2012 versus $12.3 million
in fiscal 2011).
Interest expense, net, decreased $1.7 million during fiscal 2012
compared with the prior year. We repaid all of our outstanding
Selling, distribution and administrative expenses (SD&A) consist of
debt in fiscal 2011 which lowered interest expense.
Other expense (income), net, represents certain non-operating
items of income and expense. This was $1.6 million of expense
in fiscal 2012 compared to income of $3.8 million of income in
fiscal 2011. Current year expense primarily consists of foreign
currency transaction losses of $1.6 million. Fiscal 2011 included
$2.0 million of unrealized gains on investments held by non-
qualified deferred compensation trusts and recognition of a
$1.7 million gain from death benefits received under two life
insurance policies.
YEAR ENDED JUNE 30, 2011 vs. 2010
The following table is included to aid in review of Applied’s
statements of consolidated income.
Year Ended June 30,
As a % of Net Sales
Change in
$'s Versus
Prior Period
2011
2010 % Increase
Net Sales
Gross Profit
100.0 % 100.0 %
27.7 %
27.2 %
Selling, Distribution & Administrative
20.9 %
21.4 %
Operating Income
Net Income
6.8 %
4.4 %
5.8 %
3.5 %
16.9 %
18.9 %
14.0 %
37.0 %
46.8 %
Net sales in fiscal 2011 were $2.2 billion, which was
$319.6 million or 16.9% above the prior year driven by
selling products at a higher gross profit margin led to an
approximate 0.9% improvement in gross profit margins. Other
positive impacts on margins were an increase of approximately
0.4% from businesses acquired during the fiscal year and an
increase of approximately 0.2% due to lower scrap expense.
SD&A increased $56.7 million or 14.0% during fiscal 2011
compared to fiscal year 2010, and as a percent of sales decreased
to 20.9% from 21.4% in fiscal 2010. Associate compensation
and benefits, including amounts tied to financial performance,
increased $27.4 million. Acquisitions added $18.4 million of
SD&A compared to fiscal year 2010, including additional
amortization expense of $1.4 million. Incremental expenses
associated with the development of a new ERP platform totaled
$8.6 million. Foreign currency translation had an unfavorable
impact of $3.1 million in fiscal 2011.
Operating income increased 37.0% to $150.8 million during
Income tax expense as a percent of income before taxes was
improvements in the industrial economy. Incremental net sales
fiscal 2011 from $110.1 million during 2010. As a percent of
34.8% for fiscal 2012 and 36.7% for fiscal 2011. The impact of
from companies acquired in fiscal 2011 contributed
lower effective tax rates and higher income in foreign jurisdictions
approximately $40.8 million or 1.8%. Currency translation
sales, operating income increased to 6.8% in fiscal 2011 from
5.8% in 2010. The $40.7 million increase in operating income
favorably reduced our rate when compared to the U.S. federal
statutory rate by 1.8%. Further reducing our rate compared to
the U.S. federal statutory rate is a permanent dividend deduction
benefit of 0.5%. These reductions compared to the U.S. federal
increased fiscal year 2012 sales by approximately $16.3 million or
during fiscal 2011 primarily reflects higher sales levels, improved
0.7%. In local currency, net sales from our Canadian operations
gross profit margins and the impact of leverage on increased
were up 23.1% from fiscal 2010, including 8.4% from
sales as we kept our SD&A to 20.9% of sales in 2011 versus
acquisitions. In local currency, net sales from our Mexican
21.4% in fiscal 2010.
rate were offset by the impact of state and local taxes which
operations were up 17.9%. The number of selling days in fiscal
Operating income as a percentage of sales for the Service Center
increased the rate by 2.5%.
2011 was the same as in fiscal 2010.
Based Distribution segment increased to 6.5% in fiscal 2011 from
permanent dividend deduction benefit of 0.5%. These
Businesses segment increased $85.4 million or 23.9%, driven by
The Fluid Power Businesses segment operating income increased
Net sales of our Service Center Based Distribution segment
5.0% in fiscal 2010, this increase is attributed to higher sales
increased $234.3 million, or 15.2%, compared to fiscal year 2010
levels without a commensurate increase in SD&A (representing
led by improvements in the industrial economy, with acquisitions
0.9% of the improvement) and improved gross profit margins
adding $40.8 million or 2.7%. Net sales of our Fluid Power
(representing 0.6% of the improvement).
improvements in the industrial economy.
The sales product mix for fiscal 2011 was 70.5% industrial
to 9.5% in fiscal 2011 from 7.5% in fiscal 2010, attributed to
higher sales levels without a commensurate increase in SD&A
products and 29.5% fluid power products compared to 71.7%
(representing 1.5% of the improvement) and improved gross
industrial and 28.3% fluid power in the prior year.
profit margins (representing 0.5% of the improvement).
At June 30, 2011, we had a total of 474 operating facilities in the
Interest expense, net, decreased $3.8 million during fiscal 2011
We expect our income tax rate for fiscal 2013 to be in the range
U.S., Canada and Mexico versus 455 at June 30, 2010. The
compared with the prior year. We repaid all of our outstanding
of 34.0% to 35.0%.
increase in operating facilities represented 11 new locations due
debt in fiscal 2011 which lowered interest expense.
As a result of the factors addressed above, net income for fiscal
to acquisitions, the opening of 2 new locations, the impact of
Other expense (income), net, was $3.8 million of income in fiscal
2012 increased $12.0 million or 12.4% from the prior year. Net
redefining certain shop operations which added 11 locations, and
2011 compared to income of $0.4 million in fiscal 2010. Fiscal
income per share increased at a slightly higher rate of 13.4% due
the merger of 5 locations with other locations.
2011 included $2.0 million of unrealized gains on investments
to stock repurchases in fiscal 2012.
The number of Company associates was 4,664 at June 30, 2012
and 4,640 at June 30, 2011.
Our gross profit margin increased to 27.7% in fiscal 2011 from
held by non-qualified deferred compensation trusts and
27.2% in fiscal 2010. LIFO benefits had a negative 1.0% impact
recognition of a $1.7 million gain from death benefits received
on gross profit margin in fiscal 2011 versus fiscal 2010. LIFO
under two life insurance policies.
In fiscal 2011, the impact of lower effective tax rates and higher
income in foreign jurisdictions favorably reduced our rate when
compared to the U.S. federal statutory rate by 1.0%. Further
reducing our rate compared to the U.S federal statutory rate is a
reductions compared to the U.S. federal rate were offset by the
impact of state and local taxes and by provision made for U.S.
income tax on a portion of undistributed earnings not considered
permanently reinvested in our Canadian subsidiaries which
increased the rate by 2.8% and 1.8%, respectively.
benefits recorded during fiscal year 2011 totaled $5.3 million
which provided an overall benefit in our gross profit percent of
0.2%. This compares to a LIFO benefit of $23.5 million in fiscal
2010 which added 1.2% to gross profit. Our focused efforts on
25358_AIT_Report_WT.indd 7
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3
Applied Industrial Technologies, Inc. and Subsidiaries
7
associate compensation, benefits and other expenses associated
with selling, purchasing, warehousing, supply chain
management, and providing marketing and distribution of the
Company’s products, as well as costs associated with a variety of
administrative functions such as human resources, information
technology, treasury, accounting, legal, and facility related
expenses. SD&A increased $23.7 million or 5.1% during fiscal
2012 compared to the prior year, and as a percent of sales
decreased to 20.5% from 20.9% in fiscal 2011. Enterprise
Resource Planning (ERP) project cash expenses were $18.3 million
($9.8 million above the prior year period). SD&A of businesses
acquired since the prior year period added $5.6 million. Effective
December 31, 2011, the Executive Organization and
Compensation Committee of the Board of Directors froze
participant benefits (credited service and final average earnings)
and entry into the Supplemental Executive Retirement Benefits
Plan (SERP) which constituted a plan curtailment. As a result, we
recognized $3.1 million in prior service costs upon curtailment of
the plan in the second quarter of fiscal 2012. We also incurred
one-time expenses associated with our CEO transition of $1.4
million in fiscal 2012. The translation impact of our foreign
subsidiaries into U.S. dollars had an unfavorable impact of $0.5
million on SD&A in the year.
Operating income increased 11.7% to $168.4 million during
fiscal 2012 from $150.8 million during 2011. As a percent of
sales, operating income increased to 7.1% in the current year
from 6.8% in 2011. The $17.6 million increase in operating
income during fiscal 2012 primarily reflects higher sales levels and
the impact of leverage on increased sales as we kept our SD&A to
20.5% of sales in 2012 versus 20.9% in fiscal 2011.
Operating income as a percentage of sales for the Service Center
Based Distribution segment increased to 7.1% in fiscal 2012 from
6.5% in fiscal 2011, this increase is attributable to improved
gross profit margins (representing 0.4% of the improvement) and
higher sales levels without a commensurate increase in SD&A
(representing 0.2% of the improvement).
The Fluid Power Businesses segment operating income decreased
slightly to 9.2% in fiscal 2012 from 9.5% in fiscal 2011. This
reduction is attributable to lower net gross profit margins
primarily from one vertical market within one of our Fluid Power
Businesses (representing 0.5% of the reduction). Lower SD&A
2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Income tax expense as a percent of income before taxes was
Net Cash Flows
Capital Expenditures
Accounts Receivable Analysis
36.7% for fiscal 2011 and 37.2% for fiscal 2010. The net
The following table is included to aid in review of Applied’s
We expect capital expenditures for fiscal 2013 to be in the
The following table is included to aid in analysis of accounts
decrease in the effective tax rate reflects higher income levels
statements of consolidated cash flows; all amounts are in
$13.0 million to $14.0 million range, consisting of capital
receivable and the associated provision for losses on accounts
earned in fiscal 2011 in foreign jurisdictions which have a lower
thousands.
associated with additional information technology equipment and
receivable (amounts in thousands):
overall statutory rate than the U.S. as well as the reversal of a
valuation allowance no longer necessary. These factors were
offset somewhat by provision made for U.S. income tax on a
portion of undistributed earnings not considered permanently
reinvested in our Canadian subsidiaries.
As a result of the factors addressed above, net income for fiscal
2011 increased $30.9 million or 46.8% from fiscal year 2010.
Net income per share increased at a comparable rate.
The number of Company associates was 4,640 at June 30, 2011
and 4,468 at June 30, 2010. The net associate increase year-
over-year was attributable primarily to acquisitions (net increase
of 239 associates), partially offset by headcount reductions in pre-
existing operations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of capital is cash flow from operations,
supplemented as necessary by bank borrowings or other sources
of debt. At June 30, 2012 and June 30, 2011, we had no
outstanding borrowings. Management expects that our existing
cash, cash equivalents, funds available under the revolving credit
facility, cash provided from operations, and the use of operating
leases will be sufficient to finance normal working capital needs
in each of the countries we operate in, payment of dividends,
acquisitions, investments in properties, facilities and equipment,
and the purchase of additional Company common stock.
Management also believes that additional long-term debt and
line of credit financing could be obtained based on the
Company’s credit standing and financial strength.
The Company’s working capital at June 30, 2012 was $435.6
million compared to $404.2 million at June 30, 2011. The
current ratio was 2.9 to 1 at June 30, 2012 and at June 30, 2011.
The Executive Organization and Compensation Committee of the
Board of Directors froze participant benefits (credited service and
final average earnings) and entry into the SERP effective
December 31, 2011. This action constituted a plan curtailment,
resulting in a reduction of postemployment benefits of $8.9
million and deferred tax assets of $3.4 million in the consolidated
balance sheet.
Year Ended June 30,
infrastructure investments. Depreciation for fiscal 2013 is
Net Cash Provided by (Used in):
2012
2011
2010
Operating Activities
$
90,422 $ 76,842 $ 184,324
Investing Activities
Financing Activities
Exchange Rate Effect
(Decrease) Increase in Cash
and Cash Equivalents
(39,434 )
(47,887 )
(6,784 )
(60,816 )
(116,523 )
(30,514 )
(2,822 )
2,883
1,109
$
(12,650 ) $ (84,685 ) $ 148,135
In the last two fiscal years, and typical during periods of sales
expansion, a portion of cash generated from operations is
invested in working capital, particularly receivables and inventory.
The most significant factor in the spike in 2010 operating cash
flows related to the fiscal 2010 inventory management program
which by June 30, 2010 had resulted in a $101.4 million
reduction in U.S. bearing and drives products inventory amounts
from the June 30, 2009 levels.
Net cash used in investing activities in fiscal 2012 included
$26.0 million for capital expenditures and $14.7 million for
acquisitions. Capital expenditures included $16.7 million related
to the ERP project. In fiscal 2011, net cash used in investing
activities included $30.5 million for acquisitions and $20.4 million
for capital expenditures ($12.5 million related to the ERP project).
Net cash used by investing activities was primarily used for capital
expenditures in fiscal 2010. Capital expenditures consist primarily
of information technology equipment and building improvements.
Net cash used in financing activities in fiscal 2012 included $33.8
million for dividend payments and $31.0 million to repurchase
997,200 shares of treasury stock. These uses were partially offset
by $3.7 million of excess tax benefits from share-based
compensation. In fiscal 2011, we repaid $50.0 million under our
revolving credit facility, $25.0 million under our private placement
debt and $12.8 million related to the associated cross-currency
swaps. Additionally, we paid dividends of $29.8 million and
repurchased 189,600 shares of treasury stock for $6.1 million.
In fiscal 2010, financing activities included dividends of
$25.4 million, repayment of a net $5.0 million on our revolving
credit facility, and $3.9 million to repurchase 159,900 shares of
treasury stock. The increase in dividends over the last three fiscal
years is the result of increases in our dividend payout rates. We
paid dividends of $0.80, $0.70 and $0.60 per share in fiscal
2012, 2011 and 2010, respectively.
expected to be in the range of $12.5 million to $13.5 million.
June 30,
2012
2011
respectively, at an average price per share of $31.12, $32.09 and
Provision as a % of net sales
0.16 %
0.09 %
Share Repurchases
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, 2012, we had
authorization to purchase an additional 1,142,800 shares.
In fiscal 2012, 2011 and 2010, we repurchased 997,200,
189,600 and 159,900 shares of the Company’s common stock,
$24.57, respectively.
Borrowing Arrangements
The Company has a five-year committed revolving credit
agreement that expires in May 2017. This agreement provides
for unsecured borrowings of up to $150.0 million. We had no
borrowings outstanding under our revolving credit agreements at
June 30, 2012 or June 30, 2011. Unused lines under this facility,
net of outstanding letters of credit, totaled $143.1 million and
were available to fund future acquisitions or other capital and
operating requirements. Borrowings under this agreement would
be at 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 and 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, 2012 or
June 30, 2011.
Accounts receivable, gross
$ 315,375
$ 297,767
Allowance for doubtful accounts
8,332
7,016
Accounts receivable, net
Allowance for doubtful accounts,
% of gross receivables
$ 307,043
$ 290,751
2.6 %
2.4 %
Year Ended June 30,
2012
2011.
Provision for losses on accounts receivable $
3,915
$
2,029
Accounts receivable are reported at net realizable value and
consist of trade receivables from customers. Management
monitors accounts receivable by reviewing Days Sales
Outstanding (DSO) and the aging of receivables for each of the
Company's locations.
On a consolidated basis, DSO was 45.2 at June 30, 2012 versus
44.2 at June 30, 2011. Accounts receivable increased 5.6% this
year, compared to a 7.3% increase in sales in the twelve months
ended June 30, 2012. We primarily attribute the increase in DSO
to higher sales to large contract accounts.
Less than 3% of our accounts receivable balances are more
than 90 days past due. On an overall basis, our provision for
losses from uncollected receivables represents 0.16% of our sales
in the year ended June 30, 2012. Historically, this percentage is
around 0.15%. Management believes the overall receivables
aging and provision for losses on uncollected receivables are at
reasonable levels.
The revolving credit facility and uncommitted shelf facility contain
restrictive covenants regarding liquidity, net worth, financial
Inventory Analysis
ratios, and other covenants. At June 30, 2012, the most
Inventories are valued at the lower of cost or market, using the
restrictive of these covenants required that the Company have
last-in, first-out (LIFO) method for U.S. inventories and the
consolidated income before interest, taxes, depreciation and
average cost method for foreign inventories. Management uses
amortization at least equal to 300% of net interest expense.
an inventory turnover ratio to monitor and evaluate inventory.
At June 30, 2012, the Company was in compliance with all
Management calculates this ratio on an annual as well as a
covenants and expects to remain in compliance during the
quarterly basis and uses inventory valued at current costs. The
terms of the agreements.
annualized inventory turnover (using current costs) for the period
ended June 30, 2012 was 4.6 versus 4.7 at June 30, 2011. We
believe our inventory turnover ratio in fiscal 2013 will remain
similar to the fiscal 2012 levels.
8
Applied Industrial Technologies, Inc. and Subsidiaries
4
5
25358_AIT_Report_WT.indd 8
8/28/12 8:39 AM
overall statutory rate than the U.S. as well as the reversal of a
valuation allowance no longer necessary. These factors were
offset somewhat by provision made for U.S. income tax on a
portion of undistributed earnings not considered permanently
reinvested in our Canadian subsidiaries.
As a result of the factors addressed above, net income for fiscal
2011 increased $30.9 million or 46.8% from fiscal year 2010.
Net income per share increased at a comparable rate.
The number of Company associates was 4,640 at June 30, 2011
and 4,468 at June 30, 2010. The net associate increase year-
over-year was attributable primarily to acquisitions (net increase
of 239 associates), partially offset by headcount reductions in pre-
existing operations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of capital is cash flow from operations,
supplemented as necessary by bank borrowings or other sources
of debt. At June 30, 2012 and June 30, 2011, we had no
outstanding borrowings. Management expects that our existing
cash, cash equivalents, funds available under the revolving credit
facility, cash provided from operations, and the use of operating
leases will be sufficient to finance normal working capital needs
in each of the countries we operate in, payment of dividends,
acquisitions, investments in properties, facilities and equipment,
and the purchase of additional Company common stock.
