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<SEC-DOCUMENT>0000950152-06-007266.txt : 20060828
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<ACCEPTANCE-DATETIME>20060828162219
ACCESSION NUMBER: 0000950152-06-007266
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20060630
FILED AS OF DATE: 20060828
DATE AS OF CHANGE: 20060828
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APPLIED INDUSTRIAL TECHNOLOGIES INC
CENTRAL INDEX KEY: 0000109563
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080]
IRS NUMBER: 340117420
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-02299
FILM NUMBER: 061058964
BUSINESS ADDRESS:
STREET 1: ONE APPLIED PLAZA
CITY: CLEVELAND
STATE: OH
ZIP: 44115-5056
BUSINESS PHONE: 216-426-4753
MAIL ADDRESS:
STREET 1: ONE APPLIED PLAZA
CITY: CLEVELAND
STATE: OH
ZIP: 44115-5056
FORMER COMPANY:
FORMER CONFORMED NAME: BEARINGS INC /OH/
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: BROWN JIM STORES INC
DATE OF NAME CHANGE: 19600201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
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<FILENAME>l22078ae10vk.txt
<DESCRIPTION>APPLIED INDUSTRIAL TECHNOLOGIES, INC. 10-K
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Ohio 34-0117420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
One Applied Plaza, 3301 Euclid Avenue, Cleveland, Ohio 44115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000.
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, without par value New York Stock Exchange
Preferred Stock Purchase Rights
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. X Yes No
----- -----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
Yes X No
- ----- -----
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. X Yes No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
-----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer X Accelerated filer Non-accelerated filer
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes X No
----- -----
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter (December 31, 2005): $972,335,951.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 15, 2006
----- ------------------------------
<S> <C>
Common Stock, without par value 44,139,290
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the documents, portions of which are incorporated by
reference, and the Parts of this Form 10-K into which such portions are
incorporated:
(1) Applied Industrial Technologies, Inc. Annual Report to shareholders
for the fiscal year ended June 30, 2006, portions of which are
incorporated by reference into Parts I, II and IV of this Form 10-K;
and,
(2) Applied's Proxy Statement relating to the annual meeting of
shareholders to be held October 24, 2006, portions of which are
incorporated by reference into Parts II, III, and IV of this Form
10-K.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES 3
LITIGATION REFORM ACT
PART I
Item 1. Business 4
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments. 13
Item 2. Properties 13
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
EXECUTIVE OFFICERS OF THE REGISTRANT 15
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis 17
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
Item 9A. Controls and Procedures 19
Item 9B. Other Information 19
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 20
Item 13. Certain Relationships and Related Transactions 20
Item 14. Principal Accountant Fees and Services 20
PART IV
Item 15. Exhibits and Financial Statement Schedules 21
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 27
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 28
SIGNATURES 29
EXHIBITS
</TABLE>
2
<PAGE>
CAUTIONARY STATEMENT
UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE, CONTAINS
STATEMENTS THAT ARE FORWARD-LOOKING, BASED ON MANAGEMENT'S CURRENT EXPECTATIONS
ABOUT THE FUTURE. FORWARD-LOOKING STATEMENTS ARE OFTEN IDENTIFIED BY QUALIFIERS
SUCH AS "EXPECT," "BELIEVE," "PLAN," "INTEND," "WILL," "SHOULD," "COULD,"
"ANTICIPATE," "MAY," AND SIMILAR EXPRESSIONS. SIMILARLY, DESCRIPTIONS OF OUR
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 APPLIED AND ITS MANAGEMENT AS TO FUTURE
OCCURRENCES AND TRENDS. APPLIED 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 APPLIED'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 APPLIED OR ANY OTHER PERSON THAT THE RESULTS
EXPRESSED IN THE STATEMENTS WILL BE ACHIEVED. IN ADDITION, APPLIED 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.
APPLIED BELIEVES ITS PRIMARY RISK FACTORS INCLUDE, BUT ARE NOT LIMITED TO,
THOSE IDENTIFIED IN "RISK FACTORS" AT PART I, ITEM 1A, AND IN "NARRATIVE
DESCRIPTION OF BUSINESS," AT PART I, ITEM 1, SECTION (C), IN THIS ANNUAL REPORT
ON FORM 10-K, AS WELL AS IN "MANAGEMENT'S DISCUSSION AND ANALYSIS" IN APPLIED'S
2006 ANNUAL REPORT TO SHAREHOLDERS. PLEASE READ THOSE DISCLOSURES CAREFULLY.
3
<PAGE>
PART I.
ITEM 1. BUSINESS.
In this Annual Report on Form 10-K, "Applied" refers to Applied Industrial
Technologies, Inc., an Ohio corporation. References to "we," "us," "our," and
"the company" refer to Applied and its subsidiaries.
The company is one of North America's leading industrial product
distributors. In addition, we provide fluid power, mechanical, and rubber shop
services. We offer technical application support for our products and provide
creative solutions to help customers minimize downtime and reduce overall
procurement costs. Although we do not generally manufacture the products we
sell, we do assemble and repair various products and systems. Our customers are
primarily North American companies, who use our products to maintain and to
repair their machinery and equipment. We also sell for original equipment
manufacturing uses.
Applied and its predecessor companies have engaged in this business since
1923, when The Ohio Ball Bearing Company was formed. Applied reincorporated in
Ohio in 1988.
Applied's Internet address is www.applied.com. The following documents are
available free of charge at the investor relations area of our website:
- Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, together
with Section 16 insider beneficial stock ownership reports, all as
soon as reasonably practicable after they are electronically filed
with, or furnished to, the Securities and Exchange Commission
- Our Code of Business Ethics
- Our Board of Directors Governance Principles and Practices
- Charters for the Audit, Corporate Governance, and Executive
Organization & Compensation Committees of our Board of Directors
The information contained on our website is not incorporated into this
annual report on Form 10-K. The documents referenced above are also available in
print to any shareholder who sends a written request to our Vice President-Chief
Financial Officer & Treasurer at One Applied Plaza, 3301 Euclid Avenue,
Cleveland, Ohio 44115.
(a) General Development of Business.
In fiscal 2006, we continued to extend our geographic reach and product
offerings. After making several acquisitions in recent years outside the United
States, in September 2005 we acquired the assets of Spencer Industries, Inc., a
fluid power distributor serving the western United States with annualized sales
at the time of the acquisition of approximately $49 million. The business
operates as Spencer Fluid Power. In March 2006, we acquired Minnesota Bearing
Company, a distributor of bearings, power transmission components, and fluid
power products with locations throughout the upper Midwest and with annualized
sales at the time of the acquisition of
4
<PAGE>
approximately $35 million. We also secured new or expanded distribution
authorizations for various Parker Hannifin, Altra Industrial Motion, Rust-Oleum,
3M, and Sumitomo industrial product lines.
Additional information regarding developments in our business can be found
in our 2006 Annual Report to shareholders under the caption "Management's
Discussion and Analysis" on pages 10 through 16, which is incorporated here by
reference.
(b) Financial Information about Segments.
We have identified one reportable business segment, service center-based
distribution. This business provides customers with a wide range of industrial
products through a network of service centers stretching across North America.
We also offer technical support and provide creative solutions to help customers
minimize their production downtime and reduce overall procurement costs.
In addition to service center-based distribution, we operate specialized
fluid power companies that primarily sell products and services directly to
customers rather than through the industrial product service centers.
Segment financial information can be found in the 2006 Annual Report to
shareholders in note 12 to the consolidated financial statements on pages 32 and
33, and that information is incorporated here by reference.
(c) Narrative Description of Business.
Overview. Our field operating structure is built on two primary platforms -
industrial products, and fluid power products and systems:
- Industrial Products. We distribute a wide range of products through
our service centers in 48 states, Puerto Rico, five Canadian
provinces, and six Mexican states. Customers primarily purchase our
products for scheduled maintenance of their machinery and equipment
and for emergency repairs. In addition, we operate regional fabricated
rubber shops, which modify and repair conveyor belts and make hose
assemblies in accordance with customer requirements, and rubber
service field crews, which install and repair belts and rubber linings
at customer locations. The industrial products business accounts for a
substantial majority of our field operations and sales dollars. While
the business operates in the U.S. using the Applied Industrial
Technologies trade name, we also are known as Bearing & Transmission,
B&T Rubber, Groupe GLM, and PV Hydraulique in Canada, Applied Mexico
in Mexico, and Rafael Benitez Carrillo in Puerto Rico.
5
<PAGE>
- Fluid Power. Our specialized fluid power businesses primarily market
their products and services directly to customers, but also through
the service center network. In addition to distributing fluid power
components, the businesses operate shops that assemble fluid power
systems and components, perform equipment repair, and offer technical
advice to customers. Customers include businesses purchasing for
maintenance, repair, and operations needs, as well as for original
equipment manufacturing applications. Our fluid power businesses
operate in various geographic areas of the U.S. and Canada under the
following names: Air and Hydraulics Engineering (Southeast), Air
Draulics Engineering (Mississippi Valley), Air-Hydraulic Systems
(upper Midwest), Applied Engineered Systems (Midwest), Dees Fluid
Power (Mid-Atlantic and Northeast), Elect-Air (West Coast), Engineered
Sales (Midwest), ESI Power Hydraulics (Midwest), HyPower (western
Canada), Kent Fluid Power (West Coast), and Spencer Fluid Power
(Northwest and West).