Management also believes that additional long-term debt and
line of credit financing could be obtained based on the
Company’s credit standing and financial strength.
The Company’s working capital at June 30, 2012 was $435.6
million compared to $404.2 million at June 30, 2011. The
current ratio was 2.9 to 1 at June 30, 2012 and at June 30, 2011.
The Executive Organization and Compensation Committee of the
Board of Directors froze participant benefits (credited service and
final average earnings) and entry into the SERP effective
December 31, 2011. This action constituted a plan curtailment,
resulting in a reduction of postemployment benefits of $8.9
million and deferred tax assets of $3.4 million in the consolidated
balance sheet.
Net Cash Provided by (Used in):
2012
2011
2010
Operating Activities
$
90,422 $ 76,842 $ 184,324
Investing Activities
Financing Activities
Exchange Rate Effect
(Decrease) Increase in Cash
and Cash Equivalents
(39,434 )
(47,887 )
(6,784 )
(60,816 )
(116,523 )
(30,514 )
(2,822 )
2,883
1,109
$
(12,650 ) $ (84,685 ) $ 148,135
In the last two fiscal years, and typical during periods of sales
expansion, a portion of cash generated from operations is
invested in working capital, particularly receivables and inventory.
The most significant factor in the spike in 2010 operating cash
flows related to the fiscal 2010 inventory management program
which by June 30, 2010 had resulted in a $101.4 million
reduction in U.S. bearing and drives products inventory amounts
from the June 30, 2009 levels.
Net cash used in investing activities in fiscal 2012 included
$26.0 million for capital expenditures and $14.7 million for
acquisitions. Capital expenditures included $16.7 million related
to the ERP project. In fiscal 2011, net cash used in investing
activities included $30.5 million for acquisitions and $20.4 million
for capital expenditures ($12.5 million related to the ERP project).
Net cash used by investing activities was primarily used for capital
expenditures in fiscal 2010. Capital expenditures consist primarily
of information technology equipment and building improvements.
Net cash used in financing activities in fiscal 2012 included $33.8
million for dividend payments and $31.0 million to repurchase
997,200 shares of treasury stock. These uses were partially offset
by $3.7 million of excess tax benefits from share-based
compensation. In fiscal 2011, we repaid $50.0 million under our
revolving credit facility, $25.0 million under our private placement
debt and $12.8 million related to the associated cross-currency
swaps. Additionally, we paid dividends of $29.8 million and
repurchased 189,600 shares of treasury stock for $6.1 million.
In fiscal 2010, financing activities included dividends of
$25.4 million, repayment of a net $5.0 million on our revolving
credit facility, and $3.9 million to repurchase 159,900 shares of
treasury stock. The increase in dividends over the last three fiscal
years is the result of increases in our dividend payout rates. We
paid dividends of $0.80, $0.70 and $0.60 per share in fiscal
2012, 2011 and 2010, respectively.
Income tax expense as a percent of income before taxes was
Net Cash Flows
Capital Expenditures
Accounts Receivable Analysis
36.7% for fiscal 2011 and 37.2% for fiscal 2010. The net
The following table is included to aid in review of Applied’s
We expect capital expenditures for fiscal 2013 to be in the
The following table is included to aid in analysis of accounts
decrease in the effective tax rate reflects higher income levels
statements of consolidated cash flows; all amounts are in
$13.0 million to $14.0 million range, consisting of capital
receivable and the associated provision for losses on accounts
earned in fiscal 2011 in foreign jurisdictions which have a lower
thousands.
associated with additional information technology equipment and
receivable (amounts in thousands):
Year Ended June 30,
infrastructure investments. Depreciation for fiscal 2013 is
expected to be in the range of $12.5 million to $13.5 million.
June 30,
2012
2011
Share Repurchases
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, 2012, we had
authorization to purchase an additional 1,142,800 shares.
In fiscal 2012, 2011 and 2010, we repurchased 997,200,
189,600 and 159,900 shares of the Company’s common stock,
Accounts receivable, gross
$ 315,375
$ 297,767
Allowance for doubtful accounts
8,332
7,016
Accounts receivable, net
Allowance for doubtful accounts,
% of gross receivables
$ 307,043
$ 290,751
2.6 %
2.4 %
Year Ended June 30,
2012
2011.
Provision for losses on accounts receivable $
3,915
$
2,029
respectively, at an average price per share of $31.12, $32.09 and
Provision as a % of net sales
0.16 %
0.09 %
$24.57, respectively.
Borrowing Arrangements
The Company has a five-year committed revolving credit
agreement that expires in May 2017. This agreement provides
for unsecured borrowings of up to $150.0 million. We had no
borrowings outstanding under our revolving credit agreements at
June 30, 2012 or June 30, 2011. Unused lines under this facility,
net of outstanding letters of credit, totaled $143.1 million and
were available to fund future acquisitions or other capital and
operating requirements. Borrowings under this agreement would
be at 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 and 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, 2012 or
June 30, 2011.
Accounts receivable are reported at net realizable value and
consist of trade receivables from customers. Management
monitors accounts receivable by reviewing Days Sales
Outstanding (DSO) and the aging of receivables for each of the
Company's locations.
On a consolidated basis, DSO was 45.2 at June 30, 2012 versus
44.2 at June 30, 2011. Accounts receivable increased 5.6% this
year, compared to a 7.3% increase in sales in the twelve months
ended June 30, 2012. We primarily attribute the increase in DSO
to higher sales to large contract accounts.
Less than 3% of our accounts receivable balances are more
than 90 days past due. On an overall basis, our provision for
losses from uncollected receivables represents 0.16% of our sales
in the year ended June 30, 2012. Historically, this percentage is
around 0.15%. Management believes the overall receivables
aging and provision for losses on uncollected receivables are at
reasonable levels.
The revolving credit facility and uncommitted shelf facility contain
restrictive covenants regarding liquidity, net worth, financial
Inventory Analysis
ratios, and other covenants. At June 30, 2012, the most
Inventories are valued at the lower of cost or market, using the
restrictive of these covenants required that the Company have
last-in, first-out (LIFO) method for U.S. inventories and the
consolidated income before interest, taxes, depreciation and
average cost method for foreign inventories. Management uses
amortization at least equal to 300% of net interest expense.
an inventory turnover ratio to monitor and evaluate inventory.
At June 30, 2012, the Company was in compliance with all
Management calculates this ratio on an annual as well as a
covenants and expects to remain in compliance during the
quarterly basis and uses inventory valued at current costs. The
terms of the agreements.
annualized inventory turnover (using current costs) for the period
ended June 30, 2012 was 4.6 versus 4.7 at June 30, 2011. We
believe our inventory turnover ratio in fiscal 2013 will remain
similar to the fiscal 2012 levels.
4
5
Applied Industrial Technologies, Inc. and Subsidiaries
9
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
1,970
$ 1,970
inventory dollars relate to LIFO layers added in the 1970s. The
CONTRACTUAL OBLIGATIONS
The following table shows the approximate value of the
Company’s contractual obligations and other commitments to
make future payments as of June 30, 2012 (in thousands):
Period
Less
Than
1 yr
Total
Period
1-3 yrs
Period
4-5 yrs
Period
Over
5 yrs
Other
Operating leases
$ 81,600 $ 23,500 $ 32,300 $ 14,700 $ 11,100
45,100
6,300
11,500
6,100
21,200
Planned funding of
post-retirement
obligations
Unrecognized
income tax benefit
liabilities, including
interest and
penalties
Total Contractual
Cash Obligations
$ 128,670 $ 29,800 $ 43,800 $ 20,800 $ 32,300 $ 1,970
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.
SUBSEQUENT EVENT
On August 1, 2012, the Company acquired SKF's company-
owned distribution businesses in Australia and New Zealand for
cash consideration. These businesses will expand Applied's global
capabilities and are part of the Service Center Based Distribution
segment. The Company funded the acquisition from its available
cash and existing revolving credit facilities. Results of operations
acquired will be included in the Company's results of operations
from the date of closing.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the
United States of America requires management to make
judgments, assumptions and estimates at a specific point in time
that affect the amounts reported in the consolidated financial
statements and disclosed in the accompanying notes. The
Business and Accounting Policies note to the consolidated
financial statements describes the significant accounting policies
and methods used in preparation of the consolidated financial
statements.
10
Applied Industrial Technologies, Inc. and Subsidiaries
6
Estimates are used for, but not limited to, determining the net
entire customer pool and changes in the overall aging of
Although management believes that the estimated liabilities for
carrying value of trade accounts receivable, inventories, recording
accounts receivable. While we have a large customer base that is
self-insurance are adequate, the estimates described above may
self-insurance liabilities and other accrued liabilities. Actual
geographically dispersed, a general economic downturn in any of
not be indicative of current and future losses. In addition, the
results could differ from these estimates. The following critical
the industry segments in which we operate could result in higher
actuarial calculations used to estimate self-insurance liabilities are
accounting policies are impacted significantly by judgments,
than expected defaults, and therefore, the need to revise
based on numerous assumptions, some of which are subjective.
assumptions and estimates used in the preparation of the
estimates for bad debts. Accounts are written off against the
We will continue to adjust our estimated liabilities for self-
consolidated financial statements.
allowance when it becomes evident collection will not occur.
insurance, as deemed necessary, in the event that future loss
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 37% of our domestic
excess of current cost over LIFO cost is $144.8 million as reflected
in our consolidated balance sheet at June 30, 2012. 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-
intangibles are evaluated for impairment when changes in
to-year. See the Inventories note to the consolidated financial
conditions indicate carrying value may not be recoverable. We
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
As of June 30, 2012 and 2011, our allowance for doubtful
accounts was 2.6% and 2.4% of gross receivables, respectively.
Our provision for losses on accounts receivable was $3.9 million,
$2.0 million and $2.5 million in fiscal 2012, 2011 and 2010,
experience differs from historical loss patterns.
Pension and Other Postemployment
Benefit Plans
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. Finite-lived
The measurement of liabilities related to pension plans and
other postemployment benefit plans is based on management’s
assumptions related to future events including interest rates,
return on pension plan assets, 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. At June 30, 2012, a 1% point change
would have the following effects (in thousands):
One-Percentage Point
-Increase
$ (3,501)
(117)
)
)
Decrease
$ 3,965
130
evaluate goodwill and indefinite-lived intangibles for impairment at
Effect of change in:
least annually. This evaluation requires significant judgment by
Discount rate on liability
management, including estimated future operating results,
Discount rate on net periodic benefit cost
evaluations, actual results could differ significantly. For example, a
have an impact on the postemployment liability or the associated
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
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.
All of the 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.
Self-Insurance Liabilities
Effective December 31, 2011, participant benefits and entry into
the SERP was frozen. As such, compensation increases no longer
periodic benefit cost. Additionally, a 1% change in the return on
assets is not material since most of the plans are non-qualified
and unfunded.
Income Taxes
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. As of June 30, 2012, the Company had
recognized $34.4 million of net deferred tax assets. This includes a
$0.2 million valuation allowance recorded related to estimated
We maintain business insurance programs with significant self-
limitations in the deductibility of certain expenses. Management
insured retention covering workers’ compensation, business,
believes that sufficient income will be earned in the future to
automobile, general product liability and other claims. We accrue
realize its deferred income tax assets. The realization of these
estimated losses using actuarial calculations, models and
deferred tax assets can be impacted by changes to tax laws,
assumptions based on historical loss experience. We maintain a
statutory tax rates and future taxable income levels.
self-insured health benefits plan, which provides medical benefits
to U.S. based 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.
7
25358_AIT_Report_WT.indd 10
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1,970
$ 1,970
inventory dollars relate to LIFO layers added in the 1970s. The
CONTRACTUAL OBLIGATIONS
The following table shows the approximate value of the
Company’s contractual obligations and other commitments to
make future payments as of June 30, 2012 (in thousands):
Period
Less
Than
1 yr
Total
Period
1-3 yrs
Period
4-5 yrs
Period
Over
5 yrs
Other
Operating leases
$ 81,600 $ 23,500 $ 32,300 $ 14,700 $ 11,100
45,100
6,300
11,500
6,100
21,200
Planned funding of
post-retirement
obligations
Unrecognized
income tax benefit
liabilities, including
interest and
penalties
Total Contractual
Cash Obligations
$ 128,670 $ 29,800 $ 43,800 $ 20,800 $ 32,300 $ 1,970
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.
SUBSEQUENT EVENT
On August 1, 2012, the Company acquired SKF's company-
owned distribution businesses in Australia and New Zealand for
cash consideration. These businesses will expand Applied's global
capabilities and are part of the Service Center Based Distribution
segment. The Company funded the acquisition from its available
cash and existing revolving credit facilities. Results of operations
acquired will be included in the Company's results of operations
from the date of closing.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the
United States of America requires management to make
judgments, assumptions and estimates at a specific point in time
that affect the amounts reported in the consolidated financial
statements and disclosed in the accompanying notes. The
Business and Accounting Policies note to the consolidated
financial statements describes the significant accounting policies
and methods used in 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 37% of our domestic
excess of current cost over LIFO cost is $144.8 million as reflected
in our consolidated balance sheet at June 30, 2012. The
Company maintains five LIFO pools based on the following
product groupings: bearings, power transmission products,
rubber products, fluid power products and other products.
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
Estimates are used for, but not limited to, determining the net
entire customer pool and changes in the overall aging of
Although management believes that the estimated liabilities for
carrying value of trade accounts receivable, inventories, recording
accounts receivable. While we have a large customer base that is
self-insurance are adequate, the estimates described above may
self-insurance liabilities and other accrued liabilities. Actual
geographically dispersed, a general economic downturn in any of
not be indicative of current and future losses. In addition, the
results could differ from these estimates. The following critical
the industry segments in which we operate could result in higher
actuarial calculations used to estimate self-insurance liabilities are
accounting policies are impacted significantly by judgments,
than expected defaults, and therefore, the need to revise
based on numerous assumptions, some of which are subjective.
assumptions and estimates used in the preparation of the
estimates for bad debts. Accounts are written off against the
We will continue to adjust our estimated liabilities for self-
consolidated financial statements.
allowance when it becomes evident collection will not occur.
insurance, as deemed necessary, in the event that future loss
As of June 30, 2012 and 2011, our allowance for doubtful
accounts was 2.6% and 2.4% of gross receivables, respectively.
Our provision for losses on accounts receivable was $3.9 million,
$2.0 million and $2.5 million in fiscal 2012, 2011 and 2010,
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. Finite-lived
LIFO layers and/or liquidations are determined consistently year-
intangibles are evaluated for impairment when changes in
to-year. See the Inventories note to the consolidated financial
conditions indicate carrying value may not be recoverable. We
experience differs from historical loss patterns.
Pension and Other Postemployment
Benefit Plans
The measurement of liabilities related to pension plans and
other postemployment benefit plans is based on management’s
assumptions related to future events including interest rates,
return on pension plan assets, 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. At June 30, 2012, a 1% point change
would have the following effects (in thousands):
evaluate goodwill and indefinite-lived intangibles for impairment at
Effect of change in:
least annually. This evaluation requires significant judgment by
Discount rate on liability
management, including estimated future operating results,
Discount rate on net periodic benefit cost
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
Effective December 31, 2011, participant benefits and entry into
the SERP was frozen. As such, compensation increases no longer
One-Percentage Point
-Increase
$ (3,501)
)
(117)
)
Decrease
$ 3,965
130
evaluations, actual results could differ significantly. For example, a
have an impact on the postemployment liability or the associated
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.
All of the 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.
Self-Insurance Liabilities
periodic benefit cost. Additionally, a 1% change in the return on
assets is not material since most of the plans are non-qualified
and unfunded.
Income Taxes
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. As of June 30, 2012, the Company had
recognized $34.4 million of net deferred tax assets. This includes a
$0.2 million valuation allowance recorded related to estimated
We maintain business insurance programs with significant self-
limitations in the deductibility of certain expenses. Management
insured retention covering workers’ compensation, business,
believes that sufficient income will be earned in the future to
automobile, general product liability and other claims. We accrue
realize its deferred income tax assets. The realization of these
estimated losses using actuarial calculations, models and
deferred tax assets can be impacted by changes to tax laws,
assumptions based on historical loss experience. We maintain a
statutory tax rates and future taxable income levels.
self-insured health benefits plan, which provides medical benefits
to U.S. based 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.
6
7
Applied Industrial Technologies, Inc. and Subsidiaries
11
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QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We repaid the debt that was outstanding at June 30, 2010 during
Our market risk is impacted by changes in foreign currency
fiscal 2011, thus, at June 30, 2012, we were not exposed to
exchange rates and to a lesser extent by changes in interest rates.
interest rate fluctuations on outstanding debt. We monitor
We occasionally utilize derivative instruments as part of our overall
depository institutions that hold our cash and cash equivalents,
financial risk management policy, but do not use derivative
primarily for safety of principal and secondarily for maximizing yield
instruments for speculative or trading purposes. We do not
on those funds. We diversify our cash and cash equivalents among
currently have any outstanding derivative instruments.
counterparties to minimize exposure to any of these entities.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Income taxes on undistributed earnings of non-U.S. subsidiaries
are not accrued for the portion of such earnings management
considers to be permanently reinvested. At June 30, 2012,
undistributed earnings of non-U.S. subsidiaries considered
permanently reinvested totaled approximately $79.8 million for
which no provision for U.S. income tax had been made. At
June 30, 2012, undistributed earnings of non-U.S. subsidiaries
not considered permanently reinvested totaled $13.6 million for
which $2.8 million in U.S. income taxes were accrued and
charged to income tax expense during fiscal 2011.
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; changes in the prices
for products and services relative to the cost of providing them;
reduction in supplier inventory purchase incentives; loss of key
supplier authorizations, lack of product availability, or changes in
supplier distribution programs; the cost of products and energy
and other operating costs; changes in customer preferences for
products and services of the nature and brands sold by us;
changes in customer procurement policies and practices;
competitive pressures; our reliance on information systems; our
ability to implement our ERP system in a timely, cost-effective,
and competent manner, and to capture its planned benefits while
maintaining an adequate internal control environment; 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; 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; 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;
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; 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; risks related to legal proceedings to which we are a
party; 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, 2012.
Foreign Currency Exchange Rate Risk
Since we operate throughout North America and approximately 15%
of our fiscal year 2012 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 components of
accumulated other comprehensive income (loss) as reported in the
statements of consolidated comprehensive income. 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 statements of
consolidated income as a component of other expense (income),
net. Applied does not currently hedge the net investments in
our foreign operations.
During the course of the fiscal year, the Canadian and Mexican
foreign exchange rates to the U.S. dollar decreased by 6% and
17%, respectively. In the twelve months ended June 30, 2012,
we experienced foreign currency translation losses totaling
$14.5 million, which were included in accumulated other
comprehensive income (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 experienced during the year-ended June 30, 2012 of the
U.S. dollar relative to foreign currencies that affect the Company
would have resulted in a $2.2 million decrease in net income for
the year ended June 30, 2012. A 10% weakening from the levels
experienced during the year ended June 30, 2012 of the U.S. dollar
relative to foreign currencies that affect the Company would have
resulted in a $2.2 million increase in net income for the
year ended June 30, 2012.
12
Applied Industrial Technologies, Inc. and Subsidiaries
8
9
25358_AIT_Report_WT.indd 12
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Income taxes on undistributed earnings of non-U.S. subsidiaries
Important risk factors include, but are not limited to, the
are not accrued for the portion of such earnings management
following: risks relating to the operations levels of our customers
considers to be permanently reinvested. At June 30, 2012,
and the economic factors that affect them; changes in the prices
undistributed earnings of non-U.S. subsidiaries considered
for products and services relative to the cost of providing them;
permanently reinvested totaled approximately $79.8 million for
reduction in supplier inventory purchase incentives; loss of key
which no provision for U.S. income tax had been made. At
supplier authorizations, lack of product availability, or changes in
June 30, 2012, undistributed earnings of non-U.S. subsidiaries
not considered permanently reinvested totaled $13.6 million for
supplier distribution programs; the cost of products and energy
and other operating costs; changes in customer preferences for
which $2.8 million in U.S. income taxes were accrued and
charged to income tax expense during fiscal 2011.
CAUTIONARY STATEMENT UNDER PRIVATE
SECURITIES LITIGATION
REFORM ACT
products and services of the nature and brands sold by us;
changes in customer procurement policies and practices;
competitive pressures; our reliance on information systems; our
ability to implement our ERP system in a timely, cost-effective,
and competent manner, and to capture its planned benefits while
maintaining an adequate internal control environment; the
This Annual Report to Shareholders, including Management’s
impact of economic conditions on the collectability of trade
Discussion and Analysis, contains statements that are forward-
receivables; reduced demand for our products in targeted
looking based on management’s current expectations about the
markets due to reasons including consolidation in customer
future. Forward-looking statements are often identified by
industries and the transfer of manufacturing capacity to foreign
qualifiers, such as “guidance,” “expect,” “believe,” “plan,”
countries; our ability to retain and attract qualified sales and
“intend,” “will,” “should,” “could,” “would,” “anticipate,”
customer service personnel; our ability to identify and complete
“estimate,” “forecast,” “may,” and derivative or similar words or
acquisitions, integrate them effectively, and realize their
expressions. Similarly, descriptions of objectives, strategies, plans,
anticipated benefits; the variability and timing of new business
or goals are also forward-looking statements. These statements
opportunities including acquisitions, alliances, customer
may discuss, among other things, expected growth, future sales,
relationships, and supplier authorizations; the incurrence of debt
future cash flows, future capital expenditures, future performance,
and contingent liabilities in connection with acquisitions; our
and the anticipation and expectations of the Company and its
ability to access capital markets as needed on reasonable terms;
management as to future occurrences and trends. The Company
disruption of operations at our headquarters or distribution
intends that the forward-looking statements be subject to the safe
centers; risks and uncertainties associated with our foreign
harbors established in the Private Securities Litigation Reform Act
operations, including volatile economic conditions, political
of 1995 and by the Securities and Exchange Commission in its
instability, cultural and legal differences, and currency exchange
rules, regulations and releases.
Readers are cautioned not to place undue reliance on any
fluctuations; the potential for goodwill and intangible asset
impairment; changes in accounting policies and practices;
forward-looking statements. All forward-looking statements are
organizational changes within the Company; the volatility of our
based on current expectations regarding important risk factors,
stock price and the resulting impact on our consolidated financial
many of which are outside the Company’s control. Accordingly,
statements; risks related to legal proceedings to which we are a
actual results may differ materially from those expressed in the
party; adverse regulation and legislation, including potential
forward-looking statements, and the making of those statements
changes in tax regulations (e.g., those affecting the use of the
should not be regarded as a representation by the Company or
LIFO inventory accounting method and the taxation of foreign-
any other person that the results expressed in the statements will
sourced income); and the occurrence of extraordinary events
be achieved. In addition, the Company assumes no obligation
(including prolonged labor disputes, natural events and acts of
publicly to update or revise any forward-looking statements,
God, terrorist acts, fires, floods, and accidents). Other factors
whether because of new information or events, or otherwise,
and unanticipated events could also adversely affect our business,
except as may be required by law.
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, 2012.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Our market risk is impacted by changes in foreign currency
exchange rates and to a lesser extent by 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. We do not
currently have any outstanding derivative instruments.
Interest Rate Risk
We repaid the debt that was outstanding at June 30, 2010 during
fiscal 2011, thus, at June 30, 2012, we were not exposed to
interest rate fluctuations on outstanding debt. We monitor
depository institutions that hold our cash and cash equivalents,
primarily for safety of principal and secondarily for maximizing yield
on those funds. We diversify our cash and cash equivalents among
counterparties to minimize exposure to any of these entities.
Foreign Currency Exchange Rate Risk
Since we operate throughout North America and approximately 15%
of our fiscal year 2012 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 components of
accumulated other comprehensive income (loss) as reported in the
statements of consolidated comprehensive income. 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 statements of
consolidated income as a component of other expense (income),
net. Applied does not currently hedge the net investments in
our foreign operations.
During the course of the fiscal year, the Canadian and Mexican
foreign exchange rates to the U.S. dollar decreased by 6% and
17%, respectively. In the twelve months ended June 30, 2012,
we experienced foreign currency translation losses totaling
$14.5 million, which were included in accumulated other
comprehensive income (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 experienced during the year-ended June 30, 2012 of the
U.S. dollar relative to foreign currencies that affect the Company
would have resulted in a $2.2 million decrease in net income for
the year ended June 30, 2012. A 10% weakening from the levels
experienced during the year ended June 30, 2012 of the U.S. dollar
relative to foreign currencies that affect the Company would have
resulted in a $2.2 million increase in net income for the
year ended June 30, 2012.
8
9
Applied Industrial Technologies, Inc. and Subsidiaries
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STATEMENTS OF CONSOLIDATED INCOME
STATEMENTS OF CONSOLIDATED INCOME
(In thousands, except per share amounts)
(In thousands, except per share amounts)
Year Ended June 30,
Net Sales
Cost of Sales
Gross Profit
Selling, Distribution and Administrative, including depreciation
Operating Income
Interest Expense
Interest Income
Other Expense (Income), net
Income Before Income Taxes
Income Tax Expense
Net Income
Net Income Per Share — Basic
Net Income Per Share — Diluted
See notes to consolidated financial statements.
2011..
2012.
2010..
$ 2,375,445 $ 2,212,849 $ 1,893,208
1,377,486
1,720,973
515,722
654,472
405,672
486,077
110,050
168,395
5,738
457
(280 )
(466 )
1,578
(425 )
105,017
166,826
39,114
58,047
65,903
108,779 $
1.56
2.58 $
1.54
2.54 $
1,599,739
613,110
462,347
150,763
2,081
(413 )
(3,793 )
152,888
56,129
96,759 $
2.28 $
2.24 $
$
$
$
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Year Ended June 30,
Net income per the statements of consolidated income
2012.
2011-
2010-
$
108,779 $
96,759 $
65,903
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
Postemployment benefits:
Actuarial loss on remeasurement
Reclassification of actuarial losses and prior service cost into SD&A expense and
included in net periodic pension costs
Impact of reduction in postemployment benefit liability (as forecasted salary increases
will not be realized) due to the plan curtailment
Reclassification of prior service cost into SD&A expense upon plan curtailment
Unrealized loss on investment securities available for sale
Unrealized loss on cash flow hedges
Reclassification of interest from cash flow hedge into interest expense
Total of other comprehensive income (loss), before tax
Income tax expense (benefit) related to items of other comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive income, net of tax
See notes to consolidated financial statements.
(14,471 )
10,011
2,950
(5,028 )
(930 )
(3,860 )
1,123
2,214
1,781
8,860
3,117
(220 )
—
—
(6,619 )
3,009
(9,628 )
—
—
(84 )
(266 )
316
11,261
154
11,107
—
—
(46 )
(1,103 )
1,408
1,130
(671 )
1,801
$
99,151 $
107,866 $
67,704
14
Applied Industrial Technologies, Inc. and Subsidiaries
1
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STATEMENTS OF CONSOLIDATED INCOME
(In thousands, except per share amounts)
Selling, Distribution and Administrative, including depreciation
Year Ended June 30,
Net Sales
Cost of Sales
Gross Profit
Operating Income
Interest Expense
Interest Income
Other Expense (Income), net
Income Before Income Taxes
Income Tax Expense
Net Income
Net Income Per Share — Basic
Net Income Per Share — Diluted
See notes to consolidated financial statements.
2012.
2011..
2010..
$ 2,375,445 $ 2,212,849 $ 1,893,208
1,720,973
1,599,739
1,377,486
654,472
486,077
168,395
457
(466 )
1,578
613,110
462,347
150,763
2,081
(413 )
(3,793 )
515,722
405,672
110,050
5,738
(280 )
(425 )
166,826
152,888
105,017
58,047
56,129
108,779 $
96,759 $
2.58 $
2.54 $
2.28 $
2.24 $
$
$
$
39,114
65,903
1.56
1.54
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(In thousands, except per share amounts)
Year Ended June 30,
Net income per the statements of consolidated income
2012.
108,779 $
$
2011-
96,759 $
2010-
65,903
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
Postemployment benefits:
Actuarial loss on remeasurement
Reclassification of actuarial losses and prior service cost into SD&A expense and
included in net periodic pension costs
Impact of reduction in postemployment benefit liability (as forecasted salary increases
will not be realized) due to the plan curtailment
Reclassification of prior service cost into SD&A expense upon plan curtailment
Unrealized loss on investment securities available for sale
Unrealized loss on cash flow hedges
Reclassification of interest from cash flow hedge into interest expense
Total of other comprehensive income (loss), before tax
Income tax expense (benefit) related to items of other comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive income, net of tax
See notes to consolidated financial statements.
(14,471 )
10,011
2,950
(5,028 )
(930 )
(3,860 )
1,123
2,214
1,781
8,860
3,117
(220 )
—
—
(6,619 )
3,009
(9,628 )
99,151 $
—
—
(84 )
(266 )
316
11,261
154
11,107
107,866 $
—
—
(46 )
(1,103 )
1,408
1,130
(671 )
1,801
67,704
$
1
2
Applied Industrial Technologies, Inc. and Subsidiaries
15
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CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
(In thousands)
(In thousands)
June 30,
Assets
Current assets
Cash and cash equivalents
Accounts receivable, less allowances of $8,332 and $7,016
Inventories
Other current assets
Total current assets
Property — at cost
Land
Buildings
Equipment, including computers and software
Total Property — at cost
Less accumulated depreciation
Property — net
Intangibles, net
Goodwill
Deferred tax assets
Other assets
Total Assets
Liabilities
Current liabilities
Accounts payable
Compensation and related benefits
Other current liabilities
Total current liabilities
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 (12,246 and 11,611 shares)
Accumulated other comprehensive income (loss)
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See notes to consolidated financial statements.
2012
2011--
$
78,442 $
307,043
228,506
51,771
665,762
91,092
290,751
204,066
33,005
618,914
10,245
74,477
147,004
231,726
148,623
83,103
84,840
83,080
26,424
18,974
10,428
73,399
129,117
212,944
143,930
69,014
89,551
76,981
43,447
17,024
$ 962,183 $ 914,931
$ 120,890 $ 108,509
65,413
40,766
214,688
47,730
18,950
281,368
63,149
46,130
230,169
39,750
20,133
290,052
10,000
150,070
743,360
(226,730 )
(4,569 )
672,131
10,000
148,307
668,421
(198,224 )
5,059
633,563
$ 962,183 $ 914,931
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:
Net cash paid for acquisition of businesses, net of cash acquired of $38 and $168 in 2012 and
Depreciation and amortization of property
Amortization of intangibles
Amortization of stock appreciation rights and options
Deferred income taxes
Provision for losses on accounts receivable
Unrealized foreign exchange transaction losses (gains)
Other share-based compensation expense
Gain on sale of property
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
2011, respectively
Other
Net Cash used in Investing Activities
Cash Flows from Financing Activities
Repayments under revolving credit facility
Long-term debt repayment
Settlements of cross-currency swap agreements
Purchases of treasury shares
Dividends paid
Excess tax benefits from share-based compensation
Exercise of stock appreciation rights and options
Net Cash used in Financing Activities
Effect of Exchange Rate Changes on Cash
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes
Interest
See notes to consolidated financial statements.
2012
2011--
2010--
$ 108,779 $ 96,759 $ 65,903
11,236
11,234
11,465
11,382
11,465
10,151
2,058
8,641
3,915
1,298
4,592
(627 )
2,473
4,784
2,029
—
3,379
(765 )
3,020
2,408
2,508
(4 )
2,361
(198 )
(22,748 )
(36,271 )
(48,578 )
(28,511 )
(21,197 )
(14,735 )
(11,185 )
14,157
12,926
(9,098 )
1,294
83,497
17,408
13,566
20,817
90,422
76,842
184,324
(26,021 )
(20,431 )
(7,216 )
1,258
1,326
532
(14,671 )
(30,504 )
—
1,722
(100 )
—
(39,434 )
(47,887 )
(6,784 )
—
—
—
(50,000 )
(5,000 )
(25,000 )
(12,752 )
—
—
(31,032 )
(6,085 )
(3,929 )
(33,800 )
(29,751 )
(25,416 )
3,695
321
6,404
661
2,492
1,339
(60,816 )
(116,523 )
(30,514 )
(2,822 )
2,883
1,109
(12,650 )
(84,685 )
148,135
91,092
175,777
27,642
$ 78,442 $ 91,092 $ 175,777
$ 53,463 $ 47,251 $ 31,179
672
2,248
5,195
16
Applied Industrial Technologies, Inc. and Subsidiaries
3
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CONSOLIDATED BALANCE SHEETS
Current assets
Cash and cash equivalents
Accounts receivable, less allowances of $8,332 and $7,016
Equipment, including computers and software
Total Property — at cost
Less accumulated depreciation
(In thousands)
June 30,
Assets
Inventories
Other current assets
Total current assets
Property — at cost
Land
Buildings
Property — net
Intangibles, net
Goodwill
Deferred tax assets
Other assets
Total Assets
Liabilities
Current liabilities
Accounts payable
Other current liabilities
Total current liabilities
Postemployment benefits
Other liabilities
Total Liabilities
Shareholders’ Equity
Compensation and related benefits
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 (12,246 and 11,611 shares)
Accumulated other comprehensive income (loss)
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See notes to consolidated financial statements.
2012
2011--
$
78,442 $
91,092
307,043
228,506
51,771
290,751
204,066
33,005
665,762
618,914
10,245
74,477
147,004
231,726
148,623
83,103
84,840
83,080
26,424
18,974
10,428
73,399
129,117
212,944
143,930
69,014
89,551
76,981
43,447
17,024
$ 962,183 $ 914,931
$ 120,890 $ 108,509
63,149
46,130
65,413
40,766
230,169
214,688
39,750
20,133
47,730
18,950
290,052
281,368
10,000
150,070
743,360
10,000
148,307
668,421
(226,730 )
(198,224 )
(4,569 )
5,059
672,131
633,563
$ 962,183 $ 914,931
STATEMENTS OF CONSOLIDATED CASH FLOWS
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
(In thousands)
Year Ended June 30,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property
Amortization of intangibles
Amortization of stock appreciation rights and options
Deferred income taxes
Provision for losses on accounts receivable
Unrealized foreign exchange transaction losses (gains)
Other share-based compensation expense
Gain on sale of property
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 $38 and $168 in 2012 and
2011, respectively
Other
Net Cash used in Investing Activities
Cash Flows from Financing Activities
Repayments under revolving credit facility
Long-term debt repayment
Settlements of cross-currency swap agreements
Purchases of treasury shares
Dividends paid
Excess tax benefits from share-based compensation
Exercise of stock appreciation rights and options
Net Cash used in Financing Activities
Effect of Exchange Rate Changes on Cash
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes
Interest
See notes to consolidated financial statements.