Products. We are one of North America's leading distributors of bearings,
power transmission components, fluid power components and systems, industrial
rubber products, linear components, tools, safety products, general maintenance
products and a variety of mill supply products. Fluid power products include
hydraulic, pneumatic, lubrication, and filtration components and systems.
These products are generally supplied to us by manufacturers whom we serve
as a non-exclusive distributor. The product suppliers also may provide us
product training, as well as sales and marketing support. Authorizations to
represent particular suppliers and product lines may vary by geographic region.
We believe our supplier relationships are generally good, and many have existed
for decades. The disruption of relationships with certain suppliers, or the
disruption of their own operations, could adversely affect our business.
Our product suppliers generally confine their direct sales activities to
large-volume transactions, mainly with original equipment manufacturers. The
suppliers generally do not sell maintenance and repair products directly to the
customer but instead refer the customer to us or another distributor. Of course,
there is no assurance that this practice will continue, however, and its
discontinuance could adversely affect our business.
Net sales by product category for the most recent three fiscal years is
detailed in the 2006 Annual Report to shareholders in note 12 to the
consolidated financial statements on page 33, and that information is
incorporated here by reference.
Services. Our service center associates advise and assist customers with
respect to product selection and application, and inventory management. We
consider this advice and assistance to be an integral part of our sales efforts.
Beyond traditional parts distribution services, we offer product and process
solutions involving multiple technologies, helping to reduce production
downtime, as well as overall procurement and maintenance costs for customers. By
providing high levels of service, product and industry expertise, and technical
support, while at the same time offering competitive pricing, we believe we
develop stronger, longer-lasting, and more profitable customer relationships.
6
<PAGE>
Our sales associates include customer sales and service representatives and
account managers, as well as product and industry specialists. Customer sales
and service representatives receive, process, and expedite customer orders,
provide product and pricing information, and assist account managers in serving
customers. Account managers make on-site calls to current and potential
customers to provide product and price information, identify customer
requirements, provide recommendations, and assist in implementing equipment
maintenance and storeroom management programs, including our automated storeroom
replenishment system, AppliedSTORE(R). Account managers also measure and
document for customers the value of cost savings and increased productivity
generated by our services and recommendations. Product and industry specialists
assist with applications in their areas of technical expertise.
We maintain product inventory levels at each service center tailored to the
local market. These inventories consist of standard items as well as other items
specific to local customers' immediate needs. Seven distribution centers
replenish service center inventories and also may ship products directly to
customers. The inventory maintained at our facilities allows us to satisfy our
customers' just-in-time product needs.
Timely delivery of products is an integral part of our service,
particularly when customers require products for emergency repairs to their
machinery or equipment. Service centers and distribution centers use the most
effective method of transportation available to meet customer needs, including
our own delivery vehicles, dedicated third-party transportation providers, as
well as both surface and air common carrier and courier services. Customers can
also pick up items at our service centers.
Our information systems enhance our ability to serve customers. While we
have long transacted with customers through electronic data interchange (EDI),
customers can also turn to our website at www.applied.com to search for products
in a comprehensive electronic database, research product attributes, view
prices, check inventory levels, place orders, and track order status. We also
interface with certain customers' technology platforms and plant maintenance
systems.
Along with our electronic capabilities, we support our service center
network with paper catalogs. The Applied Maintenance America(SM) product catalog
facilitates customers' purchases of general maintenance and safety products, and
tools. Our Fluid Power Connection(R) catalog does the same for hydraulic and
pneumatic components. Products from both specialty catalogs are also available
at www.applied.com.
We supplement the service center product offering with our
MaintenancePro(R) fee-based technical training seminars. These courses provide
customer personnel with information on maintenance, troubleshooting, component
application, and failure analysis in the areas of hydraulics and pneumatics,
lubrication, bearings, and power transmission.
7
<PAGE>
In addition to distributing products, we offer shop services in select
geographic areas. Our fabricated rubber shops modify and repair conveyor belts
and provide hose assemblies (also available at select service centers and
distribution centers) in accordance with customer requirements. We also provide
field crews that install and repair belts and rubber lining, primarily at
customer locations. Among the other services we offer, either performed by us
directly or by third party providers, are the rebuilding and assembly of speed
reducers, pumps, valves, cylinders, and electric and hydraulic motors, and
custom machining.
Our specialized fluid power businesses generally operate independently of
the industrial service centers, but as product distributors, share the same
focus on customer service. Product and application recommendations, inventory
availability, and delivery speed are all key to the businesses' success. The
fluid power businesses distinguish themselves from most component distributors
by offering engineering, design, system fabrication, installation, and repair
services. Each business has account managers with extensive technical knowledge,
who handle sophisticated projects for customers primarily within the business's
geographic region. The businesses also provide technical support to our service
centers.
Markets. We purchase from over 2,000 product manufacturers and resell the
products to many thousands of customers in a wide variety of industries,
including agriculture and food processing, automotive, chemical processing,
forest products, industrial machinery and equipment, mining, primary metals,
transportation, and utilities, as well as to government agencies. Customers
range from the largest concerns in North America, with whom we may have
multiple-location relationships, to the smallest. We are not significantly
dependent on a single customer or group of customers, the loss of which would
have a material adverse effect on our business as a whole, and no single
customer accounts for more than 4% of our net sales.
Competition. We consider our business to be highly competitive. In
addition, our markets present few economic or technological barriers to entry,
contributing to a high fragmentation of market share in our industry.
Longstanding supplier and customer relationships, geographic coverage, name
recognition, and our associates' experience and training do, however, support
our competitive position. Competition is based generally on breadth and quality
of product and service offerings, product availability, price, ease of product
selection and ordering, catalogs, online capability, and having a local
presence.
Our principal competitors are other bearing, power transmission, industrial
rubber, fluid power, linear motion, and general maintenance and safety product
distributors, and, to a lesser extent, mill supply and catalog companies. These
competitors include local, regional, national, and multinational operations. We
also compete with original equipment manufacturers and their distributors in the
sale of maintenance and replacement components. Some competitors have greater
financial resources than we do. The identity and number of our competitors vary
throughout the geographic and product markets we serve.
8
<PAGE>
Although we are one of the leading distributors in North America for the
major product categories we carry, our market share for those products in any
given geographic area may be relatively small compared to the portion of the
market served by original equipment manufacturers and other distributors.
Backlog Orders and Seasonality. Because of our product resources and
distribution network, we do not have a substantial backlog of orders, nor are
backlog orders significant at any given time. Our business has exhibited minor
seasonality - in particular, sales per day during the first half of our fiscal
year have tended to be slightly lower compared with the second half due, in
part, to the impact of customer plant shutdowns and holidays.
Patents, Trademarks, and Licenses. Customer recognition of our service
marks and trade names, including Applied Industrial Technologies(R), Applied(R),
and AIT(R), is an important contributing factor to our sales. Patents and
licenses are not of material importance to our business.
Raw Materials and General Business Conditions. Our operations are dependent
on general industrial and economic conditions and would be adversely affected by
the unavailability of raw materials to our suppliers, prolonged labor disputes
experienced by suppliers or customers, or by any recession or depression that
has an adverse effect on North American industrial activity generally or on key
customer industries served by us.
Number of Employees. On July 31, 2006, we had 4,683 employees.
Working Capital. Our working capital position is discussed in "Management's
Discussion and Analysis" in the 2006 Annual Report to shareholders on pages 12
through 14.
We require substantial working capital related to accounts receivable and
inventories. Significant amounts of inventory are carried to meet rapid delivery
requirements of customers. We generally require payments for sales on account
within 30 days. Returns are not considered to have a material effect on our
working capital requirements. We believe these practices are generally
consistent among companies in our industry.
Environmental Laws. We believe that compliance with laws regulating the
discharge of materials into the environment or otherwise relating to
environmental protection will not have a material adverse effect on our capital
expenditures, earnings, or competitive position.
(d) Financial Information about Geographic Areas.
We believe our U.S. operations' export sales during the fiscal year ended
June 30, 2006, and prior fiscal years, were less than 2% of net sales, and were
not concentrated in a specific geographic area.
Additional information regarding our foreign operations, including
information about revenues and long-lived assets, is included in the 2006 Annual
Report to shareholders in note 12 to
9
<PAGE>
the consolidated financial statements on page 33 and in "Quantitative and
Qualitative Disclosures About Market Risk" on page 17 and that information is
incorporated here by reference.
ITEM 1A. RISK FACTORS.
In addition to other information set forth in this report, you should
carefully consider the following factors that could materially affect our
business, financial condition, or results of operations. The risks described
below are not the only risks facing our company. Additional risks not currently
known to us, risks that could apply to any issuer, or risks that we currently
deem immaterial, may also impact our business and operations.