2012
2011--
2010--
$ 108,779 $ 96,759 $ 65,903
11,236
11,465
2,058
8,641
3,915
1,298
4,592
(627 )
(22,748 )
(28,511 )
(14,735 )
14,157
(9,098 )
90,422
11,234
11,382
2,473
4,784
2,029
—
3,379
(765 )
11,465
10,151
3,020
2,408
2,508
(4 )
2,361
(198 )
(36,271 )
(21,197 )
(11,185 )
12,926
1,294
76,842
(48,578 )
83,497
17,408
13,566
20,817
184,324
(26,021 )
1,258
(20,431 )
1,326
(7,216 )
532
(14,671 )
—
(39,434 )
(30,504 )
1,722
(47,887 )
(100 )
—
(6,784 )
—
—
—
(31,032 )
(33,800 )
3,695
321
(60,816 )
(2,822 )
(12,650 )
91,092
(5,000 )
—
—
(3,929 )
(25,416 )
2,492
1,339
(30,514 )
1,109
148,135
27,642
$ 78,442 $ 91,092 $ 175,777
(50,000 )
(25,000 )
(12,752 )
(6,085 )
(29,751 )
6,404
661
(116,523 )
2,883
(84,685 )
175,777
$ 53,463 $ 47,251 $ 31,179
5,195
672
2,248
3
4
Applied Industrial Technologies, Inc. and Subsidiaries
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STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(In thousands, except per share amounts)
(In thousands, except per share amounts)
For the Years Ended June 30, 2012, 2011 and 2010
Balance at July 1, 2009
Net income
Other comprehensive income (loss)
Cash dividends — $0.60 per share
Purchases of common stock for treasury
Treasury shares issued for:
Exercise of stock appreciation rights and options
Deferred compensation plans
Compensation expense — stock appreciation rights
and options
Other share-based compensation expense
Other
Balance at June 30, 2010
Net income
Other comprehensive income (loss)
Cash dividends — $0.70 per share
Purchases of common stock for treasury
Treasury shares issued for:
Exercise of stock appreciation rights and options
Deferred compensation plans
Compensation expense — stock appreciation rights
and options
Other share-based compensation expense
Other
Balance at June 30, 2011
Net income
Other comprehensive income (loss)
Cash dividends — $0.80 per share
Shares of
Common
Stock
Outstanding
Common
Stock
Additional
Paid-In
Capital
Income
Retained
for Use
in the
Business
Treasury
Shares-
at Cost
Accumulated
Other
Comprehensive
Income (Loss)
Total’
Shareholders’
Equity’
42,284 $ 10,000 $ 136,895 $ 560,574 $ (191,518 ) $
(7,849 ) $
508,102
65,903
(25,416 )
1,801
(3,929 )
1,372
187
(160 )
214
11
1,499
68
3,020
2,106
27
(403 )
309
420
65,903
1,801
(25,416 )
(3,929 )
2,871
255
3,020
2,106
326
42,376
10,000 143,185 601,370 (193,468 )
(6,048 )
555,039
96,759
(29,751 )
11,107
(6,085 )
706
119
(190 )
379
6
(109 )
102
2,473
3,158
31
(502 )
43
504
42,602
10,000 148,307 668,421 (198,224 )
5,059
108,779
(33,800 )
(9,628 )
Purchases of common stock for treasury
(997 )
Treasury shares issued for:
Exercise of stock appreciation rights and options
Performance share awards
Deferred compensation plans
Compensation expense — stock appreciation rights
and options
Other share-based compensation expense
250
91
9
(1,853 )
(2,664 )
128
2,058
4,308
(31,032 )
1,448
714
156
Other
12
(214 )
(40 )
208
96,759
11,107
(29,751 )
(6,085 )
597
221
2,473
3,158
45
633,563
108,779
(9,628 )
(33,800 )
(31,032 )
(405 )
(1,950 )
284
2,058
4,308
(46 )
Balance at June 30, 2012
41,967 $ 10,000 $ 150,070 $ 743,360 $ (226,730 ) $
(4,569 ) $
672,131
See notes to consolidated financial statements.
18
Applied Industrial Technologies, Inc. and Subsidiaries
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NOTE 1: BUSINESS AND ACCOUNTING POLICIES
Business
Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading industrial distributor serving
Maintenance Repair Operations (MRO) and Original Equipment Manufacturing (OEM) customers in virtually every industry. 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 and inventory
management solutions that provide added 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.
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.
Statements of Consolidated Comprehensive Income
Accounting Standards Codification (ASC) Topic 220 "Comprehensive Income" requires the reporting of comprehensive income in
addition to net income. Effective for fiscal 2012 and retrospective for fiscal 2011 and 2010, the Company has elected to include a
statement of consolidated comprehensive income as part of its basic consolidated financial statements. Prior to inclusion of the
statement of consolidated comprehensive income, comprehensive income, other comprehensive income and the components of
other comprehensive income were reported as part of the statement of consolidated shareholders' equity.
Foreign Currency
Estimates
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 reported in other comprehensive income (loss) in the
statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies
are included in the statements of consolidated income as a component of other expense (income), net.
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
Marketable Securities
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.
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 expense
(income), 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 primarily across North America. As such, the
Company does not believe that a significant concentration of credit risk exists in its accounts receivable.
27
(403 )
309
420
42,376
10,000 143,185 601,370 (193,468 )
(6,048 )
555,039
96,759
(29,751 )
11,107
STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY
(In thousands, except per share amounts)
For the Years Ended June 30, 2012, 2011 and 2010
Outstanding
Stock
Capital
Business
at Cost
Income (Loss)
Shares of
Common
Additional
Paid-In
Stock
Common
in the
Shares-
Comprehensive
Shareholders’
Income
Retained
for Use
Treasury
Accumulated
Other
42,284 $ 10,000 $ 136,895 $ 560,574 $ (191,518 ) $
(7,849 ) $
508,102
65,903
(25,416 )
1,801
Balance at July 1, 2009
Net income
Other comprehensive income (loss)
Cash dividends — $0.60 per share
Purchases of common stock for treasury
Treasury shares issued for:
Exercise of stock appreciation rights and options
Deferred compensation plans
Compensation expense — stock appreciation rights
and options
Other share-based compensation expense
Other
Balance at June 30, 2010
Net income
Other comprehensive income (loss)
Cash dividends — $0.70 per share
Purchases of common stock for treasury
Treasury shares issued for:
Exercise of stock appreciation rights and options
Deferred compensation plans
Compensation expense — stock appreciation rights
and options
Other share-based compensation expense
Other
Balance at June 30, 2011
Net income
Other comprehensive income (loss)
Cash dividends — $0.80 per share
Treasury shares issued for:
Exercise of stock appreciation rights and options
Performance share awards
Deferred compensation plans
Compensation expense — stock appreciation rights
Other share-based compensation expense
and options
Other
See notes to consolidated financial statements.
(160 )
214
11
(190 )
379
6
250
91
9
(3,929 )
1,372
187
(6,085 )
706
119
(31,032 )
1,448
714
156
1,499
68
3,020
2,106
(109 )
102
2,473
3,158
(1,853 )
(2,664 )
128
2,058
4,308
31
(502 )
43
504
42,602
10,000 148,307 668,421 (198,224 )
5,059
108,779
(33,800 )
(9,628 )
Purchases of common stock for treasury
(997 )
Total’
Equity’
65,903
1,801
(25,416 )
(3,929 )
2,871
255
3,020
2,106
326
96,759
11,107
(29,751 )
(6,085 )
597
221
2,473
3,158
45
633,563
108,779
(9,628 )
(33,800 )
(31,032 )
(405 )
(1,950 )
284
2,058
4,308
(46 )
Balance at June 30, 2012
41,967 $ 10,000 $ 150,070 $ 743,360 $ (226,730 ) $
(4,569 ) $
672,131
12
(214 )
(40 )
208
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 a leading industrial distributor serving
Maintenance Repair Operations (MRO) and Original Equipment Manufacturing (OEM) customers in virtually every industry. 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 and inventory
management solutions that provide added 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.
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.
Statements of Consolidated Comprehensive Income
Accounting Standards Codification (ASC) Topic 220 "Comprehensive Income" requires the reporting of comprehensive income in
addition to net income. Effective for fiscal 2012 and retrospective for fiscal 2011 and 2010, the Company has elected to include a
statement of consolidated comprehensive income as part of its basic consolidated financial statements. Prior to inclusion of the
statement of consolidated comprehensive income, comprehensive income, other comprehensive income and the components of
other comprehensive income were reported as part of the statement of consolidated shareholders' equity.
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 reported in other comprehensive income (loss) in the
statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies
are included in the statements of consolidated income as a component of other expense (income), 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 expense
(income), 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 primarily across North America. As such, the
Company does not believe that a significant concentration of credit risk exists in its accounts receivable.
5
Applied Industrial Technologies, Inc. and Subsidiaries
19
25358_AIT_Report_WT.indd 19
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
The Company’s cash and cash equivalents consists of deposits with commercial banks. 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 Comp any
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, 2012, approximately 37% of the Company’s domestic inventory dollars relate to LIFO layers
added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power
transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined
consistently year-to-year.
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. Supplier programs are analyzed each quarter to determine the appropriateness of the
amount of purchase incentives accrued. 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 Related Depreciation and Amortization
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 Company capitalizes internal use software
development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use.
Amortization of software begins when it is ready for its intended use, and is amortized on a straight-line basis over the estimated
useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on
the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or ch anges
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
finite-lived intangible assets is computed using the straight-line method over the estimated period of benefit. The Company also
maintains intangible assets with indefinite lives which are not amortized. Amortization of intangible assets is included in selling,
distribution and administrative expenses in the accompanying statements of consolidated income. Intangible assets with finite lives are
reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Intangible assets with indefinite
lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed.
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 U.S. based 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, collectability 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.
Shipping and Handling Costs
The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution a nd
administrative expenses in the accompanying statements of consolidated income. Internal delivery costs in selling, distribut ion and
administrative expenses were approximately $15,500, $15,400 and $14,400 for the fiscal years ended June 30, 2012, 2011 and
2010, 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 ASC. The Company recognizes accrued interest and
penalties related to unrecognized income tax benefits in the provision for income taxes.
Share-Based Compensation
Following approval by the Company's shareholders in October 2011, the 2011 Long-Term Performance Plan (the "2011 Plan")
replaced the 2007 Long-Term Performance Plan (the "2007 Plan"). Share-based compensation represents the cost related to
share-based awards granted to associates under either the 2011 Plan or the 2007 Plan. The Company measures share-based
compensation cost at grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service
20 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 20
8/23/12 8:33 AM
The Company’s cash and cash equivalents consists of deposits with commercial banks. 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 Comp any
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, 2012, approximately 37% of the Company’s domestic inventory dollars relate to LIFO layers
added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power
transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined
consistently year-to-year.
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. Supplier programs are analyzed each quarter to determine the appropriateness of the
amount of purchase incentives accrued. 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 Related Depreciation and Amortization
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 Company capitalizes internal use software
development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use.
Amortization of software begins when it is ready for its intended use, and is amortized on a straight-line basis over the estimated
useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on
the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or ch anges
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
finite-lived intangible assets is computed using the straight-line method over the estimated period of benefit. The Company also
maintains intangible assets with indefinite lives which are not amortized. Amortization of intangible assets is included in selling,
distribution and administrative expenses in the accompanying statements of consolidated income. Intangible assets with finite lives are
reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Intangible assets with indefinite
lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed.
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 U.S. based 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, collectability 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.
Shipping and Handling Costs
The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution a nd
administrative expenses in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and
administrative expenses were approximately $15,500, $15,400 and $14,400 for the fiscal years ended June 30, 2012, 2011 and
2010, 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 ASC. The Company recognizes accrued interest and
penalties related to unrecognized income tax benefits in the provision for income taxes.
Share-Based Compensation
Following approval by the Company's shareholders in October 2011, the 2011 Long-Term Performance Plan (the "2011 Plan")
replaced the 2007 Long-Term Performance Plan (the "2007 Plan"). Share-based compensation represents the cost related to
share-based awards granted to associates under either the 2011 Plan or the 2007 Plan. The Company measures share-based
compensation cost at grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service
25358_AIT_Report_WT.indd 21
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Applied Industrial Technologies, Inc. and Subsidiaries
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing
market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option
pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate
and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-
year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on
the closing market price of Company common stock on the grant date.
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.
New Accounting Pronouncement
In December 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance on the offsetting of assets and
liabilities, which is effective for the Company on July 1, 2013. The guidance requires additional disclosures regarding offsetting
arrangements in accordance with ASC 210-20-45 to enable financial statement users to understand the effect of these
arrangements on a company's financial position. The Company is currently evaluating the effect the adoption of the guidance will
have on its disclosures.
NOTE 2: BUSINESS COMBINATIONS
The Company acquired the following distributors to complement and extend its business over a broader geographic area. Results of
operations for the acquired businesses are part of the Service Center Based Distribution segment. The results of operations for these
acquisitions are not material for any year presented. Results of operations of acquired businesses are included in the accom panying
consolidated financial statements from their respective acquisition dates based on the Company’s consolidation policy.
Fiscal 2012 Acquisitions
In February 2012, the Company acquired Solutions Industrielles Chicoutimi, which provides bearings, power transmission products
and repair services and Spécialités Industrielles Harvey, which distributes bearings and power transmission products, plus hydraulic,
pneumatic and electrical components. In August 2011, the Company acquired Chaines-Plus, a distributor of bearings, power
transmission and related products. These distributors are all located in Quebec, Canada.
Fiscal 2011 Acquisitions
In May 2011, the Company acquired Gulf Coast Bearing & Supply Co., a full line bearing and power transmission distributor, located
in the U.S. In July 2010, the Company acquired UZ Engineered Products, a distributor of industrial supply products for maintenance,
repair, and operational needs, in the government and commercial sectors, throughout the U.S. and Canada. In August 2010, the
Company acquired SCS Supply Group, a distributor of bearings, power transmission components, electrical components, fluid power
products and industrial supplies located in Ontario, Canada.
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
2012.
2011.
$
302,465 $
280,875
70,797
373,262
144,756
60,837
341,712
137,646
$
228,506 $
204,066
Overall LIFO expense increased cost of goods sold by $7,100 for fiscal 2012. This amount is net of $3,400 of LIFO layer liqu idation benefits.
In fiscal 2011 and 2010, reductions in U.S. inventories, primarily in the bearings pool, resulted in the liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years. As a result, LIFO benefits reduced cost of goods sold by $5,300 and
$23,500 in fiscal 2011 and 2010, respectively. The LIFO reserves were reduced by the same amounts. If inventory levels had
remained constant with the prior year’s levels, instead of recording these benefits, the Company would have recorded LIFO expense
of $7,000 and $19,200 in fiscal 2011 and 2010, respectively. Therefore, the overall impact of LIFO layer liquidations increased gross
profit by $12,300 and $42,700 in fiscal 2011 and 2010, respectively.
NOTE 4: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for the Service Center Based Distribution segment for the years ended June 30,
At June 30, 2012, accumulated goodwill impairment losses subsequent to fiscal year 2002, totaled $36,605 and related to the Fluid
2012 and 2011 are as follows:
Balance at July 1, 2010
Goodwill acquired during the year
Other, primarily currency translation
Balance at June 30, 2011
Goodwill acquired during the year
Other, primarily currency translation
Balance at June 30, 2012
Power Businesses segment.
Intangibles consist of the following:
June 30, 2012
Finite-Lived Intangibles:
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Finite-Lived Intangibles
Indefinite-Lived Trade Name
Total Intangibles
June 30, 2011
Finite-Lived Intangibles:
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Finite-Lived Intangibles
Indefinite-Lived Trade Name
Total Intangibles
$
63,405
11,700
1,876
76,981
8,403
(2,304 )
$
83,080
Accumulated.
Net.
Amount.
Amortization.
Book Value.
$
84,249
$
29,905
$
54,344
25,677
13,605
4,740
128,271
1,290
7,428
4,500
2,888
44,721
$
129,561
$
44,721
$
84,840
Amount.
Accumulated.
Amortization.
Net.
Book Value.
$
78,084
$
23,111
$
54,973
25,944
14,211
5,127
123,366
1,290
5,666
3,696
2,632
35,105
$
124,656
$
35,105
$
89,551
18,249
9,105
1,852
83,550
1,290
20,278
10,515
2,495
88,261
1,290
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
22 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 22
8/23/12 8:33 AM
period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing
market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option
pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate
and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-
year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on
the closing market price of Company common stock on the grant date.
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
Treasury Shares
additional paid-in capital.
New Accounting Pronouncement
In December 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance on the offsetting of assets and
liabilities, which is effective for the Company on July 1, 2013. The guidance requires additional disclosures regarding offsetting
arrangements in accordance with ASC 210-20-45 to enable financial statement users to understand the effect of these
arrangements on a company's financial position. The Company is currently evaluating the effect the adoption of the guidance will
have on its disclosures.
NOTE 2: BUSINESS COMBINATIONS
Fiscal 2012 Acquisitions
Fiscal 2011 Acquisitions
In February 2012, the Company acquired Solutions Industrielles Chicoutimi, which provides bearings, power transmission products
and repair services and Spécialités Industrielles Harvey, which distributes bearings and power transmission products, plus hydraulic,
pneumatic and electrical components. In August 2011, the Company acquired Chaines-Plus, a distributor of bearings, power
transmission and related products. These distributors are all located in Quebec, Canada.
In May 2011, the Company acquired Gulf Coast Bearing & Supply Co., a full line bearing and power transmission distributor, located
in the U.S. In July 2010, the Company acquired UZ Engineered Products, a distributor of industrial supply products for maintenance,
repair, and operational needs, in the government and commercial sectors, throughout the U.S. and Canada. In August 2010, the
Company acquired SCS Supply Group, a distributor of bearings, power transmission components, electrical components, fluid power
products and industrial supplies located in Ontario, Canada.
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
2012.
2011.
$
302,465 $
280,875
70,797
373,262
144,756
60,837
341,712
137,646
$
228,506 $
204,066
Overall LIFO expense increased cost of goods sold by $7,100 for fiscal 2012. This amount is net of $3,400 of LIFO layer liqu idation benefits.