RISKS RELATED TO OUR BUSINESS
LOSS OF KEY SUPPLIER AUTHORIZATIONS, LACK OF PRODUCT AVAILABILITY, OR
CHANGES IN SUPPLIER DISTRIBUTION PROGRAMS COULD ADVERSELY AFFECT OUR SALES AND
EARNINGS. Our business is dependent on maintaining an immediately available
supply of a sufficient quantity of various products to meet customer demand. Of
our overall dollar volume of product purchases in fiscal 2006, almost half was
purchased from our top 10 suppliers. Many of our relationships with key product
suppliers are longstanding, but are terminable by either party. The loss of key
supplier authorizations, or a substantial decrease in the availability of
products from these suppliers, could have a material adverse effect on our
business. Supply interruptions could arise from shortages of raw materials,
labor disputes or weather conditions affecting suppliers' production,
transportation disruptions, or other reasons beyond our control. Furthermore, we
cannot be certain that particular products will be available to us, or available
in quantities sufficient to meet customer demand. Limitations on our access to
products could put us at a competitive disadvantage.
In addition, as a distributor, we face the risk of key product suppliers
changing their relationships with distributors generally, or Applied in
particular, in a manner that adversely impacts our business. For example, key
suppliers could change the prices we must pay for their products relative to
other distributors or relative to competing products, geographic or product line
breadth of distributor authorizations, purchase incentive programs, product
purchase or stocking expectations, or other aspects of our relationships.
AN INCREASE IN COMPETITION COULD DECREASE SALES OR EARNINGS. We operate in
a highly competitive industry. We compete primarily with multinational,
national, regional, and local distributors of industrial machinery parts,
equipment, and supplies. Competition is largely focused in the local service
area and is generally based on product line breadth, product availability,
service capabilities, and price. Some existing competitors have, and new market
entrants may have, greater financial resources than we do. To the extent
existing or future competitors seek to gain or retain market share by reducing
prices, we may be required to lower our prices for products or services, thereby
adversely affecting financial results.
10
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INCREASES IN PRODUCT AND ENERGY COSTS COULD REDUCE OUR PROFITABILITY.
Recent price increases in commodity materials, such as steel, have resulted in
industrial product manufacturers increasing the prices of products we
distribute. In addition, a portion of our distribution costs is comprised of
fuel and freight costs, which have increased significantly in recent years. Our
ability to pass on increases in our costs depends on market conditions. Raising
our prices could result in decreased sales volume, which could significantly
reduce our profitability.
A DISRUPTION OF OUR INFORMATION SYSTEMS COULD INCREASE EXPENSES, DECREASE
SALES, OR OTHERWISE REDUCE EARNINGS. Our ability to transact business has become
increasingly reliant on our information systems. We depend on information
systems to process customer orders, manage inventory and accounts receivable
collections, purchase products, ship products to our customers on a timely
basis, maintain cost-effective operations, and provide superior service to our
customers. A serious, prolonged disruption of our information systems could
materially impair fundamental business processes.
OUR BUSINESS DEPENDS ON OUR ABILITY TO RETAIN AND ATTRACT QUALIFIED SALES
AND CUSTOMER SERVICE PERSONNEL. There are significant costs associated with
hiring and training sales and customer service professionals. We greatly benefit
from having employees who are familiar with the products we sell and their
applications, as well as our customer and supplier relationships. We could be
adversely affected by a shortage of available skilled workers or the loss of a
significant number of our sales or customer service professionals, including
through retirement as the workforce ages.
FUTURE ACQUISITIONS ARE A KEY COMPONENT OF OUR ANTICIPATED GROWTH. WE MAY
NOT BE ABLE TO IDENTIFY OR COMPLETE FUTURE ACQUISITIONS, INTEGRATE THEM
EFFECTIVELY INTO OUR OPERATIONS, OR REALIZE THEIR ANTICIPATED BENEFITS. Many
industries we serve are mature. As a result, our growth in recent years has
resulted in substantial part from the acquisition of other businesses. While we
wish to continue to acquire businesses, we may not be able to identify and
negotiate suitable acquisitions, obtain financing for them on satisfactory
terms, or otherwise complete acquisitions in the future. In addition, existing
or future competitors, including financial buyers, may increasingly seek to
compete with us for acquisitions, which could have the effect of increasing the
price and reducing the number of suitable opportunities.
We seek acquisition opportunities that complement and expand our
operations. However, substantial costs, delays, or other difficulties related to
integrating acquisitions into our operations could adversely affect our business
or financial results. We could face significant challenges in consolidating
functions and integrating procedures, information technology, personnel, and
operations in a timely and efficient manner.
Further, even if we integrate successfully our operations with our
acquisitions, we may not be able to realize the cost savings, sales increases,
or other benefits that we anticipate from these acquisitions, either as to
amount or in the time frame we expect. Our ability to realize anticipated
benefits may be affected by a number of factors, including the following: our
ability to reduce duplicative expenses and inventory effectively, and to
consolidate facilities; the
11
<PAGE>
incurrence of significant integration costs or charges in order to achieve those
benefits; and our ability to retain key product supplier authorizations and
customer relationships. In addition, future acquisitions could place significant
demand on administrative, operational, and financial resources.
AN INTERRUPTION OF OPERATIONS AT OUR HEADQUARTERS OR DISTRIBUTION CENTERS
COULD ADVERSELY IMPACT OUR BUSINESS. Our business is highly dependent on
maintaining operations at our headquarters and distribution centers. A serious,
prolonged interruption of operations due to power outages, terrorist attack,
earthquake, hurricane, fire, flood or other natural disaster, or other
interruption could have a material adverse effect on our business and financial
results.
OUR GROWTH OUTSIDE THE UNITED STATES INCREASES OUR EXPOSURE TO GLOBAL
ECONOMIC AND POLITICAL CONDITIONS. Our foreign operations contributed 11.3% of
our sales in 2006. If we continue to grow outside the U.S., the risks associated
with exposure to more volatile economic conditions, political instability,
cultural and legal differences in conducting business, and currency fluctuations
will increase.
WE ARE SUBJECT TO LITIGATION RISK DUE TO THE NATURE OF OUR BUSINESS, WHICH
MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. From time to time, we are
involved in lawsuits or other legal proceedings that arise from business
transactions. These may, for example, relate to product liability claims,
commercial disputes, or employment matters. In addition, we could face claims
over other matters, such as claims arising from our status as a government
contractor or corporate or securities law matters. The defense and ultimate
outcome of lawsuits or other legal proceedings may result in higher operating
expenses, which could have a material adverse effect on our business, financial
condition, or results of operations.
RISKS RELATED TO OUR INDUSTRY
OUR BUSINESS DEPENDS HEAVILY UPON THE OPERATING LEVELS OF OUR CUSTOMERS AND
THE ECONOMIC FACTORS THAT AFFECT THEM. Some of the primary markets for the
products and services we sell are subject to cyclical fluctuations that affect
demand for goods that our customers produce. Consequently, the demand for our
services and products has been and will continue to be influenced by most of the
same economic factors that affect the demand for and production of customers'
goods. When customers or prospective customers reduce their production levels in
response to lower demand for their products, they have less need for our
products and services. Also during periods of economic slowdown, our credit
losses could increase. In addition, because some customers are moving portions
of operations overseas in order to reduce manufacturing costs, our ability to
continue to serve those customers may be impaired and the size of our overall
market opportunity in North America may be diminished.
THE CONSOLIDATION OCCURRING IN OUR CUSTOMERS' AND SUPPLIERS' INDUSTRIES
COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL RESULTS. In recent years, we
have witnessed increased consolidation among our product suppliers and
customers. As customer industries consolidate, a greater proportion of our sales
could be derived from larger, national contracts, which could
12
<PAGE>
adversely impact the amount and volatility of our earnings. In addition,
consolidation increases the risk of larger customers seeking to purchase
industrial parts, equipment, and supplies directly from product manufacturers
rather than through distributors. Similarly, continued consolidation among our
product suppliers could reduce our ability to negotiate favorable pricing and
other commercial terms for our inventory purchases.
OTHER RISKS
In addition to the risks identified above, other risks we face include, but
are not limited to, the following:
- changes in customer preferences for products and services of the
nature and brands sold by Applied;
- changes in the market prices for products and services relative to the
cost of providing them;
- changes in customer procurement policies and practices;
- changes in product manufacturer sales policies and practices;
- changes in operating expenses;
- 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;
- volatility of our stock price and the resulting impact on our
financial statements;
- changes in accounting policies and practices;
- organizational changes within the company; and,
- adverse regulation and legislation.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
We believe that having a local presence is important to serving our
customers, so we maintain service centers and other operations in local markets
throughout North America. At June 30, 2006 we owned real properties at 149
locations and leased 278 locations. Certain properties house more than one
company operation.
Our principal owned real properties (each of which has more than 25,000
square feet of floor space) at June 30, 2006 were:
13
<PAGE>
- the distribution center and service center in Atlanta, Georgia
- the distribution center in Florence, Kentucky
- the service center in Monroe, Louisiana
- the service center and rubber shop in Omaha, Nebraska
- the distribution center in Carlisle, Pennsylvania
- the distribution center and rubber shop in Fort Worth, Texas
Our principal leased real properties (each of which has more than 25,000
square feet of floor space) at June 30, 2006 were:
- the corporate headquarters facility in Cleveland, Ohio
- the distribution center, rubber shop, fluid power shop, and service
center in Fontana, California
- the rubber shop and fluid power shop in Tracy, California
- the rubber shop and service center in Denver, Colorado
- the service center, fluid power shop, and offices in Minneapolis,
Minnesota
- the fluid power shop in Billings, Montana
- the distribution center in Portland, Oregon
- the offices and fluid power shop in Kent, Washington
- the service center in Longview, Washington
- the rubber shop and the fluid power shop in Longview, Washington
- the offices, service center, and rubber shop in Appleton, Wisconsin
Except for those in Billings and Kent, all of the properties listed above
are used in our service center-based distribution segment. The Fontana, Tracy,
Minneapolis, and Longview (shops) properties are used in operations both inside
and outside the service center-based distribution segment.