In fiscal 2011 and 2010, reductions in U.S. inventories, primarily in the bearings pool, resulted in the liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years. As a result, LIFO benefits reduced cost of goods sold by $5,300 and
$23,500 in fiscal 2011 and 2010, respectively. The LIFO reserves were reduced by the same amounts. If inventory levels had
remained constant with the prior year’s levels, instead of recording these benefits, the Company would have recorded LIFO expense
of $7,000 and $19,200 in fiscal 2011 and 2010, respectively. Therefore, the overall impact of LIFO layer liquidations increased gross
profit by $12,300 and $42,700 in fiscal 2011 and 2010, respectively.
NOTE 4: GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for the Service Center Based Distribution segment for the years ended June 30,
2012 and 2011 are as follows:
Balance at July 1, 2010
Goodwill acquired during the year
Other, primarily currency translation
Balance at June 30, 2011
Goodwill acquired during the year
Other, primarily currency translation
Balance at June 30, 2012
$
63,405
11,700
1,876
76,981
8,403
(2,304 )
$
83,080
The Company acquired the following distributors to complement and extend its business over a broader geographic area. Results of
operations for the acquired businesses are part of the Service Center Based Distribution segment. The results of operations for these
acquisitions are not material for any year presented. Results of operations of acquired businesses are included in the accom panying
At June 30, 2012, accumulated goodwill impairment losses subsequent to fiscal year 2002, totaled $36,605 and related to the Fluid
Power Businesses segment.
consolidated financial statements from their respective acquisition dates based on the Company’s consolidation policy.
Intangibles consist of the following:
June 30, 2012
Finite-Lived Intangibles:
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Finite-Lived Intangibles
Indefinite-Lived Trade Name
Total Intangibles
June 30, 2011
Finite-Lived Intangibles:
Customer relationships
Trade names
Vendor relationships
Non-competition agreements
Total Finite-Lived Intangibles
Indefinite-Lived Trade Name
Total Intangibles
Amount.
Accumulated.
Amortization.
Net.
Book Value.
$
84,249
25,677
13,605
4,740
128,271
1,290
$
29,905
7,428
4,500
2,888
44,721
$
54,344
18,249
9,105
1,852
83,550
1,290
$
129,561
$
44,721
$
84,840
Amount.
Accumulated.
Amortization.
Net.
Book Value.
$
78,084
$
23,111
$
54,973
25,944
14,211
5,127
123,366
1,290
5,666
3,696
2,632
35,105
20,278
10,515
2,495
88,261
1,290
$
124,656
$
35,105
$
89,551
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
25358_AIT_Report_WT.indd 23
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Applied Industrial Technologies, Inc. and Subsidiaries
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
During 2012, the Company acquired intangible assets with an initial purchase price allocation and weighted-average life as follows:
Provision
Customer relationships
Trade names
Non-competition agreements
Total Intangibles Acquired
Purchase Price
Allocation
7,810
270
435
8,515
$
$
Weighted-Average
Life
15 years
2 years
2 years
14 years
Amortization of intangibles totaled $11,465, $11,382 and $10,151 in fiscal 2012, 2011 and 2010, 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, 2012 is estimated to be $11,200 for 2013, $9,800 for 2014, $8,900 for 2015, $8,200
for 2016 and $7,600 for 2017.
NOTE 5: DEBT
The Company had no outstanding borrowings as of June 30, 2012 or June 30, 2011.
The Company has a revolving credit facility with a group of banks expiring in May 2017. This agreement provides for unsecured
borrowings of up to $150,000. Fees on this facility range from 0.09% to 0.175% per year based upon the Company's leverage
ratio at each quarter end. 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. Unused lines under this facility, net of outstanding letters of credit of $6,854 to secure
certain insurance obligations, totaled $143,146 at June 30, 2012 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, 2012 or June 30, 2011.
The revolving credit facility and uncommitted shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios,
and other covenants. At June 30, 2012, 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, 2012, the
Company was in compliance with all covenants.
NOTE 6: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 2012 and June 30, 2011 totaled $10,322 and $10,881, respectively.
These marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are
included in other assets on the consolidated balance sheets and their fair values were derived using quoted market prices (Level 1 in
the fair value hierarchy).
NOTE 7: INCOME TAXES
Income Before Income Taxes
The components of income before income taxes are as follows:
Year Ended June 30,
U.S.
Foreign
Total income before income taxes
2012.
2011.
$
137,667 $
127,567 $
29,159
25,321
2010.
91,932
13,085
$
166,826 $
152,888 $
105,017
The provision (benefit) for income taxes consists of:
Year Ended June 30,
State and local
Current:
Federal
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Total deferred
Total
Year Ended June 30,
Statutory income tax rate
Effects of:
State and local taxes
U.S. tax on foreign income, net
Valuation allowance
Foreign income taxes
Deductible dividend
Other, net
Effective income tax rate
2012
2011
2010
$
36,178 $
36,799 $
28,342
5,522
7,706
6,208
8,338
4,123
4,241
49,406
51,345
36,706
8,577
503
(439 )
8,641
5,648
169
(1,033 )
4,784
1,880
(311 )
839
2,408
$
58,047 $
56,129 $
39,114
2012
35.0 %
2011
35.0 %
2.5 %
—
—
(1.8 )%
(0.5 )%
(0.4 )%
34.8 %
2.8 %
1.8 %
(0.6 )%
(1.0 )%
(0.5 )%
(0.8 )%
36.7 %
2010
35.0 %
2.2 %
—
0.8 %
0.5 %
(0.7 )%
(0.6 )%
37.2 %
The exercise of non-qualified stock appreciation rights and options during fiscal 2012, 2011 and 2010 resulted in $2,725, $6,003
and $1,466, 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 2012, 2011 and 2010 resulted in
$970, $401 and $1,026, 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:
24 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 24
8/23/12 8:33 AM
During 2012, the Company acquired intangible assets with an initial purchase price allocation and weighted-average life as follows:
Provision
Purchase Price
Weighted-Average
The provision (benefit) for income taxes consists of:
$
$
Allocation
7,810
270
435
8,515
Life
15 years
2 years
2 years
14 years
Customer relationships
Trade names
Non-competition agreements
Total Intangibles Acquired
for 2016 and $7,600 for 2017.
NOTE 5: DEBT
Amortization of intangibles totaled $11,465, $11,382 and $10,151 in fiscal 2012, 2011 and 2010, 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, 2012 is estimated to be $11,200 for 2013, $9,800 for 2014, $8,900 for 2015, $8,200
The Company had no outstanding borrowings as of June 30, 2012 or June 30, 2011.
The Company has a revolving credit facility with a group of banks expiring in May 2017. This agreement provides for unsecured
borrowings of up to $150,000. Fees on this facility range from 0.09% to 0.175% per year based upon the Company's leverage
ratio at each quarter end. 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. Unused lines under this facility, net of outstanding letters of credit of $6,854 to secure
certain insurance obligations, totaled $143,146 at June 30, 2012 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, 2012 or June 30, 2011.
The revolving credit facility and uncommitted shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios,
and other covenants. At June 30, 2012, 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, 2012, the
Company was in compliance with all covenants.
NOTE 6: FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at June 30, 2012 and June 30, 2011 totaled $10,322 and $10,881, respectively.
These marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are
included in other assets on the consolidated balance sheets and their fair values were derived using quoted market prices (Level 1 in
The components of income before income taxes are as follows:
the fair value hierarchy).
NOTE 7: INCOME TAXES
Income Before Income Taxes
Year Ended June 30,
U.S.
Foreign
Total income before income taxes
2012.
2011.
$
137,667 $
127,567 $
29,159
25,321
2010.
91,932
13,085
$
166,826 $
152,888 $
105,017
Year Ended June 30,
Current:
Federal
State and local
Foreign
Total current
Deferred:
Federal
State and local
Foreign
Total deferred
Total
2012
2011
2010
$
36,178 $
36,799 $
28,342
5,522
7,706
6,208
8,338
4,123
4,241
49,406
51,345
36,706
8,577
503
(439 )
8,641
5,648
169
(1,033 )
4,784
1,880
(311 )
839
2,408
$
58,047 $
56,129 $
39,114
The exercise of non-qualified stock appreciation rights and options during fiscal 2012, 2011 and 2010 resulted in $2,725, $6,003
and $1,466, 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 2012, 2011 and 2010 resulted in
$970, $401 and $1,026, 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
Valuation allowance
Foreign income taxes
Deductible dividend
Other, net
Effective income tax rate
2012
35.0 %
2011
35.0 %
2.5 %
—
—
(1.8 )%
(0.5 )%
(0.4 )%
34.8 %
2.8 %
1.8 %
(0.6 )%
(1.0 )%
(0.5 )%
(0.8 )%
36.7 %
2010
35.0 %
2.2 %
—
0.8 %
0.5 %
(0.7 )%
(0.6 )%
37.2 %
25358_AIT_Report_WT.indd 25
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Applied Industrial Technologies, Inc. and Subsidiaries
25
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 2015-2027)
Foreign tax credits (expiring in years 2020 and 2022)
Other
Total deferred tax assets
Less: Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Inventories
Unremitted foreign earnings
Depreciation and differences in property bases
Total deferred tax liabilities
Net deferred tax assets
The net deferred tax asset is classified as follows:
Other current assets
Deferred tax assets (long-term)
Other liabilities
Net deferred tax assets
2012
2011
$
$
$
$
37,341 $
6,151
6,518
444
4,092
480
55,026
(157 )
54,869
(6,021 )
(2,804 )
(11,602 )
(20,427 )
34,442 $
12,189 $
26,424
(4,171 )
34,442 $
36,746
5,498
9,075
432
4,090
677
56,518
(158 )
56,360
(4,755 )
(2,804 )
(2,062 )
(9,621 )
46,739
5,510
43,447
(2,218 )
46,739
Included in the balance of unrecognized income tax benefits at June 30, 2012, 2011 and 2010 are $1,221, $659 and $988,
respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2012, 2011 and 2010, the Company recognized $(95), $(22) and $22, 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
$430 and $525 as of June 30, 2012 and 2011, 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 2009 through 2012 and to state and local income
tax examinations for the tax years 2008 through 2012. In addition, the Company is subject to foreign income tax examinations for
The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment
the tax years 2005 through 2012.
of cash is not expected within one year.
NOTE 8: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2012, 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 Income (Loss)
Accumulated other comprehensive income (loss) is comprised of the following:
Postemployment liability, net of income taxes of $(3,899) and $(6,990)
June 30,
Foreign currency translation
Unrealized gains on investment securities available for sale, net of income taxes of $(32) and $48
Total accumulated other comprehensive income (loss)
2012
2011
$
(6,229 )
$
(11,212 )
1,718
16,189
(58 )
82
$
(4,569 )
$
5,059
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.
U.S. federal income taxes are provided on the portion of non-U.S. subsidiaries income that is not considered to be permanently
reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2012, undistributed earnings of non-U.S. subsidiaries
considered to be permanently reinvested and for which no U.S. tax has been provided totaled approximately $79,800. 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. Undistributed earnings of non-U.S. subsidiaries not
considered permanently reinvested totaled approximately $13,600. U.S. taxes totaling $2,804 have been accrued on these earnings.
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:
Year 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
Unrecognized Income Tax Benefits at end of year
2012
1,181 $
331
398
(371 )
—
1,539 $
2011
1,842 $
153
50
(273 )
(591 )
1,181 $
2010
1,860
130
46
(194 )
—
1,842
$
$
26 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 26
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Included in the balance of unrecognized income tax benefits at June 30, 2012, 2011 and 2010 are $1,221, $659 and $988,
respectively, of income tax benefits that, if recognized, would affect the effective income tax rate.
During 2012, 2011 and 2010, the Company recognized $(95), $(22) and $22, 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
$430 and $525 as of June 30, 2012 and 2011, 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 2009 through 2012 and to state and local income
tax examinations for the tax years 2008 through 2012. In addition, the Company is subject to foreign income tax examinations for
the tax years 2005 through 2012.
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 8: SHAREHOLDERS’ EQUITY
Treasury Shares
At June 30, 2012, 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 Income (Loss)
Accumulated other comprehensive income (loss) is comprised of the following:
June 30,
Postemployment liability, net of income taxes of $(3,899) and $(6,990)
Foreign currency translation
Unrealized gains on investment securities available for sale, net of income taxes of $(32) and $48
Total accumulated other comprehensive income (loss)
2012
2011
$
(6,229 )
$
(11,212 )
1,718
16,189
(58 )
82
$
(4,569 )
$
5,059
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 2015-2027)
Foreign tax credits (expiring in years 2020 and 2022)
Other
Total deferred tax assets
Less: Valuation allowance
Deferred tax liabilities:
Inventories
Deferred tax assets, net of valuation allowance
Unremitted foreign earnings
Depreciation and differences in property bases
Total deferred tax liabilities
Net deferred tax assets
The net deferred tax asset is classified as follows:
Other current assets
Deferred tax assets (long-term)
Other liabilities
Net deferred tax assets
2012
2011
$
37,341 $
36,746
6,151
6,518
444
4,092
480
55,026
(157 )
54,869
(6,021 )
(2,804 )
(11,602 )
(20,427 )
5,498
9,075
432
4,090
677
56,518
(158 )
56,360
(4,755 )
(2,804 )
(2,062 )
(9,621 )
$
34,442 $
46,739
$
$
12,189 $
26,424
(4,171 )
34,442 $
5,510
43,447
(2,218 )
46,739
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.
U.S. federal income taxes are provided on the portion of non-U.S. subsidiaries income that is not considered to be permanently
reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2012, undistributed earnings of non-U.S. subsidiaries
considered to be permanently reinvested and for which no U.S. tax has been provided totaled approximately $79,800. 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. Undistributed earnings of non-U.S. subsidiaries not
considered permanently reinvested totaled approximately $13,600. U.S. taxes totaling $2,804 have been accrued on these earnings.
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:
Year 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
2012
2011
$
1,181 $
1,842 $
331
398
(371 )
—
153
50
(273 )
(591 )
2010
1,860
130
46
(194 )
—
Unrecognized Income Tax Benefits at end of year
$
1,539 $
1,181 $
1,842
25358_AIT_Report_WT.indd 27
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Applied Industrial Technologies, Inc. and Subsidiaries
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
Year Ended June 30,
2012
Tax
Expense
(Benefit)
Pre-Tax
Amount
Net.
Amount.
Pre-Tax
Amount
2011
Tax
Expense
(Benefit)
Net
Amount
Pre-Tax
Amount
2010
Tax
Expense
(Benefit)
Net
Amount
Foreign currency translation
adjustments
Postemployment benefits:
Actuarial loss on
remeasurement
Reclassification of actuarial
losses and prior service
cost into SD&A expense
and included in net
periodic pension costs
Impact of reduction in
postemployment benefit
liability (as forecasted
salary increases will not
be realized) due to a plan
curtailment
Reclassification of prior
service cost into SD&A
expense upon plan
curtailment
Unrealized loss on investment
securities available for sale
Unrealized loss on cash flow
hedges
Reclassification of interest from
cash flow hedge into interest
expense
Other comprehensive income
(loss)
$ (14,471 )
$ — $ (14,471 )
$ 10,011 $
(264 )
$ 10,275 $ 2,950 $
(32 )
$ 2,982
(5,028 )
(1,954 )
(3,074 )
(930 )
(435 )
(495 )
(3,860 )
(1,467 )
(2,393 )
1,123
432
691
2,214
850
1,364
1,781
677
1,104
8,860
3,411
5,449
—
—
—
—
—
—
for future grants at June 30, 2012 were 1,959.
Stock Appreciation Rights and Stock Options
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2012, 2011 and 2010 are:
3,117
1,200
1,917
—
—
—
—
—
—
(220 )
(80 )
(140 )
(84 )
(31 )
(53 )
(46 )
(19 )
(27 )
—
—
—
(266 )
(82 )
(184 )
(1,103 )
(365 )
(738 )
—
—
—
316
116
200
1,408
535
873
$ (6,619 )
$ 3,009 $ (9,628 )
$ 11,261 $
154 $ 11,107 $ 1,130 $
(671 )
$ 1,801
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
2012-
2011.
2010.
$
108,779 $
96,759 $
65,903
42,139
42,433
684
821
42,823
43,254
$
$
2.58 $
2.54 $
2.28 $
2.24 $
42,312
549
42,861
1.56
1.54
Stock appreciation rights and options relating to the acquisition of 140, 176 and 1,034 shares of common stock were outstanding
at June 30, 2012, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share for the fiscal
years then ended as they were anti-dilutive.
28 Applied Industrial Technologies, Inc. and Subsidiaries
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NOTE 9: SHARE-BASED COMPENSATION
Share-Based Incentive Plans
Following approval by the Company's shareholders in October 2011, the 2011 Long-Term Performance Plan (the "2011 Plan")
replaced the 2007 Long-Term Performance Plan. The 2011 Plan, which expires in 2016, provides for granting of SARs, stock
options, 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. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including
SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below:
Year Ended June 30,
SARs and options
Performance shares
Restricted stock and RSUs
Total compensation costs under award programs
2012.
2,058 $
1,983
2,325
2011-
2,473 $
1,705
1,453
6,366 $
5,631 $
2010-
3,020
1,076
1,029
5,125
$
$
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 unrecognized compensation cost for share-based award programs paid (or with the potential to be paid) at June 30,
2012 is $7,434. Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of
2.1 years. The aggregate number of shares of common stock which may be awarded under the 2011 Plan is 2,000; shares available
Per share fair value of SARs and stock options granted during the year
$
9.88
$
9.78
$
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 U.S. Treasury zero-coupon bonds with remaining terms equal to the
expected life of the SARs and stock options. 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.
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 SARs and stock options activity is presented below:
2012
5.6
1.1 %
2.5 %
44.2 %
2011
5.1
1.6 %
2.5 %
46.2 %
2010
5.5
2.4 %
2.5 %
52.2 %
8.45
Weighted-Average.
Shares
Exercise Price.
1,804
246
(802 )
(20 )
1,228
794
$
$
$
22.68
30.14
21.83
25.94
24.68
23.37
Expected life, in years
Risk free interest rate
Dividend yield
Volatility
Year Ended June 30, 2012
(Share amounts in thousands)
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable at end of year
Foreign currency translation
adjustments
Postemployment benefits:
Actuarial loss on
remeasurement
Reclassification of actuarial
losses and prior service
cost into SD&A expense
and included in net
periodic pension costs
Impact of reduction in
postemployment benefit
liability (as forecasted
salary increases will not
be realized) due to a plan
curtailment
Reclassification of prior
service cost into SD&A
expense upon plan
curtailment
Unrealized loss on investment
securities available for sale
Unrealized loss on cash flow
hedges
Reclassification of interest from
cash flow hedge into interest
expense
(loss)
Other comprehensive income
Net Income Per Share
Year Ended June 30,
Net Income
Average Shares Outstanding:
(5,028 )
(1,954 )
(3,074 )
(930 )
(435 )
(495 )
(3,860 )
(1,467 )
(2,393 )
1,123
432
691
2,214
850
1,364
1,781
677
1,104
8,860
3,411
5,449
—
—
—
—
—
—
3,117
1,200
1,917
—
—
—
—
—
—
(220 )
(80 )
(140 )
(84 )
(31 )
(53 )
(46 )
(19 )
(27 )
—
—
—
(266 )
(82 )
(184 )
(1,103 )
(365 )
(738 )
—
—
—
316
116
200
1,408
535
873
$ (6,619 )
$ 3,009 $ (9,628 )
$ 11,261 $
154 $ 11,107 $ 1,130 $
(671 )
$ 1,801
The following is a computation of basic and diluted earnings per share:
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
2012-
2011.
2010.
$
108,779 $
96,759 $
65,903
42,139
42,433
684
821
42,823
43,254
$
$
2.58 $
2.54 $
2.28 $
2.24 $
42,312
549
42,861
1.56
1.54
Stock appreciation rights and options relating to the acquisition of 140, 176 and 1,034 shares of common stock were outstanding
at June 30, 2012, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share for the fiscal
years then ended as they were anti-dilutive.
Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
Year Ended June 30,
2012
Tax
2011
Tax
2010
Tax
Pre-Tax
Expense
Net.
Pre-Tax
Expense
Net
Pre-Tax
Expense
Net
Amount
(Benefit)
Amount.
Amount
(Benefit)
Amount
Amount
(Benefit)
Amount
$ (14,471 )
$ — $ (14,471 )
$ 10,011 $
(264 )
$ 10,275 $ 2,950 $
(32 )
$ 2,982
Following approval by the Company's shareholders in October 2011, the 2011 Long-Term Performance Plan (the "2011 Plan")
replaced the 2007 Long-Term Performance Plan. The 2011 Plan, which expires in 2016, provides for granting of SARs, stock
options, 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. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including
SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below:
NOTE 9: SHARE-BASED COMPENSATION
Share-Based Incentive Plans
Year Ended June 30,
SARs and options
Performance shares
Restricted stock and RSUs
Total compensation costs under award programs
2012.
2,058 $
1,983
2,325
6,366 $
2011-
2,473 $
1,705
1,453
5,631 $
2010-
3,020
1,076
1,029
5,125
$
$
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 unrecognized compensation cost for share-based award programs paid (or with the potential to be paid) at June 30,
2012 is $7,434. Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of
2.1 years. The aggregate number of shares of common stock which may be awarded under the 2011 Plan is 2,000; shares available
for future grants at June 30, 2012 were 1,959.
Stock Appreciation Rights and Stock Options
The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2012, 2011 and 2010 are:
Expected life, in years
Risk free interest rate
Dividend yield
Volatility
2012
5.6
1.1 %
2.5 %
44.2 %
2011
5.1
1.6 %
2.5 %
46.2 %
Per share fair value of SARs and stock options granted during the year
$
9.88
$
9.78
$
2010
5.5
2.4 %
2.5 %
52.2 %
8.45
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 U.S. Treasury zero-coupon bonds with remaining terms equal to the
expected life of the SARs and stock options. 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.
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 SARs and stock options activity is presented below:
Year Ended June 30, 2012
(Share amounts in thousands)
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable at end of year
Shares
1,804
246
(802 )
(20 )
1,228
794
Weighted-Average.
Exercise Price.
$
$
$
22.68
30.14
21.83
25.94
24.68
23.37
25358_AIT_Report_WT.indd 29
8/23/12 8:33 AM
Applied Industrial Technologies, Inc. and Subsidiaries
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
The weighted-average remaining contractual terms for SARs and stock options outstanding and exercisable at June 30, 2012
were 6.0 and 4.8 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding and exercisable at
June 30, 2012 were $15,023 and $10,775, respectively. The aggregate intrinsic value of the SARs and stock options exercised
during fiscal 2012, 2011 and 2010 was $13,747, $18,526 and $5,157, respectively.
As of June 30, 2012, unrecognized compensation cost related to SARs and stock options amounted to $1,951. That cost is
expected to be recognized over a weighted-average period of 2.4 years. The total fair value of shares vested during fiscal 2012,
2011 and 2010 was $4,266, $2,645 and $2,673, respectively.
Performance Shares
Performance shares 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.
A summary of nonvested performance shares activity at June 30, 2012 is presented below:
Year Ended June 30, 2012
(Share amounts in thousands)
Nonvested, beginning of year
Granted
Forfeitures
Vested
Nonvested, end of year
Shares
222
31
(47 )
(144 )
62
$
Weighted-Average.
Grant-Date.
Fair Value.
23.23
28.34
27.15
20.67
28.80
$
The Committee set three one-year goals for the 2012 and 2011 grants tied to the Company’s earnings before interest, tax,
depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Each fiscal year during the three-year term has its
own separate goals. Achievement during any particular fiscal year is “banked” for payout at the end of the three-year term.
As of June 30, 2012, the potential shares to be banked in future periods was 62. Unrecognized compensation cost relating to
these shares has the potential to reach $1,812 and would be recognized in expense over the weighted-average remaining
vesting period of 1.7 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. 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.
A summary of the status of the Company’s nonvested restricted stock and RSUs at June 30, 2012 is presented below:
Year Ended June 30, 2012
(Share amounts in thousands)
Nonvested, beginning of year
Granted
Forfeitures
Vested
Nonvested, end of year
Weighted-Average.
Grant-Date.
Fair Value.
$
$
25.97
31.58
27.30
31.42
28.50
Shares
162
135
(31 )
(15 )
251
Unrecognized compensation cost related to unvested restricted stock awards and RSUs aggregated $3,670 at June 30, 2012,
and is expected to be recognized over the weighted-average remaining vesting period of 2.1 years.
30 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 30
8/23/12 8:33 AM
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 share holder
return targets. All performance periods had expired by June 30, 2011. During fiscal 2011 and 2010, the Company recorded $1,020
and $(231), respectively, of compensation expense (income) for achievement relative to the total shareholder return-based goals of
the Company’s performance grants. The liability at June 30, 2011 was $1,558; this was paid in fiscal 2012.
NOTE 10: BENEFIT PLANS
Retirement Savings Plan
2010, respectively.
Deferred Compensation Plans
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 2012, 2011 and 2010). The Company partially matches
401(k) contributions by participants; this match was suspended from January 1, 2009 to June 30, 2010. The Company’s expense for
profit sharing and matching of associates’ 401(k) contributions was $10,866, $11,251 and $4,891 during fiscal 2012, 2011 and
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. Assets held in these rabbi trusts consist of investments in money market and
mutual funds and Company common stock.
Postemployment Benefit Plans
are unfunded:
Supplemental Executive Retirement Benefits Plan
The Company provides the following postemployment benefits which, except for the Qualified Defined Benefit Retirement 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. On December 19, 2011, the Executive Organization and Compensation Committee of the Board of Directors
froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement
Benefits Plan (SERP) effective December 31, 2011. This action constituted a plan curtailment. The plan liability was remeasured
in conjunction with the curtailment using a 3.5% discount rate and participant final average earnings through the curtailment
date. The remeasurement in conjunction with the curtailment resulted in an actuarial loss (recorded in other comprehensive
income (loss)) of $302 ($492 loss, net of income tax of $190).
The curtailment is reflected in the Company's consolidated balance sheets as: 1) a reduction to the overall SERP liability
(included in postemployment benefits) of $8,860, 2) a reduction to deferred tax assets of $3,411 and 3) an increase in
accumulated other comprehensive income (loss) of $5,449. Prior service costs previously recorded through accumulated other
comprehensive income (loss) were reclassified into the statements of consolidated income ($3,117 gross expense, net of income
tax of $1,200). The gross expense is recorded in selling, distribution and administrative expense in fiscal 2012.
Key Executive Restoration Plan
In fiscal 2012, the Executive Organization & Compensation Committee of the Board of Directors adopted the Key Executive
Restoration Plan (KERP), an unfunded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded
$128 of expense associated with this plan in fiscal 2012.
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.
The weighted-average remaining contractual terms for SARs and stock options outstanding and exercisable at June 30, 2012
were 6.0 and 4.8 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding and exercisable at
June 30, 2012 were $15,023 and $10,775, respectively. The aggregate intrinsic value of the SARs and stock options exercised
during fiscal 2012, 2011 and 2010 was $13,747, $18,526 and $5,157, respectively.
As of June 30, 2012, unrecognized compensation cost related to SARs and stock options amounted to $1,951. That cost is
expected to be recognized over a weighted-average period of 2.4 years. The total fair value of shares vested during fiscal 2012,
2011 and 2010 was $4,266, $2,645 and $2,673, respectively.
Performance Shares
Performance shares 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.
A summary of nonvested performance shares activity at June 30, 2012 is presented below:
The Committee set three one-year goals for the 2012 and 2011 grants tied to the Company’s earnings before interest, tax,
depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Each fiscal year during the three-year term has its
own separate goals. Achievement during any particular fiscal year is “banked” for payout at the end of the three-year term.
As of June 30, 2012, the potential shares to be banked in future periods was 62. Unrecognized compensation cost relating to
these shares has the potential to reach $1,812 and would be recognized in expense over the weighted-average remaining
vesting period of 1.7 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. 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.
A summary of the status of the Company’s nonvested restricted stock and RSUs at June 30, 2012 is presented below:
Weighted-Average.
Grant-Date.
Fair Value.
23.23
28.34
27.15
20.67
28.80
Shares
222
31
(47 )
(144 )
62
Weighted-Average.
Grant-Date.
Fair Value.
25.97
31.58
27.30
31.42
28.50
Shares
162
135
(31 )
(15 )
251
$
$
$
$
Year Ended June 30, 2012
(Share amounts in thousands)
Nonvested, beginning of year
Granted
Forfeitures
Vested
Nonvested, end of year
Year Ended June 30, 2012
(Share amounts in thousands)
Nonvested, beginning of year
Granted
Forfeitures
Vested
Nonvested, end of year
Unrecognized compensation cost related to unvested restricted stock awards and RSUs aggregated $3,670 at June 30, 2012,
and is expected to be recognized over the weighted-average remaining vesting period of 2.1 years.
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 share holder
return targets. All performance periods had expired by June 30, 2011. During fiscal 2011 and 2010, the Company recorded $1,020
and $(231), respectively, of compensation expense (income) for achievement relative to the total shareholder return-based goals of
the Company’s performance grants. The liability at June 30, 2011 was $1,558; this was paid in fiscal 2012.
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 2012, 2011 and 2010). The Company partially matches
401(k) contributions by participants; this match was suspended from January 1, 2009 to June 30, 2010. The Company’s expense for
profit sharing and matching of associates’ 401(k) contributions was $10,866, $11,251 and $4,891 during fiscal 2012, 2011 and
2010, 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. Assets held in these rabbi trusts consist of investments in money market and
mutual funds and Company common stock.
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. On December 19, 2011, the Executive Organization and Compensation Committee of the Board of Directors
froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement
Benefits Plan (SERP) effective December 31, 2011. This action constituted a plan curtailment. The plan liability was remeasured
in conjunction with the curtailment using a 3.5% discount rate and participant final average earnings through the curtailment
date. The remeasurement in conjunction with the curtailment resulted in an actuarial loss (recorded in other comprehensive
income (loss)) of $302 ($492 loss, net of income tax of $190).
The curtailment is reflected in the Company's consolidated balance sheets as: 1) a reduction to the overall SERP liability
(included in postemployment benefits) of $8,860, 2) a reduction to deferred tax assets of $3,411 and 3) an increase in
accumulated other comprehensive income (loss) of $5,449. Prior service costs previously recorded through accumulated other
comprehensive income (loss) were reclassified into the statements of consolidated income ($3,117 gross expense, net of income
tax of $1,200). The gross expense is recorded in selling, distribution and administrative expense in fiscal 2012.
Key Executive Restoration Plan
In fiscal 2012, the Executive Organization & Compensation Committee of the Board of Directors adopted the Key Executive
Restoration Plan (KERP), an unfunded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded
$128 of expense associated with this plan in fiscal 2012.
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.
25358_AIT_Report_WT.indd 31
8/23/12 8:33 AM
Applied Industrial Technologies, Inc. and Subsidiaries
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
Salary Continuation Benefits
The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in
The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020.
excess of plan assets:
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 following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the
postemployment plans at June 30:
Change in benefit obligation:
Benefit obligation at beginning of the year
Service cost
Interest cost
Plan participants’ contributions
Benefits paid
Amendments
Actuarial loss (gain) during year
Curtailment
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual (loss) gain on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Pension Benefits
Retiree Health Care Benefits
2012
2011
2012
2011.
$
53,490
$
289
2,047
—
(4,144 )
150
4,179
(8,860 )
$
$
$
$
47,151
$
6,056
$
(30 )
4,557
—
(4,144 )
6,439
(40,712 )
$
$
51,114 $
460
2,232
—
(1,856 )
151
1,389
—
53,490 $
5,229 $
984
1,699
—
(1,856 )
6,056 $
$
(47,434 )
4,667 $
30
237
47
(256 )
—
423
—
5,148 $
— $
—
209
47
(256 )
— $
$
(5,148 )
4,593
39
235
37
(227 )
—
(10 )
—
4,667
—
—
190
37
(227 )
—
(4,667 )
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income (loss) for the
postemployment plans were as follows:
June 30,
Amounts recognized in the consolidated balance sheets:
Other current liabilities
Postemployment benefits
Net amount recognized
Pension Benefits
Retiree Health Care Benefits
2012
2011
2012
2011.
$
6,018
$
34,694
40,712
$
4,151 $
43,283
47,434 $
220 $
4,928
5,148 $
220
4,447
4,667
Amounts recognized in accumulated other comprehensive income (loss):
Net actuarial (loss) gain
Prior service cost
(10,112 )
$
(15,012 )
$
398
$
(279 )
(3,808 )
(135 )
Total amounts recognized in accumulated other comprehensive income (loss)
(10,391 )
$
(18,820 )
$
263 $
892
(274 )
618
Pension Benefits
$
47,151 $
2012
47,151
6,439
2011
53,490
43,528
6,056
June 30,
Projected benefit obligations
Accumulated benefit obligations
Fair value of plan assets
The net periodic costs are as follows:
Year Ended June 30,
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss (gain)
Amortization of prior service cost
Pension Benefits
Retiree Health Care Benefits
2012--
2011--
2010--
2012--
2011--
2010--
$
289 $
460 $
574 $
30 $
39 $
2,047
2,232
2,911
(396 )
644
412
3,117
(385 )
1,449
710
—
(351 )
924
797
—
237
—
(72 )
139
——
235
—
(83 )
139
—
52
259
—
(87 )
148
—
372
Assumptions
as follows:
June 30,
Recognition of prior service cost upon plan curtailment
Net periodic cost
$
6,113 $
4,466 $
4,855 $
334 $
330 $
The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $735 and $83, respectively. The estimated
net actuarial gain and prior service cost for the retiree health care benefits that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $(53) and $107, respectively.
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 used to determine benefit obligations and net periodic benefit cost for the plans were
Assumptions used to determine benefit obligations at year end:
Assumptions used to determine net periodic benefit cost:
Discount rate
Rate of compensation increase
Discount rate
Expected return on plan assets
Rate of compensation increase
Pension Benefits
Retiree Health Care Benefits
2012
2011
2012
2011
2.8 %
N/A
3.5 %
7.5 %
5.5 %
4.5 %
5.5 %
4.3 %
7.5 %
5.5 %
4.0 %
N/A
5.5 %
N/A
N/A
5.5 %
N/A
5.5 %
N/A
N/A
Due to freezing participant benefits in the SERP plan, the rate of compensation increase is no longer applicable. The assumed health
care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 7.5% and 8% as of
June 30, 2012 and 2011, 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,
2012 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
Decrease
$
48
$
854
(39 )
(701 )
32 Applied Industrial Technologies, Inc. and Subsidiaries
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Salary Continuation Benefits
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 following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the
postemployment plans at June 30:
Change in benefit obligation:
Benefit obligation at beginning of the year
Plan participants’ contributions
Service cost
Interest cost
Benefits paid
Amendments
Curtailment
Actuarial loss (gain) during year
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual (loss) gain on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Pension Benefits
Retiree Health Care Benefits
2012
2011
2012
2011.
$
53,490
$
51,114 $
4,667 $
4,593
460
2,232
—
(1,856 )
151
1,389
—
984
1,699
—
(1,856 )
30
237
47
(256 )
—
423
—
—
209
47
(256 )
39
235
37
(227 )
—
(10 )
—
—
—
190
37
(227 )
—
47,151
$
53,490 $
5,148 $
4,667
6,056
$
5,229 $
— $
289
2,047
—
(4,144 )
150
4,179
(8,860 )
(30 )
4,557
—
(4,144 )
$
$
$
$
6,439
$
6,056 $
— $
(40,712 )
$
(47,434 )
$
(5,148 )
$
(4,667 )
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income (loss) for the
postemployment plans were as follows:
Amounts recognized in the consolidated balance sheets:
June 30,
Other current liabilities
Postemployment benefits
Net amount recognized
Net actuarial (loss) gain
Prior service cost
Amounts recognized in accumulated other comprehensive income (loss):
Pension Benefits
Retiree Health Care Benefits
2012
2011
2012
2011.