We consider our properties generally sufficient to meet our requirements
for office space and inventory stocking. A service center's size is primarily
influenced by the amount of inventory the service center requires to meet
customers' needs. We use all of our owned and leased properties except for
certain properties which in the aggregate are not material and are either for
sale, lease, or sublease to third parties due to a relocation or closing. We
also may lease or sublease to others unused portions of buildings.
In recent years, when opening new operations, we have tended to lease
rather than purchase real property. We do not consider any of our service
center, distribution center, or shop properties to be material, because we
believe that, if it becomes necessary or desirable to relocate an operation,
other suitable property could be found.
Additional information regarding our properties is included in the 2006
Annual Report to shareholders in note 11 to the consolidated financial
statements on page 32, and that information is incorporated here by reference.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Applied and/or one of its subsidiaries is a party to various judicial and
administrative proceedings. Based on circumstances currently known, we do not
believe that any liabilities that may result from these proceedings are
reasonably likely to have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Applied's security holders during
the last quarter of fiscal 2006.
EXECUTIVE OFFICERS OF THE REGISTRANT.
Applied's executive officers are elected by the Board of Directors for a
term of one year, or until their successors are chosen and qualified, at the
Board's organizational meeting held following the annual meeting of
shareholders. The following is a list of the executive officers and a
description of their business experience during the past five years. Except as
otherwise stated, the positions and offices indicated are with Applied, and the
persons were elected to their current positions on October 12, 2005:
David L. Pugh. Mr. Pugh is Chairman & Chief Executive Officer, and a
member of our Board of Directors. He is 57 years of age.
Bill L. Purser. Mr. Purser is President & Chief Operating Officer. He
is 63 years of age.
Todd A. Barlett. Mr. Barlett is Vice President-Acquisitions and Global
Business Development (since July 2004). He had served as Vice
President-Global Business Development (from 2000 to July 2004). He is 51
years of age.
Fred D. Bauer. Mr. Bauer is Vice President-General Counsel (since
April 2002) and Secretary (since October 2001). He had served as Vice
President-Legal Services (from 2000 to April 2002) and Assistant Secretary
(from 1994 to October 2001). He is 40 years of age.
Michael L. Coticchia. Mr. Coticchia is Vice President-Chief
Administrative Officer and Government Business (since July 2006). Prior to
that, he served as Vice President-Human Resources and Administration (from
April 2002 to July 2006), Vice President-Human Resources and Risk
Management (from 1998 to April 2002) and Assistant Secretary (from 1990 to
January 2002). He is 43 years of age.
15
<PAGE>
Mark O. Eisele. Mr. Eisele is Vice President-Chief Financial Officer &
Treasurer (since January 2004). Prior to that, he had been Vice President &
Controller (from 1997 to December 2003). He is 49 years of age.
James T. Hopper. Mr. Hopper is Vice President-Chief Information
Officer. He is 62 years of age.
Jeffrey A. Ramras. Mr. Ramras is Vice President-Marketing and Supply
Chain Management (since September 2002). He had served as Vice
President-Supply Chain Management (from 2000 to September 2002). He is 51
years of age.
Richard C. Shaw. Mr. Shaw is Vice President-Communications and
Learning. He is 57 years of age.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Applied's common stock, without par value, is listed for trading on the New
York Stock Exchange under the ticker symbol AIT. Information concerning the
principal market for Applied's common stock, the quarterly stock prices and
dividends for the fiscal years ended June 30, 2006, 2005, and 2004 and the
number of shareholders of record as of August 15, 2006 is set forth in the 2006
Annual Report to shareholders on page 37, under the caption "Quarterly Operating
Results and Market Data," and that information is incorporated here by
reference.
Information concerning securities authorized for issuance under Applied's
equity compensation plans is incorporated by reference to Applied's proxy
statement relating to the annual meeting of shareholders to be held October 24,
2006, under the caption "Equity Compensation Plan Information."
The following table summarizes Applied's repurchases of its common stock in
the quarter ended June 30, 2006. All of the share amounts and prices in the
table and footnotes have been adjusted for the 3-for-2 stock split paid on June
15, 2006.
16
<PAGE>
<TABLE>
<CAPTION>
(c) Total Number of (d) Maximum Number of
(a) Total (b) Average Shares Purchased as Part Shares that May Yet Be
Number Price Paid of Publicly Announced Purchased Under the Plans
Period of Shares per Share ($) Plans or Programs or Programs *
- ------ --------- ------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
April 1, 2006 to
April 30, 2006 0 -- 0 1,500,000
May 1, 2006 to
May 31, 2006 226,800 25.28 226,800 1,273,200
June 1, 2006 to
June 30, 2006 869,300 23.49 869,300 403,900
--------- ----- --------- ---------
Total 1,096,100 23.86 1,096,100 403,900
========= ===== ========= =========
</TABLE>
* On January 18, 2006, the Board of Directors authorized the purchase of up
to 1,500,000 shares of Applied common stock. The authorization was publicly
announced that day. After 1,096,100 shares were repurchased, the Board of
Directors replaced the existing authorization on July 18, 2006, again
granting the company authorization to purchase up to 1,500,000 shares. The
new authorization was publicly announced that day. The purchases may be
made in the open market or in privately negotiated transactions. The new
authorization is in effect until all shares are purchased or the
authorization is revoked or amended by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA.
The summary of selected financial data for the last five years is set forth
in the 2006 Annual Report to shareholders in the table on pages 38 and 39 under
the caption "10 Year Summary" and is incorporated here by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis" is set forth in the 2006 Annual
Report to shareholders on pages 10 through 16 and is incorporated here by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
The disclosures about market risk required by this item are set forth in
Applied's 2006 Annual Report to shareholders on page 17, which information is
incorporated here by reference. For further information relating to borrowing
and interest rates, see the Liquidity and Capital
17
<PAGE>
Resources section of "Management's Discussion and Analysis" and Notes 6 and 7 to
the consolidated financial statements in Applied's 2006 Annual Report to
shareholders on pages 10-16, 26 and 27, respectively, which information is
incorporated here by reference. In addition, please see "Risk Factors" at pages
10-13, above, for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and supplementary data of
Applied and its subsidiaries and the reports of the independent registered
public accounting firm listed below, which are included in the 2006 Annual
Report to shareholders at the pages indicated, are incorporated here by
reference and filed with this Report:
<TABLE>
<CAPTION>
Caption Page No.
- ------- --------
<S> <C>
Financial Statements:
Statements of Consolidated Income
for the Years Ended June 30, 2006, 2005, and 2004 18
Consolidated Balance Sheets June 30, 2006 and 2005 19
Statements of Consolidated Cash Flows for the Years Ended
June 30, 2006, 2005, and 2004 20
Statements of Consolidated Shareholders' Equity for the
Years Ended June 30, 2006, 2005, and 2004 21
Notes to Consolidated Financial Statements
for the Years Ended June 30, 2006, 2005, and 2004 22 - 33
Reports of Independent Registered Public Accounting Firm 34, 36
Supplementary Data:
Quarterly Operating Results and Market Data 37
</TABLE>
18
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Management, under the supervision and with the participation of the chief
executive officer and the chief financial officer, has evaluated Applied's
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the chief executive officer and chief
financial officer have concluded that the disclosure controls and procedures are
effective in timely alerting them to material information about Applied required
to be included in our Exchange Act reports.
Management's annual report on Applied's internal control over financial
reporting and the attestation report of the independent registered public
accounting firm are set forth in the 2006 Annual Report to shareholders on pages
35-36, and are incorporated here by reference.
Management has not identified any change in internal control over financial
reporting occurring during the fourth quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item as to Applied's directors is
incorporated by reference to Applied's proxy statement relating to the annual
meeting of shareholders to be held October 24, 2006, under the caption "Election
of Directors." The information required by this Item as to Applied's executive
officers has been furnished in this Report on pages 15 and 16 in Part I, after
Item 4, under the caption "Executive Officers of the Registrant."
The information required by this Item as to compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by reference to Applied's
proxy statement relating to the annual meeting of shareholders to be held
October 24, 2006, under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance."
19
<PAGE>
Applied has a code of ethics, entitled the Code of Business Ethics, that
applies to our employees, including our chief executive officer, chief operating
officer, chief financial officer, and corporate controller. The Code of Business
Ethics is posted at the investor relations area of our www.applied.com website.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
Applied's proxy statement relating to the annual meeting of shareholders to be
held October 24, 2006, under the captions "Compensation of Directors," "Deferred
Compensation Plan for Non-Employee Directors," "Summary Compensation,"
"Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises and
Fiscal Year-End Option/SAR Values," "Long-Term Incentive Plans - Awards in Last
Fiscal Year," "Estimated Retirement Benefits Under Supplemental Executive
Retirement Benefits Plan," "Deferred Compensation Plan," and "Change in Control
Agreements and Other Related Arrangements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information concerning the security ownership of certain beneficial owners
and management and related stockholder matters is incorporated by reference to
Applied's proxy statement relating to the annual meeting of shareholders to be
held October 24, 2006, under the captions "Beneficial Ownership of Certain
Applied Shareholders and Management" and "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to
Applied's proxy statement relating to the annual meeting of shareholders to be
held October 24, 2006, under the caption "Item 2 - Ratification of Auditors."
20
<PAGE>
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)1. Financial Statements.
The following consolidated financial statements, notes thereto, the reports
of independent registered public accounting firm, and supplemental data are
included in the 2006 Annual Report to shareholders on pages 18 - 34 and 36 - 37,
and are incorporated by reference in Item 8 of this Report.
Caption
Statements of Consolidated Income for the Years Ended June 30, 2006,
2005, and 2004
Consolidated Balance Sheets at June 30, 2006 and 2005
Statements of Consolidated Cash Flows for the Years Ended June 30,
2006, 2005, and 2004
Statements of Consolidated Shareholders' Equity for the Years Ended
June 30, 2006, 2005, and 2004
Notes to Consolidated Financial Statements for the Years Ended June
30, 2006, 2005, and 2004
Reports of Independent Registered Public Accounting Firm
Supplementary Data:
Quarterly Operating Results and Market Data
(a)2. Financial Statement Schedule.
The following report and schedule are included in this Part IV, and are
found in this Report at the pages indicated:
<TABLE>
<CAPTION>
Caption Page No.
- ------- --------
<S> <C>
Report of Independent Registered Public Accounting Firm 27
Schedule II - Valuation and Qualifying Accounts 28
</TABLE>
21
<PAGE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions, are not
applicable, or the required information is included in the consolidated
financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3(a) Amended and Restated Articles of Incorporation of Applied Industrial
Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit
3(a) to the Company's Form 10-Q for the quarter ended December 31,
2005, SEC File No. 1-2299, and incorporated here by reference).
3(b) Code of Regulations of Applied Industrial Technologies, Inc., as
amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form
10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299,
and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio Secretary of State on October 18, 1988,
including an Agreement and Plan of Reorganization dated September 6,
1988 (filed as Exhibit 4(a) to Applied's Registration Statement on
Form S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) Private Shelf Agreement dated as of November 27, 1996, as amended on
January 30, 1998, between Applied and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance Company of
America) (filed as Exhibit 4(f) to Applied's Form 10-Q for the quarter
ended March 31, 1998, SEC File No. 1-2299, and incorporated here by
reference).
4(c) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf
Agreement between Applied and Prudential Investment Management, Inc.
(assignee of The Prudential Insurance Company of America) (filed as
Exhibit 4(e) to Applied's Form 10-Q for the quarter ended September
30, 2000, SEC File No. 1-2299, and incorporated here by reference).
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
4(d) Amendment dated November 14, 2003 to 1996 Private Shelf Agreement
between Applied and Prudential Investment Management, Inc. (assignee
of The Prudential Insurance Company of America) (filed as Exhibit 4(d)
to Applied's Form 10-Q for the quarter ended December 31, 2003, SEC
File No. 1-2299, and incorporated here by reference).
4(e) Amendment dated February 25, 2004 to 1996 Private Shelf Agreement
between Applied and Prudential Investment Management, Inc. (assignee
of The Prudential Insurance Company of America) (filed as Exhibit 4(e)
to Applied's Form 10-Q for the quarter ended March 31, 2004, SEC File
No. 1-2299, and incorporated here by reference).
4(f) $100,000,000 Credit Agreement dated as of June 3, 2005, among Applied,
KeyBank National Association as Agent, and various financial
institutions (filed as Exhibit 4 to Applied's Form 8-K dated June 9,
2005, SEC File No. 1-2299, and incorporated here by reference).
4(g) Rights Agreement, dated as of February 2, 1998, between Applied and
Computershare Investor Services LLP (successor to Harris Trust and
Savings Bank), as Rights Agent, which includes as Exhibit B thereto
the Form of Rights Certificate (filed as Exhibit No. 1 to Applied's
Registration Statement on Form 8-A filed July 20, 1998, SEC File No.
1-2299, and incorporated here by reference).
*10(a) Form of Change in Control Agreement (amended and restated as of August
8, 2001) between Applied and each of its executive officers (filed as
Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31,
2001, SEC File No. 1-2299, and incorporated here by reference).
*10(b) A written description of Applied's director compensation program is
incorporated by reference to Applied's proxy statement relating to the
annual meeting of shareholders to be held October 24, 2006 under the
caption, "Compensation of Directors."
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
*10(c) Applied Deferred Compensation Plan for Non-Employee Directors
(September 1, 2003 Restatement) (filed as Exhibit 10(c) to Applied's
Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(d) A written description of Applied's Life and Accidental Death and
Dismemberment Insurance for executive officers (filed as Exhibit 10(b)
to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC
File No. 1-2299, and incorporated here by reference).
*10(e) A written description of Applied's Long-Term Disability Insurance for
executive officers (filed as Exhibit 10(c) to Applied's Form 10-Q for
the quarter ended December 31, 1997, SEC File No. 1-2299, and
incorporated here by reference).
*10(f) Form of Director and Officer Indemnification Agreement entered into
between Applied and each of its directors and executive officers
(filed as Exhibit 10(g) to Applied's Registration Statement on Form
S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated
here by reference).
*10(g) Applied Supplemental Executive Retirement Benefits Plan (January 1,
2002 Restatement) in which current and certain former executive
officers participate (filed as Exhibit 10 to Applied's Form 10-Q for
the quarter ended March 31, 2002, SEC File No. 1-2299, and
incorporated here by reference).
*10(h) Applied Deferred Compensation Plan (September 1, 2003 Restatement)
(filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June
30, 2003, SEC File No. 1-2299, and incorporated here by reference).
*10(i) First Amendment to the Company's Deferred Compensation Plan (September
1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form 10-Q for
the quarter ended December 31, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(j) 1997 Long-Term Performance Plan re-adopted by Shareholders on October
22, 2002 (filed as Exhibit 10(a) to Applied's Form 10-Q for the
quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated
here by reference).
*10(k) Amendment No. 1 to 1997 Long-Term Performance Plan, effective as of
August 8, 2003 (filed as Exhibit 10(j) to Applied's Form 10-K
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
for the year ended June 30, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(l) Applied Supplemental Defined Contribution Plan (January 1, 1997
Restatement) (filed as Exhibit 10(m) to Applied's Registration
Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801,
and incorporated here by reference).
*10(m) First Amendment to Applied Supplemental Defined Contribution Plan
effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied's
Form 10-Q for the quarter ended September 30, 2000, SEC File No.
1-2299, and incorporated here by reference).
*10(n) Second Amendment to Applied Supplemental Defined Contribution Plan
effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's
Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299,
and incorporated here by reference).
*10(o) Form of Non-Statutory Stock Option Award Terms and Conditions
(Directors) (filed as Exhibit 10 to Applied's Form 8-K dated November
30, 2005, SEC File No. 1-2299, and incorporated here by reference).
*10(p) Stock Appreciation Rights Award Terms and Conditions (Officers) (filed
as Exhibit 10(c) to Applied's Form 8-K dated August 9, 2005, SEC File
No. 1-2299, and incorporated here by reference).
*10(q) Performance Grant Terms and Conditions (filed as Exhibit 10(b) to
Applied's Form 8-K dated August 8, 2006, SEC File No. 1-2299, and
incorporated here by reference).
*10(r) 2006 Management Incentive Plan General Terms (filed as Exhibit 10(a)
to Applied's Form 8-K dated August 9, 2005, SEC File No. 1-2299, and
incorporated here by reference).
*10(s) 2007 Management Incentive Plan General Terms (re-filed to correct the
version filed as Exhibit 10(a) to the Applied's Form 8-K dated August
8, 2006, SEC File No. 1-2299).
*10(t) Non-qualified Deferred Compensation Agreement between Applied and J.
Michael Moore effective as of December 31, 1997 (filed as Exhibit
10(a) to Applied's Form 10-Q for the quarter ended March 31, 1998, SEC
File No. 1-2299, and incorporated here by reference).
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
10(u) Lease dated as of March 1, 1996 between Applied and the
Cleveland-Cuyahoga County Port Authority (filed as Exhibit 10(n) to
Applied's Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by reference).
13 Applied 2006 Annual Report to shareholders (not deemed "filed" as part
of this Form 10-K except for those portions that are expressly
incorporated by reference).
21 Applied's subsidiaries at June 30, 2006.
23 Consent of Independent Registered Public Accounting Firm.
24 Powers of attorney.
31 Rule 13a-14(a)/15d-14(a) certifications.
32 Section 1350 certifications.
</TABLE>
Applied will furnish a copy of any exhibit described above and not
contained herein upon payment of a specified reasonable fee which shall be
limited to Applied's reasonable expenses in furnishing the exhibit.
Certain instruments with respect to long-term debt have not been filed as
exhibits because the total amount of securities authorized under any one of the
instruments does not exceed 10 percent of the total assets of Applied and its
subsidiaries on a consolidated basis. Applied agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of each such
instrument.
26
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Applied Industrial Technologies,
Inc.