$
6,018
$
4,151 $
34,694
43,283
40,712
$
47,434 $
220 $
4,928
5,148 $
220
4,447
4,667
(10,112 )
$
(15,012 )
$
398
$
(279 )
(3,808 )
(135 )
892
(274 )
618
The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020.
The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in
excess of plan assets:
June 30,
Projected benefit obligations
Accumulated benefit obligations
Fair value of plan assets
The net periodic costs are as follows:
Year Ended June 30,
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss (gain)
Amortization of prior service cost
Recognition of prior service cost upon plan curtailment
Net periodic cost
$
Pension Benefits
2012
47,151 $
47,151
6,439
2011
53,490
43,528
6,056
Pension Benefits
Retiree Health Care Benefits
2012--
289 $
2,047
(396 )
644
412
3,117
6,113 $
2011--
460 $
2,232
(385 )
1,449
710
—
4,466 $
2010--
574 $
2,911
(351 )
924
797
—
4,855 $
$
$
2012--
2011--
30 $
237
—
(72 )
139
——
334 $
39 $
235
—
(83 )
139
—
330 $
2010--
52
259
—
(87 )
148
—
372
The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $735 and $83, respectively. The estimated
net actuarial gain and prior service cost for the retiree health care benefits that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $(53) and $107, 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 used to determine benefit obligations and net periodic benefit cost for the plans were
as follows:
June 30,
Assumptions used to determine benefit obligations at year end:
Discount rate
Rate of compensation increase
Assumptions used to determine net periodic benefit cost:
Discount rate
Expected return on plan assets
Rate of compensation increase
Pension Benefits
2011
2012
Retiree Health Care Benefits
2011
2012
2.8 %
N/A
3.5 %
7.5 %
5.5 %
4.5 %
5.5 %
4.3 %
7.5 %
5.5 %
4.0 %
N/A
5.5 %
N/A
N/A
5.5 %
N/A
5.5 %
N/A
N/A
Due to freezing participant benefits in the SERP plan, the rate of compensation increase is no longer applicable. The assumed health
care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 7.5% and 8% as of
June 30, 2012 and 2011, 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,
2012 and for the year then ended:
Total amounts recognized in accumulated other comprehensive income (loss)
(10,391 )
$
(18,820 )
$
263 $
Effect on total service and interest cost components of periodic expense
Effect on postretirement benefit obligation
One-Percentage Point
Increase
Decrease
$
$
48
854
(39 )
(701 )
Applied Industrial Technologies, Inc. and Subsidiaries
33
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
Plan Assets
NOTE 11: LEASES
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 and target
allocation as of June 30:
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, 2012 are as follows:
Asset Class:
Equity securities
Debt securities
Other
Total
Target Allocation
Fair Value
2012
2011
40 – 70% $
20 – 50%
0 – 20%
100% $
3,735 $
2,382
322
6,439 $
3,876
1,756
424
6,056
During Fiscal Years
2013
2014
2015
2016
2017
Thereafter
Total minimum lease payments
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.
Cash Flows
Employer Contributions
The Company expects to contribute $6,000 to its pension benefit plans and $240 to its retiree health care benefit plans in
2013. Contributions do not equal estimated future payments as certain payments are made from plan assets.
Estimated Future Benefit Payments
Segment Financial Information
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
2013
2014
2015
2016
2017
2018 through 2022
$
Pension Benefits
6,200
5,900
5,700
4,500
1,700
15,200
$
Retiree Health Care
Benefits
240
240
240
240
260
1,420
Year Ended June 30, 2012
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Year Ended June 30, 2011
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Year Ended June 30, 2010
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
$
$
23,500
18,000
14,300
9,600
5,100
11,100
81,600
Total
178,476
962,183
11,236
26,021
157,591
914,931
11,234
20,431
103,823
891,520
11,465
7,216
Service Center
Based Distribution
Fluid Power
Businesses
$ 1,904,564
$ 470,881
$ 2,375,445
135,240
731,915
9,403
24,339
115,798
700,486
9,152
19,392
77,029
690,970
9,336
6,389
43,236
230,268
1,833
1,682
41,793
214,445
2,082
1,039
26,794
200,550
2,129
827
$ 1,770,798
$ 442,051
$ 2,212,849
$ 1,536,543
$ 356,665
$ 1,893,208
Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment were
$31,200 in 2012, $31,400 in 2011 and $30,700 in 2010.
NOTE 12: SEGMENT AND GEOGRAPHIC INFORMATION
The Company's reportable segments are: 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 generally the same as those described in Note 1. Sales primarily
from the Fluid Power Businesses segment to the Service Center Based Distribution segment of $18,097, $17,665 and $14,006, in
fiscal 2012, 2011 and 2010, respectively, have been eliminated in the table below.
34 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 34
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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.
Cash Flows
Employer Contributions
The Company expects to contribute $6,000 to its pension benefit plans and $240 to its retiree health care benefit plans in
2013. Contributions do not equal estimated future payments as certain payments are made from plan assets.
During Fiscal Years
2013
2014
2015
2016
2017
2018 through 2022
Pension Benefits
$
Retiree Health Care
Benefits
$
6,200
5,900
5,700
4,500
1,700
15,200
240
240
240
240
260
1,420
Plan Assets
allocation as of June 30:
Asset Class:
Equity securities
Debt securities
Other
Total
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 and target
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, 2012 are as follows:
Target Allocation
Fair Value
2012
2011
40 – 70% $
20 – 50%
0 – 20%
100% $
3,735 $
2,382
322
6,439 $
3,876
1,756
424
6,056
During Fiscal Years
2013
2014
2015
2016
2017
Thereafter
Total minimum lease payments
$
$
23,500
18,000
14,300
9,600
5,100
11,100
81,600
Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment were
$31,200 in 2012, $31,400 in 2011 and $30,700 in 2010.
NOTE 12: SEGMENT AND GEOGRAPHIC INFORMATION
The Company's reportable segments are: 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 generally the same as those described in Note 1. Sales primarily
from the Fluid Power Businesses segment to the Service Center Based Distribution segment of $18,097, $17,665 and $14,006, in
fiscal 2012, 2011 and 2010, respectively, have been eliminated in the table below.
Estimated Future Benefit Payments
Segment Financial Information
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:
Year Ended June 30, 2012
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Year Ended June 30, 2011
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Year Ended June 30, 2010
Net sales
Operating income for reportable segments
Assets used in the business
Depreciation and amortization of property
Capital expenditures
Service Center
Based Distribution
Fluid Power
Businesses
$ 1,904,564
135,240
731,915
9,403
24,339
$ 1,770,798
115,798
700,486
9,152
19,392
$ 1,536,543
77,029
690,970
9,336
6,389
$ 470,881
43,236
230,268
1,833
1,682
$ 442,051
41,793
214,445
2,082
1,039
$ 356,665
26,794
200,550
2,129
827
Total
$ 2,375,445
178,476
962,183
11,236
26,021
$ 2,212,849
157,591
914,931
11,234
20,431
$ 1,893,208
103,823
891,520
11,465
7,216
Applied Industrial Technologies, Inc. and Subsidiaries
35
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NOTE 13: COMMITMENTS AND CONTINGENCIES
In connection with the construction and lease of its corporate headquarters facility, the Company has guaranteed repayment of $4,400
of taxable development revenue bonds issued by Cuyahoga County and the Cleveland-Cuyahoga County Port Authority. These bonds
were issued with a 20-year term and are scheduled to mature in March 2016. Any default, as defined in the guarantee agreements,
would obligate the Company for the full amount of the outstanding bonds through maturity. Due to the nature of the guarantee, the
Company has not recorded any liability on the consolidated financial statements. In the event of a default and subsequent payout
under any or all guarantees, the Company maintains the right to pursue all legal options available to mitigate its exposure.
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the
Company believes the likelihood is remote that the ultimate resolution of any of these matters will have, either individually or in the
aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
NOTE 14: OTHER EXPENSE (INCOME), NET
Other expense (income), net, consists of the following:
Year Ended June 30,
2012
2011
2010
Unrealized loss (gain) on assets held in rabbi trust for a non-qualified
deferred compensation plan
Benefit from payouts on corporate-owned life insurance policies
Foreign currency transaction losses (gains)
Loss on cross-currency swap
Other, net
Total other expense (income), net
$
36 $
(2,016 ) $
(1,012 )
—
1,592
—
(50 )
(1,722 )
(541 )
368
118
$
1,578 $
(3,793 ) $
—
36
510
41
(425 )
The Company is the owner and beneficiary under life insurance policies acquired in conjunction with a fiscal 1998 acquisition, with
benefits in force of $12,300 and a net cash surrender value of $3,200 at June 30, 2012. In January 2011, the Company received
death benefits under two of these policies and realized a gain of $1,722.
NOTE 15: SUBSEQUENT EVENT
On August 1, 2012, the Company acquired SKF's company-owned distribution businesses in Australia and New Zealand for cash
consideration. These businesses will expand Applied's global capabilities and are part of the Service Center Based Distribution
segment. The Company funded the acquisition from its available cash and existing revolving credit facilities. Results of operations
acquired will be included in the Company's results of operations from the date of closing.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share amounts)
ERP related assets are included in assets used in the business and capital expenditures within the Service Center Based Distribution
segment. Within the geographic disclosures, these assets are included in the United States. Expenses associated with the ERP are
included in the Corporate and other income, net, line in the reconciliation of operating income for reportable segments to the
consolidated income before income taxes table below.
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:
Intangible amortization — Service Center Based Distribution
Intangible amortization — Fluid Power Businesses
Corporate and other income, net
Total operating income
Interest (income) expense, net
Other expense (income), net
Income before income taxes
2012--
178,476 $
2011--
157,591 $
2010--
103,823
3,834
7,631
(1,384 )
168,395
(9 )
1,578
166,826 $
3,384
7,998
(4,554 )
150,763
1,668
(3,793 )
1,890
8,261
(16,378 )
110,050
5,458
(425 )
152,888 $
105,017
$
$
Corporate and other income, net, includes the SERP curtailment loss of $3,117 recognized in the second quarter of fiscal 2012.
Additional fluctuations in corporate and other income, net, are due to changes in the levels and amounts of expenses being allocated
to the segments. The expenses being allocated include 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
2012-
1,680,926 $
694,519
2,375,445 $
2011-
1,559,859 $
652,990
2,212,849 $
2010-
1,357,206
536,002
1,893,208
$
$
The fluid power product category includes sales of hydraulic, pneumatic, lubrication and filtration components and systems, and
repair services through the Company’s Fluid Power Businesses segment as well as the Service Center Based Distribution segment.
Geographic Information
Net sales are presented in geographic areas based on the location of the facility shipping the product. 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
2012-
2011-
2010-
2,009,317 $
292,913
73,215
2,375,445 $
1,891,700 $
260,015
61,134
2,212,849 $
1,644,237
199,772
49,199
1,893,208
2012-
2011-
198,076 $
42,624
10,323
251,023 $
191,947
29,893
13,706
235,546
$
$
$
$
36 Applied Industrial Technologies, Inc. and Subsidiaries
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NOTE 13: COMMITMENTS AND CONTINGENCIES
In connection with the construction and lease of its corporate headquarters facility, the Company has guaranteed repayment of $4,400
of taxable development revenue bonds issued by Cuyahoga County and the Cleveland-Cuyahoga County Port Authority. These bonds
were issued with a 20-year term and are scheduled to mature in March 2016. Any default, as defined in the guarantee agreements,
would obligate the Company for the full amount of the outstanding bonds through maturity. Due to the nature of the guarantee, the
Company has not recorded any liability on the consolidated financial statements. In the event of a default and subsequent payout
under any or all guarantees, the Company maintains the right to pursue all legal options available to mitigate its exposure.
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the
Company believes the likelihood is remote that the ultimate resolution of any of these matters will have, either individually or in the
aggregate, a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
NOTE 14: OTHER EXPENSE (INCOME), NET
Other expense (income), net, consists of the following:
Year Ended June 30,
2012
2011
2010
Unrealized loss (gain) on assets held in rabbi trust for a non-qualified
deferred compensation plan
Benefit from payouts on corporate-owned life insurance policies
Foreign currency transaction losses (gains)
Loss on cross-currency swap
Other, net
Total other expense (income), net
$
$
36 $
—
1,592
—
(50 )
1,578 $
(2,016 ) $
(1,722 )
(541 )
368
118
(3,793 ) $
(1,012 )
—
36
510
41
(425 )
The Company is the owner and beneficiary under life insurance policies acquired in conjunction with a fiscal 1998 acquisition, with
benefits in force of $12,300 and a net cash surrender value of $3,200 at June 30, 2012. In January 2011, the Company received
death benefits under two of these policies and realized a gain of $1,722.
NOTE 15: SUBSEQUENT EVENT
On August 1, 2012, the Company acquired SKF's company-owned distribution businesses in Australia and New Zealand for cash
consideration. These businesses will expand Applied's global capabilities and are part of the Service Center Based Distribution
segment. The Company funded the acquisition from its available cash and existing revolving credit facilities. Results of operations
acquired will be included in the Company's results of operations from the date of closing.
ERP related assets are included in assets used in the business and capital expenditures within the Service Center Based Distribution
segment. Within the geographic disclosures, these assets are included in the United States. Expenses associated with the ERP are
included in the Corporate and other income, net, line in the reconciliation of operating income for reportable segments to the
consolidated income before income taxes table below.
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:
Intangible amortization — Service Center Based Distribution
Intangible amortization — Fluid Power Businesses
Corporate and other income, net
Total operating income
Interest (income) expense, net
Other expense (income), net
Income before income taxes
2012--
2011--
2010--
$
178,476 $
157,591 $
103,823
3,834
7,631
(1,384 )
168,395
(9 )
1,578
3,384
7,998
(4,554 )
150,763
1,668
(3,793 )
1,890
8,261
(16,378 )
110,050
5,458
(425 )
$
166,826 $
152,888 $
105,017
Corporate and other income, net, includes the SERP curtailment loss of $3,117 recognized in the second quarter of fiscal 2012.
Additional fluctuations in corporate and other income, net, are due to changes in the levels and amounts of expenses being allocated
to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.
Product Category
Net sales by product category are as follows:
The fluid power product category includes sales of hydraulic, pneumatic, lubrication and filtration components and systems, and
repair services through the Company’s Fluid Power Businesses segment as well as the Service Center Based Distribution segment.
Geographic Information
geographic area is as follows:
Net sales are presented in geographic areas based on the location of the facility shipping the product. Long-lived assets are based
on physical locations and are comprised of the net book value of property, goodwill and intangible assets. Information by
2012-
2011-
2010-
$
$
1,680,926 $
1,559,859 $
1,357,206
694,519
652,990
536,002
2,375,445 $
2,212,849 $
1,893,208
2012-
2011-
2010-
$
2,009,317 $
1,891,700 $
1,644,237
292,913
73,215
260,015
61,134
199,772
49,199
$
2,375,445 $
2,212,849 $
1,893,208
2012-
2011-
$
$
198,076 $
191,947
42,624
10,323
29,893
13,706
251,023 $
235,546
Year Ended June 30,
Industrial
Fluid power
Net sales
Year Ended June 30,
Net Sales:
United States
Canada
Mexico
Total
June 30,
Long-Lived Assets:
United States
Canada
Mexico
Total
25358_AIT_Report_WT.indd 37
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Applied Industrial Technologies, Inc. and Subsidiaries
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors a nd Share holders of A pplied I ndus tria l Tec hnol ogies , Inc.
Clevela nd, Ohio
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2012 and 2011, and the related statements of consolidated income, comprehensive income, shareholders’
equity, and cash flows for each of the three years in the period ended June 30, 2012. 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 opini on.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at
June 30, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended June 30,
2012, 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, 2012, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
August 15, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
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 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,
2012. 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, 2012.
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.
Cleveland, Ohio
August 15, 2012
Neil A. Schrimsher
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 15, 2012
38 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 38
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors a nd Share holders of A pplied I ndus tria l Tec hnol ogies , Inc.
Clevela nd, Ohio
We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2012 and 2011, and the related statements of consolidated income, comprehensive income, shareholders’
equity, and cash flows for each of the three years in the period ended June 30, 2012. 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 opini on.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at
June 30, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended June 30,
2012, 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, 2012, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
August 15, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
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 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,
2012. 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, 2012.
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.
Cleveland, Ohio
August 15, 2012
Neil A. Schrimsher
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 15, 2012
25358_AIT_Report_WT.indd 39
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Applied Industrial Technologies, Inc. and Subsidiaries
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors a nd Share holders of A pplied Indus tria l Tec hnol ogies , Inc.
Clevela nd, Ohio
We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”)
as of June 30, 2012, 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, 2012,
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, comprehensive income, shareholders’ equity and cash
flows as of and for the year ended June 30, 2012 of the Company and our report dated August 15, 2012 expressed an unqualified
opinion on those consolidated financial statements.