We have audited the consolidated financial statements of Applied Industrial
Technologies, Inc. and subsidiaries (the "Company") as of June 30, 2006 and
2005, and for each of the three years in the period ended June 30, 2006,
management's assessment of the effectiveness of the Company's internal control
over financial reporting as of June 30, 2006, and the effectiveness of the
Company's internal control over financial reporting as of June 30, 2006, and
have issued our reports thereon dated August 18, 2006; such consolidated
financial statements and reports are included in your 2006 Annual Report to
Shareholders and are incorporated herein by reference. Our report relating to
the consolidated financial statements of the Company includes an explanatory
paragraph concerning the adoption of a new accounting standard effective July 1,
2005. Our audits also included the consolidated financial statement schedule of
the Company listed in Item 15. This consolidated financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 18, 2006
27
<PAGE>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(in thousands)
<TABLE>
<CAPTION>
COLUMN C
-------------------------
ADDITIONS
COLUMN B ADDITIONS (DEDUCTIONS) COLUMN D COLUMN E
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
COLUMN A BEGINNING COSTS AND OTHER FROM AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ---------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30 2006:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $6,500 $1,953 ($510)(B) $1,943(A) $6,000
YEAR ENDED JUNE 30 2005:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $6,400 $1,958 $300(B) $2,158(A) $6,500
YEAR ENDED JUNE 30 2004:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $6,100 $2,525 $60(B) $2,285(A) $6,400
</TABLE>
(A) Amounts represent uncollectible accounts charged off.
(B) Amounts represent reserves for the return of merchandise by customers.
SCHEDULE II
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
/s/ David L. Pugh /s/ Bill L. Purser
- ------------------------------------- ----------------------------------------
David L. Pugh, Chairman & Bill L. Purser, President &
Chief Executive Officer Chief Operating Officer
/s/ Mark O. Eisele /s/ Daniel T. Brezovec
- ------------------------------------- ----------------------------------------
Mark O. Eisele Daniel T. Brezovec
Vice President-Chief Financial Corporate Controller
Officer & Treasurer (Principal Accounting Officer)
Date: August 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
* *
- ------------------------------------- ----------------------------------------
William G. Bares, Director Thomas A. Commes, Director
* *
- ------------------------------------- ----------------------------------------
Peter A. Dorsman, Director L. Thomas Hiltz, Director
* *
- ------------------------------------- ----------------------------------------
Edith Kelly-Green, Director John F. Meier, Director
* /s/ David L. Pugh
- ------------------------------------- ----------------------------------------
J. Michael Moore, Director David L. Pugh, Chairman & Chief
Executive Officer and Director
* *
- ------------------------------------- ----------------------------------------
Dr. Jerry Sue Thornton, Director Peter C. Wallace, Director
*
- -------------------------------------
Stephen E. Yates, Director
/s/ Fred D. Bauer
- -------------------------------------
Fred D. Bauer, as attorney in fact
for persons indicated by "*"
Date: August 28, 2006
29
<PAGE>
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 2006
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C> <C>
3(a) Amended and Restated Articles of Incorporation of Applied Industrial
Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit
3(a) to the Company's Form 10-Q for the quarter ended December 31,
2005, SEC File No. 1-2299, and incorporated here by reference).
3(b) Code of Regulations of Applied Industrial Technologies, Inc., as
amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form
10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299,
and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio Secretary of State on October 18, 1988,
including an Agreement and Plan of Reorganization dated September 6,
1988 (filed as Exhibit 4(a) to Applied's Registration Statement on
Form S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) Private Shelf Agreement dated as of November 27, 1996, as amended on
January 30, 1998, between Applied and The Prudential Insurance Company
of America (filed as Exhibit 4(f) to Applied's Form 10-Q for the
quarter ended March 31, 1998, SEC File No. 1-2299, and incorporated
here by reference).
4(c) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf
Agreement between Applied and The Prudential Insurance Company of
America (filed as Exhibit 4(e) to Applied's Form 10-Q for the quarter
ended September 30, 2000, SEC File No. 1-2299, and incorporated here
by reference).
4(d) Amendment dated November 14, 2003 to 1996 Private Shelf Agreement
between Applied and The Prudential Insurance Company of America (filed
as Exhibit 4(d) to Applied's Form 10-Q for the quarter ended December
31, 2003, SEC File No. 1-2299, and incorporated here by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
4(e) Amendment dated February 25, 2004 to 1996 Private Shelf Agreement
between Applied and the Prudential Insurance Company of America (filed
as Exhibit 4(e) to Applied's Form 10-Q for the quarter ended March 31,
2004, SEC File No. 1-2299, and incorporated here by reference).
4(f) $100,000,000 Credit Agreement dated as of June 3, 2005, among Applied,
KeyBank National Association as Agent, and various financial
institutions (filed as Exhibit 4 to Applied's Form 8-K dated June 9,
2005, SEC File No. 1-2299, and incorporated here by reference).
4(g) Rights Agreement, dated as of February 2, 1998, between Applied and
Computershare Investor Services LLP (successor to Harris Trust and
Savings Bank), as Rights Agent, which includes as Exhibit B thereto
the Form of Rights Certificate (filed as Exhibit No. 1 to Applied's
Registration Statement on Form 8-A filed July 20, 1998, SEC File No.
1-2299, and incorporated here by reference).
*10(a) Form of Change in Control Agreement (amended and restated as of August
8, 2001) between Applied and each of its executive officers (filed as
Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31,
2001, SEC File No. 1-2299, and incorporated here by reference).
*10(b) A written description of Applied's director compensation program is
incorporated by reference to Applied's proxy statement relating to the
annual meeting of shareholders to be held October 24, 2006, under the
caption, "Compensation of Directors."
*10(c) Applied Deferred Compensation Plan for Non-Employee Directors
(September 1, 2003 Restatement) (filed as Exhibit 10(c) to Applied's
Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(d) A written description of Applied's Life and Accidental Death and
Dismemberment Insurance for executive officers (filed as Exhibit 10(b)
to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC
File No. 1-2299, and incorporated here by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
*10(e) A written description of Applied's Long-Term Disability Insurance for
executive officers (filed as Exhibit 10(c) to Applied's Form 10-Q for
the quarter ended December 31, 1997, SEC File No. 1-2299, and
incorporated here by reference).
*10(f) Form of Director and Officer Indemnification Agreement entered into
between Applied and each of its directors and executive officers
(filed as Exhibit 10(g) to Applied's Registration Statement on Form
S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated
here by reference).
*10(g) Applied Supplemental Executive Retirement Benefits Plan (January 1,
2002 Restatement) in which current and certain former executive
officers participate (filed as Exhibit 10 to Applied's Form 10-Q for
the quarter ended March 31, 2002, SEC File No. 1-2299, and
incorporated here by reference).
*10(h) Applied Deferred Compensation Plan (September 1, 2003 Restatement)
(filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June
30, 2003, SEC File No. 1-2299, and incorporated here by reference).
*10(i) First Amendment to the Company's Deferred Compensation Plan (September
1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form 10-Q for
the quarter ended December 31, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(j) 1997 Long-Term Performance Plan re-adopted by Shareholders on October
22, 2002 (filed as Exhibit 10(a) to Applied's Form 10-Q for the
quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated
here by reference).
*10(k) Amendment No. 1 to 1997 Long-Term Performance Plan, effective as of
August 8, 2003. (filed as Exhibit 10(j) to Applied's Form 10-K for the
year ended June 30, 2003, SEC File No. 1-2299, and incorporated here
by reference).
*10(l) Applied Supplemental Defined Contribution Plan (January 1, 1997
Restatement) (filed as Exhibit 10(m) to Applied's Registration
Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801,
and incorporated here by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
*10(m) First Amendment to Applied Supplemental Defined Contribution Plan
effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied's
Form 10-Q for the quarter ended September 30, 2000, SEC File No.
1-2299, and incorporated here by reference).
*10(n) Second Amendment to Applied Supplemental Defined Contribution Plan
effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's
Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299,
and incorporated here by reference).
*10(o) Form of Non-Statutory Stock Option Award Terms and Conditions
(Directors) (filed as Exhibit 10 to Applied's Form 8-K dated November
30, 2006, SEC File No. 1-2299, and incorporated here by reference).
*10(p) Stock Appreciation Rights Award Terms and Conditions (Officers) (filed
as Exhibit 10(c) to Applied's Form 8-K dated August 9, 2005, SEC File
No. 1-2299, and incorporated here by reference).
*10(q) Performance Grant Terms and Conditions (filed as Exhibit 10(b) to
Applied's Form 8-K dated August 8, 2006, SEC File No. 1-2299, and
incorporated here by reference).
*10(r) 2006 Management Incentive Plan General Terms (filed as Exhibit 10(a)
to Applied's Form 8-K dated August 9, 2005, SEC File No. 1-2299, and
incorporated here by reference).
*10(s) 2007 Management Incentive Plan General Terms (re-filed to correct the
version filed as Exhibit 10(a) to the Applied's Form 8-K dated August
8, 2006, SEC File No. 1-2299). Attached
*10(t) Non-qualified Deferred Compensation Agreement between Applied and J.
Michael Moore effective as of December 31, 1997 (filed as Exhibit
10(a) to Applied's Form 10-Q for the quarter ended March 31, 1998, SEC
File No. 1-2299, and incorporated here by reference).
10(u) Lease dated as of March 1, 1996 between Applied and the
Cleveland-Cuyahoga County Port Authority (filed as Exhibit 10(n) to
Applied's Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
13 Applied 2006 Annual Report to shareholders (not deemed "filed" as part
of this Form 10-K except for those portions that are expressly
incorporated by reference). Attached
21 Applied's subsidiaries at June 30, 2006. Attached
23 Consent of Independent Registered Public Accounting Firm. Attached
24 Powers of attorney. Attached
31 Rule 13a-14(a)/15d-14(a) certifications. Attached
32 Section 1350 certifications. Attached
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.S
<SEQUENCE>2
<FILENAME>l22078aexv10ws.txt
<DESCRIPTION>EX-10(S)
<TEXT>
<PAGE>
EXHIBIT 10(s)
2007 Management Incentive Plan General Terms
Authority
The Management Incentive Plan is established by the Board's Executive
Organization & Compensation Committee (the "Committee") under the 1997 Long-Term
Performance Plan.
Objective
The plan's objective is to reward eligible participants for their contributions
toward the company's fiscal year business goals.
Participation
The plan's participants are those employees of Applied Industrial Technologies,
Inc. designated as participants by the Committee.
Eligibility for Awards
To be eligible for an award under the plan, assuming plan goals are met, a
participant must comply with the terms and conditions of the 1997 Long-Term
Performance Plan. In addition, except as provided in the 1997 Long-Term
Performance Plan, the participant must be actively employed by Applied on June
30, 2007, except,
- Participants retiring at age 55 or older under an Applied retirement
plan are eligible for a prorated award based on date of retirement
(calculated using number of quarters' and partial quarters'
participation).
- Participants whose employment ceases due to death or permanent and
total disability are eligible for a prorated award based on date of
termination (calculated using number of quarters' and partial
quarters' participation).
Goals
The Committee establishes the plan's goals. In the event of a stock split, then
all goals based on per share measures shall be equitably adjusted to give proper
effect to the split.
<PAGE>
Other
The Committee has the authority, subject to the plan's express provisions, to
construe the plan, to establish, amend, and rescind rules and regulations
relating to the plan, and to make all other determinations in the Committee's
judgment necessary or desirable for the plan's administration.
The Committee may correct any defect or supply any omission or reconcile any
inconsistency in the plan in the manner and to the extent it shall deem
expedient to carry the plan into effect. All Committee action under these
provisions shall be conclusive for all purposes.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>l22078aexv13.txt
<DESCRIPTION>EX-13
<TEXT>
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
With more than 4,600 associates across North America, Applied Industrial
Technologies ("Applied," the "Company," "We" or "Our") is an industrial
distributor that offers more than two million parts critical to the operations
of MRO and OEM customers in virtually every industry. In addition, Applied
provides customized mechanical, fabricated rubber and fluid power shop services,
as well as storeroom management and maintenance training. The Company has a long
tradition of growth dating back to 1923, the year our business was founded in
Cleveland, Ohio. During fiscal 2006, business was conducted in the United
States, Canada and Mexico from 452 facilities.
The Company's fiscal 2006 sales, operating income and earnings per share
increased 10.7%, 31.4% and 30.8%, respectively, compared to the prior year.
Significant factors that contributed to these increases included the growth and
improved profitability of the service center based distribution business,
particularly in the U.S. and Canada, and the impact of acquired businesses.
Gross margin improved 50 basis points to 27.0% as a result of improvements in
customer pricing, lower net freight costs and higher levels of supplier rebates.
In addition, the rate of growth in selling, distribution and administrative
expense for fiscal 2006 was held to less than the rate of increase in sales.
Our balance sheet remains strong as shown by the increase in our working capital
from the June 30, 2005 level. Cash provided from operations was $69.9 million
and reflects the Company's increased profitability. The Company also has two
$100 million credit/financing agreements available to fund future acquisitions
or other capital and operating requirements.
Applied monitors the Purchasing Managers Index (PMI) published by the Institute
for Supply Management and the Manufacturers Capacity Utilization (MCU) index
published by the Federal Reserve Board and considers these indices key
indicators of potential Company business environment changes.
Both the PMI and the MCU continued to show a solid economy through the second
half of fiscal 2006. The Company's sales activity traditionally lags these key
indicators by approximately six months. Given the trend of these indicators, we
expect sales improvements to continue into fiscal 2007.
We anticipate our next year sales to increase in the 7% to 10% range and our
gross profit percentage to be consistent with fiscal 2006 levels. In fiscal
2007, the gross profit margin will be highly dependent on our ability to manage
and recover supplier price increases. We anticipate that fiscal 2007 supplier
purchasing incentives will be consistent with the fiscal 2006 levels. While we
consider these purchasing incentives to be compensation for various sales,
marketing and logistics services performed, when they are recognized in our
income statement, they are accounted for as a reduction of cost of sales as
required by the Financial Accounting Standards Board ("FASB") rules.
Our aim is to hold our growth in selling, distribution and administrative
expenses to a rate lower than our sales growth rate, although we do plan to
invest in our infrastructure to support additional growth.
Our June 30, 2006 balance sheet continued to be strong and reflects the impact
of another record sales year as well as the inclusion of the acquisition of two
businesses during the year. The receivable and inventory increases result
directly from our sales increase, anticipated future demand for our products and
the impact of the acquisitions. Our working capital improved again this year
through the continued management of our inventory, receivable and payable
balances.
YEAR ENDED JUNE 30, 2006 VS. 2005
Net sales in fiscal 2006 were $1.9 billion or 10.7% above the prior year sales.
This increase was primarily due to the 7.7% improvement in our service center
based distribution sales and the impact of our acquisitions. The increase in
service center based distribution sales was driven by sales mix, volume, the
recovery of supplier price increases, the strengthening of the Canadian currency
and sales generated by acquired businesses. The majority of the increase in
sales at our other businesses was attributable to the sales generated by
businesses acquired during the year. The remainder of the increase reflects
sales mix, pricing and volume and the impact of the strengthening of the
Canadian currency. The number of sales days was the same in both annual periods.
The sales product mix for fiscal 2006 was 81.8% industrial products and 18.2%
fluid power products compared to 84.0% industrial and 16.0% fluid power in the
prior year. Business acquisitions accounted for most of the shift in sales
product mix.
At June 30, 2006, the Company had a total of 452 operating facilities in the
U.S., Canada and Mexico versus 440 at June 30, 2005. The net increase of 12
facilities was primarily due to the acquisition of two businesses during fiscal
2006.
Industrial production in the United States continued to improve throughout the
year. Our industry continued to see improvement among manufacturing customers as
reflected in the PMI and MCU indices. Should the current economic trends
continue, the Company would anticipate our positive financial results to
continue.
Gross profit margin increased to 27.0% during fiscal 2006 from 26.5% during
2005. The increase in gross profit margin during fiscal 2006 primarily reflects
improved customer pricing, lower net freight costs and higher levels of supplier
purchasing incentives. This increase in supplier purchasing incentives reflects
the recording of certain supplier purchasing incentives during the first quarter
of fiscal 2006 related to inventory purchases made in the prior year. The
criteria under U.S. generally accepted accounting principles necessary to permit
us to
<PAGE>
10/11
record these supplier purchasing incentives were not met until that time. The
gross profit margin was also positively impacted by LIFO inventory layer
liquidations during fiscal 2006, which increased gross profit by $1.6 million.
There were no LIFO layer liquidations during fiscal 2005.
Selling, distribution and administrative expense ("SD&A") consists of associate
compensation, benefits and other expenses associated with selling, purchasing,
warehousing, supply chain management and providing marketing and distribution of
the Company's products, as well as costs associated with a variety of
administrative functions such as legal, human resources, information technology,
treasury, accounting and facility related expenses. SD&A increased 8.6% during
fiscal 2006 compared to the prior year, but decreased as a percent of sales to
21.0% from 21.4% in 2005. Approximately 40% of the fiscal 2006 increase was
attributable to SD&A amounts of businesses acquired. The remainder of the
increase was primarily due to increases in associate compensation tied to
improved financial performance.
Operating income increased 31.4% to $115.6 million during fiscal 2006 from $88.0
million during 2005. As a percent of sales, operating income increased to 6.1%
in fiscal 2006 from 5.1% in 2005. The $27.6 million increase in operating income
during fiscal 2006 was primarily due to the increase in gross profit generated
by the service center based distribution business, reflecting the improved gross
profit margin noted above on higher sales levels. Operating income was also
positively impacted by the acquisition of two businesses during the current
year. These increases in operating income were only partially offset by the
increases in SD&A noted above.
Interest expense-net decreased by 32.1% or $1.5 million during fiscal 2006
compared with the prior year, primarily due to an increase in interest income
associated with higher average balances of temporary investments and higher
interest rates.
Other income, net, represents certain non-operating items of income and expense.
The decrease in other income, net in fiscal 2006 was due to $2.9 million of life
insurance settlements received during 2005 which did not recur in 2006.
Income tax expense as a percentage of income before taxes was 36.1% for fiscal
2006 and 35.9% for 2005. The increase in the effective income tax rate primarily
reflects the benefit of tax-free life insurance proceeds recorded during the
prior year that did not recur during fiscal 2006, partially offset by lower
state and local income tax rates during the current year. We expect our overall
tax rate for fiscal 2007 to rise to approximately 36.5%, as some of the benefits
experienced in 2006 are not expected to recur.