Cleveland, Ohio
August 15, 2012
40 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 40
8/23/12 8:33 AM
QUARTERLY OPERATING RESULTS
(In thousands, except per share amounts)
(UNAUDITED)
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Net
Sales
Gross
Profit
Operating
Income
Net
Income
Per Common Share
Net
Income
Cash
Dividend
$
579,574
570,397
605,461
620,013
$ 2,375,445
$
527,501
529,517
565,970
589,861
$ 2,212,849
$
437,743
446,253
486,141
523,071
$ 1,893,208
$ 158,704
155,469
167,613
172,686
$ 654,472
$ 143,120
144,281
156,566
169,143
$ 613,110
$ 115,444
116,905
130,356
153,017
$ 515,722
$ 43,267
33,335
42,019
49,774
$ 168,395
$
34,891
33,056
38,201
44,615
$ 150,763
$
17,641
18,903
27,037
46,469
$ 110,050
$ 26,382
20,935
29,418
32,044
$ 108,779
$
$
$
$
20,755
21,193
26,536
28,275
96,759
11,187
10,487
16,525
27,704
65,903
$ 0.61
0.49
0.69
0.75
$ 2.54
$ 0.48
0.49
0.61
0.65
2.24
$
$ 0.26
0.24
0.39
0.64
1.54
$
$ 0.19
0.19
0.21
0.21
$ 0.80
$ 0.17
0.17
0.17
0.19
$ 0.70
$ 0.15
0.15
0.15
0.15
$ 0.60
On August 6, 2012 there were 5,975 shareholders of record including 4,295 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, 2012 was $37.96 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.
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.
During the year ended June 30, 2012, overall LIFO expense was $7,100, which is net of $3,400 of LIFO layer liquidations recorded in the fourth quarter. The Company recorded overall LIFO benefits of $600 in the fourth quarter
(including the liquidation), which reduced cost of goods sold.
During the year ended June 30, 2011, the Company recorded overall LIFO benefits of $5,294, which reduced cost of goods sold. The overall LIFO reserves were reduced by the same amount. Total fiscal year 2011 LIFO benefits
were recorded as follows: $301 in the first quarter, $1,823 in the second quarter, $356 in the third quarter and $2,814 in the fourth quarter.
During the year ended June 30, 2010, the Company recorded overall LIFO benefits of $23,500, which reduced cost of goods sold. The overall LIFO reserves were reduced by the same amount. Total fiscal year 2010 LIFO benefits
were recorded as follows: $710 in the first quarter, $1,800 in the second quarter, $4,840 in the third quarter and $16,150 in the fourth quarter.
In the second quarter of fiscal 2011, Applied commenced its ERP project to transform the Company’s technology platforms and enhance its business information and transaction systems for future growth. Fiscal 2012 cash
expenses associated with this project totaled $18,300 and were recorded as follows: $3,700 in the first quarter, $4,100 in the second quarter, $5,700 in the third quarter and $4,800 in the fourth quarter. Fiscal 2011 cash
expenses associated with this project totaled $8,500 and were recorded as follows: $800 in the second quarter, $2,900 in the third quarter and $4,800 in the fourth quarter.
In the second quarter of fiscal 2012, the Company’s earnings were reduced by $4,400 due to two one-time items: freezing the Company’s Supplemental Executive Retirement Benefits Plan and CEO transition expense.
In the third quarter of fiscal 2011, the Company received death benefits under life insurance policies and realized a gain of $1,722.
QUARTERLY VOLUME AND PRICE INFORMATION
Price Range
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Shares Traded
Average Daily Volume
26,284,500
19,521,900
15,756,700
16,697,600
18,731,300
22,875,900
17,150,600
19,014,600
12,316,800
13,876,700
11,246,000
23,193,800
410,700
309,900
254,100
265,000
292,700
357,400
276,600
301,800
192,400
216,800
184,400
368,200
High
$ 36.77
36.07
42.01
41.79
$ 31.08
33.34
34.92
36.01
$ 23.17
22.91
25.20
33.00
Low
$24.50
25.63
34.78
34.44
$ 24.15
29.00
30.63
31.94
$ 18.11
18.80
21.06
24.80
Applied Industrial Technologies, Inc. and Subsidiaries
Applied Industrial Technologies, Inc. and Subsidiaries
41
41
25358_AIT_Report_WT.indd 41
8/23/12 8:33 AM
10 YEAR SUMMARY
(In thousands, except per share amounts and statistical data)
(UNAUDITED)
Consolidated Operations - Year Ended June 30
Net sales
Depreciation and amortization of property
Amortization:
Intangible assets
SARs and stock options (b)
Operating income
Net income
Per share data:
Net income:
Basic
Diluted
Cash dividend
Year-End Statistics - June 30
Current ratio
Operating facilities
Shareholders of record
Return on assets (c)
Return on equity (d)
Capital expenditures
Year-End Position - June 30
Working capital
Long-term debt (including long-term debt classified as current)
Total assets
Shareholders’ equity
$ 435,593
$ 404,226
962,183
672,131
914,931
633,563
2012
2011
2010
2009 (a)
2008
2007
2006
2005
2004
2003
$2,375,445
11,236
11,465
2,058
168,395
108,779
2.58
2.54
0.80
$ 2,212,849
11,234
11,382
2,473
150,763
96,759
2.28
2.24
0.70
2.9
476
6,225
11.8%
16.7%
2.9
474
6,208
11.1%
16.3%
$ 1,893,208
11,465
10,151
3,020
110,050
65,903
1.56
1.54
0.60
$ 347,528
75,000
891,520
555,039
2.3
455
5,884
7.9%
12.4%
$ 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
46,260
3,702
72,493
42,260
1.00
0.99
0.60
75,000
809,328
508,102
3.4
464
6,329
7.7%
8.4%
1,663
2,999
152,824
95,456
2.23
2.19
0.60
25,000
798,771
502,075
3.1
459
6,305
12.2%
20.0%
1,045
2,494
135,011
86,022
1.97
1.93
0.48
75,395
777,369
450,983
2.6
445
6,242
11.6%
19.9%
732
2,658
115,592
72,299
1.62
1.57
0.40
76,186
730,671
414,822
3.0
452
6,192
10.3%
17.9%
993
2,111
87,968
55,339
1.24
1.20
0.29
826
1,586
51,448
31,471
0.73
0.71
0.21
781
–
36,254
19,832
0.47
0.46
0.21
76,977
690,170
393,287
77,767
596,841
339,535
78,558
553,404
307,856
2.9
440
6,079
8.8%
15.1%
2.9
434
6,154
5.6%
9.7%
2.8
440
6,157
3.7%
6.5%
$ 369,038
$ 409,186
$ 365,523
$ 370,013
$ 345,806
$ 286,022
$ 259,359
$
26,021
$
20,431
$
7,216
$
6,988
$
8,410
$
11,192
$
11,057
$
9,208
$
14,383
$
12,794
(a) The goodwill impairment charge in fiscal 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 SAR or stock option expense as it was not required by Generally Accepted Accounting Principles.
(c) Return on assets is calculated as net income divided by monthly average assets, exclusive of the goodwill impairment.
(d) Return on equity is calculated as net income divided by the average shareholders' equity (beginning of the year and end of the year divided by 2).
Net Sales
(Dollars in Billions)
Net Income
(Dollars in Millions)
Net Income Per Share
(Dollars)
8
.
8
0
1
$
8
.
6
9
$
5
.
5
9
$
0
.
6
8
$
3
.
2
7
$
3
.
5
5
$
9
.
5
6
$
3
.
2
4
$
$120
$100
$80
$60
$40
$20
$0
5
.
1
3
$
8
.
9
1
$
03
04
05
06
07
08
09
10
11
12
* The goodwill impairment charge in fiscal 2009
* The goodwill impairment charge in fiscal 2009
reduced net income by $23.0 million.
reduced net income per share by $0.54.
42 Applied Industrial Technologies, Inc. and Subsidiaries
25358_AIT_Report_WT.indd 42
8/23/12 8:33 AM
$1.5 $1.5 $1.7 $1.9 $2.0 $2.1 $1.9 $1.9 $2.2 $2.4 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 03 04 05 06 07 08 09 10 11 12 $0.46 $0.71 $1.20 $1.57 $1.93 $2.19 $0.99 $1.54 $2.24 $2.54 $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 03 04 05 06 07 08 09 10 11 12
Consolidated Operations - Year Ended June 30
Net sales
Depreciation and amortization of property
Amortization:
Intangible assets
SARs and stock options (b)
Operating income
Net income
Per share data:
Net income:
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
Year-End Position - June 30
Working capital
Long-term debt (including long-term debt classified as current)
$2,375,445
11,236
11,465
2,058
168,395
108,779
2.58
2.54
0.80
$ 2,212,849
11,234
11,382
2,473
150,763
96,759
2.28
2.24
0.70
$ 435,593
$ 404,226
962,183
672,131
914,931
633,563
2.9
476
6,225
11.8%
16.7%
2.9
474
6,208
11.1%
16.3%
$ 1,893,208
11,465
10,151
3,020
110,050
65,903
1.56
1.54
0.60
$ 347,528
75,000
891,520
555,039
2.3
455
5,884
7.9%
12.4%
(a) The goodwill impairment charge in fiscal 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 SAR or stock option expense as it was not required by Generally Accepted Accounting Principles.
(c) Return on assets is calculated as net income divided by monthly average assets, exclusive of the goodwill impairment.
(d) Return on equity is calculated as net income divided by the average shareholders' equity (beginning of the year and end of the year divided by 2).
2012
2011
2010
2009 (a)
2008
2007
2006
2005
2004
2003
$ 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
46,260
3,702
72,493
42,260
1.00
0.99
0.60
1,663
2,999
152,824
95,456
2.23
2.19
0.60
1,045
2,494
135,011
86,022
1.97
1.93
0.48
732
2,658
115,592
72,299
1.62
1.57
0.40
993
2,111
87,968
55,339
1.24
1.20
0.29
826
1,586
51,448
31,471
0.73
0.71
0.21
781
–
36,254
19,832
0.47
0.46
0.21
$ 369,038
75,000
809,328
508,102
$ 409,186
25,000
798,771
502,075
$ 365,523
75,395
777,369
450,983
$ 370,013
76,186
730,671
414,822
$ 345,806
76,977
690,170
393,287
$ 286,022
77,767
596,841
339,535
$ 259,359
78,558
553,404
307,856
3.4
464
6,329
7.7%
8.4%
3.1
459
6,305
12.2%
20.0%
2.6
445
6,242
11.6%
19.9%
3.0
452
6,192
10.3%
17.9%
2.9
440
6,079
8.8%
15.1%
2.9
434
6,154
5.6%
9.7%
2.8
440
6,157
3.7%
6.5%
$
26,021
$
20,431
$
7,216
$
6,988
$
8,410
$
11,192
$
11,057
$
9,208
$
14,383
$
12,794
Shareholders’ Equity
(Dollars in Millions)
Dividends Per Share
(Dollars)
25358_AIT_Report_WT.indd 43
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Applied Industrial Technologies, Inc. and Subsidiaries
43
$307.9 $339.5 $393.3 $414.8 $451.0 $502.1 $508.1 $555.0 $633.6 $672.1 $0 $100 $200 $300 $400 $500 $600 $700 $800 03 04 05 06 07 08 09 10 11 12 $0.21 $0.21 $0.29 $0.40 $0.48 $0.60 $0.60 $0.60 $0.70 $0.80 $0.0 $0.1 $0.2 $0.3 $0.4 $0.5 $0.6 $0.7 $0.8 $0.9 03 04 05 06 07 08 09 10 11 12 DIRECTORS
JOHN F. MEIER (3, 4) Age 64
DAN P. KOMNENOVICH (2) Age 60
JERRY SUE THORNTON, Ph.D. (1) Age 65
Former Chairman and Chief Executive Officer
President and Chief Executive Officer
President
Libbey Inc. (Tableware Products)
Chairman of the Board of Directors
Aviall, Inc.
Cuyahoga Community College
(Aviation Parts, Related Aftermarket Operations)
(Two-Year Educational Institution)
WILLIAM G. BARES (4) Age 71
J. MICHAEL MOORE (1) Age 69
Former Chairman and Chief Executive Officer
President
PETER C. WALLACE (3, 4) Age 58
President and Chief Executive Officer
The Lubrizol Corporation (Specialty Chemical Products)
Oak Grove Consulting Group, Inc.
Robbins & Myers, Inc. (Equipment Manufacturer)
THOMAS A. COMMES (1, 3) Age 70
Former President and Chief Operating Officer
The Sherwin-Williams Company (Paints and Coatings)
PETER A. DORSMAN (2) Age 57
Executive Vice President & Chief Quality Officer
NCR Corporation (Self-Service Technology Solutions)
L. THOMAS HILTZ (2, 3) Age 66
Attorney
EDITH KELLY-GREEN (2) Age 59
Former Vice President and Chief Sourcing Officer
FedEx Express (Express Transportation)
(Management Consulting)
Former Chairman and Chief Executive Officer
Invetech Company (Industrial Distributor)
VINCENT K. PETRELLA (1) Age 52
Senior Vice President, Chief Financial Officer and
Treasurer
Lincoln Electric Holdings, Inc.
(Welding, Brazing Products Manufacturer)
NEIL A. SCHRIMSHER (3) Age 48
Chief Executive Officer
Applied Industrial Technologies, Inc.
Committees of The Board
(1) Audit Committee
Chairman: Thomas A. Commes
(2) Corporate Governance Committee
Chairman: L. Thomas Hiltz
(3) Executive Committee
Chairman: John F. Meier
(4) Executive Organization and Compensation
Committee
Chairman: Peter C. Wallace
OFFICERS
NEIL A. SCHRIMSHER Age 48
Chief Executive Officer
BENJAMIN J. MONDICS Age 54
President & Chief Operating Officer
THOMAS E. ARMOLD Age 57
TODD A. BARLETT Age 57
Vice President – Acquisitions and
Global Business Development
FRED D. BAUER Age 46
Vice President – General Counsel & Secretary
MARK O. EISELE Age 55
Vice President – Chief Financial Officer & Treasurer
DANIEL T. BREZOVEC Age 51
Corporate Controller
JODY A. CHABOWSKI Age 52
Vice President – Marketing and Strategic Accounts
MICHAEL L. COTICCHIA Age 49
Assistant Controller
Vice President – Chief Human Resources Officer
OTHER KEY MANAGEMENT
DARREN B. “BEN” PADD Age 39
WARREN E. “BUD” HOFFNER Age 52
SERGIO H. NEVÁREZ Age 54
Vice President – Midwest Area
Vice President, General Manager – Fluid Power
General Director – Applied Mexico
IVAN J. BATISTA Age 39
General Director –
Rafael Benitez Carrillo, Inc. (Puerto Rico)
ROBERT E. CURLEY Age 52
Vice President – Southeast Area
BARBARA D. EMERY Age 53
Vice President – Human Resources
JAMES A. JEFFIERS Age 38
Vice President – Central States Area
JILL A. OLSEN Age 54
Vice President – Project Genesis
LONNY D. LAWRENCE Age 49
RONALD A. SOWINSKI Age 51
Vice President – Information Technology
President & Chief Operating Officer –
JOHN M. LEYO Age 61
Vice President – North Atlantic Area
Applied Industrial Technologies Ltd. (Canada)
KURT J. WEINHEIMER Age 56
Vice President – Western Area
44 Applied Industrial Technologies, Inc. and Subsidiaries
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SHAREHOLDER INFORMATION
Applied Industrial Technologies, Inc. common stock is listed on the New York Stock Exchange under the symbol AIT. The Company is identified in most
financial listings as “AppliedIndlTch.”
RESEARCH ON APPLIED INDUSTRIAL TECHNOLOGIES IS AVAILABLE THROUGH:
BB&T CAPITAL MARKETS
Holden Lewis, 703/471-3894
CJS SECURITIES
KEYBANC CAPITAL MARKETS
STEPHENS INC.
Jeffrey D. Hammond, 216/689-0236
Matt Duncan, 501/377-3723
Jonathan Tanwanteng, 914/287-7600
Joseph Mondillo, 212/894-3339
SIDOTI & CO.
WELLS FARGO SECURITIES, LLC
Allison Poliniak-Cusic, 212/214-5062
CLEVELAND RESEARCH COMPANY
GREAT LAKES REVIEW – Division of
WUNDERLICH SECURITIES
Adam Uhlman, 216/649-7241
Wellington Shields & Co.
Elliott Schlang, 216/767-1340
Brent D. Rakers, 901/251-2236
SHAREHOLDER INQUIRIES
INVESTOR RELATIONS INQUIRIES SHOULD
ANNUAL REPORT ON FORM 10-K
Requests to transfer Applied Industrial
BE DIRECTED TO:
MARK O. EISELE
Vice President – Chief Financial Officer
& Treasurer
Applied Industrial Technologies
1 Applied Plaza
Cleveland, OH 44115-5014
Telephone: 216/426-4000, Fax: 216/426-4845
Technologies, Inc. shares and all
correspondence regarding address change
information, duplicate mailings, missing
certificates, failure to receive dividend
checks in a timely manner or to participate
in the Company’s direct stock purchase
program should be directed to the
Company’s transfer agent and registrar:
COMPUTERSHARE TRUST COMPANY, N.A.
250 Royall Street
Canton, MA 02021
800/988-5291
The Applied Industrial Technologies, Inc.
Annual Report on Form 10-K for the fiscal
year ended June 30, 2012, including the
financial 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 Officer &
Treasurer at the address shown.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held
at 10:00 a.m., Tuesday, October 23, 2012, at the
Corporate Headquarters of Applied Industrial
Technologies, 1 Applied Plaza, East 36th and
Euclid Avenue, Cleveland, Ohio 44115.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Applied Industrial Technologies, Inc., Standard & Poor’s 500, and Peer Group
(Performance Results from 7/1/2007 through 6/30/2012)
Assumes $100 invested at the close of trading 6/30/07 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 Publishing LLC
2007
$100.00
100.00
100.00
2008
$83.63
86.88
86.96
2009
$70.22
64.11
74.77
2010
$92.62
73.36
100.34
2011
$133.17
95.88
148.47
2012
$141.07
101.10
170.81
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$0.00 $50.00 $100.00 $150.00 $200.00 2007 2008 2009 2010 2011 2012 Applied Industrial Technologies, Inc. Standard & Poor's 500 Peer Group
Corporate Headquarters
1 Applied Plaza
Cleveland, Ohio 44115
216/426-4000
Applied.com
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