Net income for fiscal 2006 increased $17.0 million or 30.6% from the prior year,
reflecting the increases in sales and margins. Net income per share increased
30.8% to $1.57 in fiscal 2006 from $1.20 in 2005.
Effective July 1, 2005, the Company closed its Denver distribution center. This
was the Company's smallest distribution center and the least efficient from a
cost standpoint. The Company transferred a portion of the inventory to the area
service centers to provide additional local inventory resources and availability
for emergency shipment needs. The remainder of the inventory was transferred to
our distribution centers in Texas, California and Oregon that now service the
area previously serviced out of Denver.
The number of Company associates was 4,684 at June 30, 2006 and 4,441 at June
30, 2005. This increase was primarily due to business acquisitions.
YEAR ENDED JUNE 30, 2005 VS. 2004
Net sales in fiscal 2005 were $1.7 billion or 13.2% above 2004's sales. This
increase was primarily due to the 11.1% improvement in our U.S. service center
sales and increased sales from our Canadian operations which were up
approximately 34.3%. The U.S. service center sales were driven by sales mix,
volume and the recovery of supplier price increases. The Canadian sales increase
was also attributable to sales mix, pricing and volume as well as the impact of
the strength of the Canadian currency. Also contributing to the Canadian sales
increase was the inclusion of five months of operations of the Canadian
distribution business acquired during fiscal 2005 as well as overall Canadian
economy improvements. The overall sales increase was partially offset by one
less sales day in fiscal 2005 as compared to 2004.
The sales product mix for fiscal 2005 was 84.0% industrial products and 16.0%
fluid power products compared to 84.4% industrial and 15.6% fluid power during
2004.
There was a net increase of six facilities in the U.S., Canada and Mexico,
composed of ten new or acquired locations, one closed and three merged
facilities. At June 30, 2005, the Company had a total of 440 operating
facilities versus 434 at June 30, 2004.
Industrial production in the United States continued to improve throughout the
year. Our industry continued to see strength among manufacturing customers
consistent with improvement as reflected in the PMI and MCU indices.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
Gross profit margin was consistent at 26.5% in both fiscal 2005 and 2004. The
impact of lower freight costs and improved shop efficiencies offset the
negative pressures on gross profit margins from supplier price increases
experienced mid-year. In addition, the impact of supplier purchasing incentives
on margin was consistent in both fiscal 2005 and 2004. There were no LIFO layer
liquidations in fiscal 2005, while in 2004 LIFO layer liquidations increased
gross profit by $0.7 million.
SD&A increased 4.6% during fiscal 2005 compared to the prior year, but decreased
as a percent of sales to 21.4% from 23.1% in 2004. The overall increase during
fiscal 2005 was primarily due to higher associate compensation costs related to
the record sales and operating results and, to a lesser extent, the acquisition
of a Canadian distribution business. The fiscal 2005 increases were partially
offset by lower provisions for bad debts, higher gains on sales of assets and
lower rent expenses.
Operating income increased to $88.0 million in fiscal 2005 from $51.4 million in
2004. As a percent of sales, operating income increased to 5.1% in fiscal 2005
from 3.4% in 2004. The $36.6 million increase in operating income during fiscal
2005 was due primarily to the increase in U.S. same store sales, the increased
profitability of our U.S. fluid power businesses and the continued improvement
from our Canadian operations.
Interest expense-net decreased to $4.7 million, or 12.6% during fiscal 2005
compared with the prior year primarily due to an increase in interest income
from higher balances of temporary investments, as well as higher rates.
Other income, net, represents certain non-operating items of income and expense.
The fiscal 2005 amount consists primarily of $2.9 million of life insurance
settlements received during the year.
Income tax expense as a percentage of income before taxes was 35.9% for fiscal
2005 and 32.3% for 2004. The fiscal 2004 rate was unusually low due to the
recording of non-recurring tax benefits from a settlement with the Internal
Revenue Service.
Net income for fiscal 2005 increased $23.9 million or approximately 75.8% from
prior years' income. Overall, net income per share increased 69.0% to $1.20 in
fiscal 2005 from $0.71 in 2004.
The Company had 4,441 associates at June 30, 2005 and 4,323 at June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations depend primarily upon generating operating income,
controlling investment in inventories and receivables, and managing the timing
of payments to suppliers. The Company continues to monitor and control its
investments in inventories and receivables by taking advantage of supplier
purchasing programs, making internal information system enhancements and
accelerating receivables collection through improvements in invoice delivery,
customer communications and expanded external collection efforts. The Company
generated $69.9 million of cash from operating activities during fiscal 2006,
$81.0 million during 2005 and $40.9 million during 2004. Cash provided from
operations in fiscal 2006 benefited from our strong operating results. Operating
cash flow was also impacted in fiscal 2006 as increased sales resulted in higher
receivables balances, although the increase was at a rate less than the sales
increase - reflecting our improved DSO. The entire increase in inventory
balances pertained to the acquisitions made during the year. Cash flows from
operations were also impacted by the timing of certain income tax and service
provider payments. Also impacting the current year operating cash flow was an
accounting classification change as required under SFAS No. 123(R) related to
tax benefits received from the exercise of stock awards (see Note 1 for a
discussion). In fiscal 2006, these tax benefits were shown as a financing
activity. In prior years, the benefit was included as an operating activity. The
cash generated from operating activities in fiscal 2005 improved from 2004 due
primarily to the improved operating results and the timing of payments to
suppliers.
Cash used by investing activities was $37.9 million during fiscal 2006, $12.5
million during 2005 and $15.9 million during 2004. Cash was primarily used for
acquisitions and property purchases in each of these years. In fiscal 2006, the
Company acquired two U.S. distributors for $27.7 million, net of cash acquired,
compared to $5.9 million, net of cash acquired, in the prior year. Property
purchases consisted primarily of computers and information technology equipment.
For fiscal 2007, our property purchases are expected to be in the $10 million to
$12 million range, consisting primarily of additional computers, information
system technology and infrastructure investments. Depreciation for fiscal 2007
is expected to be in the range of $12.5 million to $13.5 million.
Cash used in financing activities was $53.8 million during fiscal 2006, $11.7
million during 2005 and $10.1 million during 2004. The increased cash used in
financing activities was primarily due to greater numbers of treasury shares
purchased and increases in the
<PAGE>
12/13
dividend rate. Over the last three fiscal years, the Company repurchased 2.4
million, 0.9 million and 0.7 million shares of the Company's common stock at an
average price per share of $23.05, $16.04 and $9.70, respectively. The Company
has also increased the quarterly dividend rate four times over the last two
fiscal years to a quarterly rate of $0.12 per share. This represents a 125.0%
increase compared to the quarterly dividend rate at the end of fiscal 2004. The
amount of the dividend paid is recommended quarterly by management and approved
by the Company's Board of Directors based on judgment, financial performance and
cash flow and payout guidelines consistent with other industrial companies.
Partially offsetting the current year use of cash for financing activities was
the accounting change, noted above, related to the classification of tax
benefits from share-based compensation as a source of cash in the financing area
of the cash flow statement. In accordance with the accounting rules, these tax
benefits were considered an operating cash flow in prior periods.
The following table shows the Company's approximate obligations and commitments
to make future payments under contractual obligations as of June 30, 2006 (in
thousands):
<TABLE>
<CAPTION>
Period Less Period Period Period
Total Than 1 yr. 1-3 yrs. 4-5 yrs. over 5 yrs.
-------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Operating leases $ 66,100 $17,900 $24,000 $11,100 $13,100
Interest payments
on debt 14,000 5,300 5,700 3,000
Planned funding
of postretirement
obligations 35,700 1,600 9,800 16,400 7,900
Long-term debt 75,000 50,000 25,000
-------- ------- ------- ------- -------
Total Contractual
Cash Obligations $190,800 $24,800 $89,500 $55,500 $21,000
======== ======= ======= ======= =======
</TABLE>
Purchase orders for inventory and other goods and services are not included in
our estimates, as purchase orders generally represent authorizations to buy
rather than binding agreements.
The Board of Directors has authorized the repurchase of shares of the Company's
common stock, at the Company's discretion, to fund benefit programs, equity
award programs, and future business acquisitions. These purchases may be made in
open market and negotiated transactions, from time-to-time, depending upon
market conditions. At June 30, 2006, the Company had authorization to purchase
an additional 403,900 shares. In July 2006, the Board of Directors replaced the
existing authorization, granting the Company authorization to purchase up to 1.5
million shares of the Company's common stock.
Capital resources are obtained from income retained in the business, borrowings
under the Company's revolving credit agreement and long-term debt facilities,
and from operating lease arrangements.
See Note 6 to the consolidated financial statements for details regarding the
outstanding debt amounts as of June 30, 2006 and 2005. The average long-term
borrowings totaled $75.0 million during fiscal 2006, 2005 and 2004. One-third of
the Company's outstanding debt has been converted from fixed rate U.S. dollar
denominated debt to fixed rate Canadian dollar denominated debt through the use
of a cross currency swap. As such, the consolidated interest expense is affected
by changes in the exchange rates of U.S. and Canadian dollars (see Note 7 to the
consolidated financial statements). The weighted average interest rate on
borrowings under our long-term debt agreements, net of the benefits from
interest rate swaps, was 6.7%, 6.5% and 6.3% in fiscal 2006, 2005 and 2004,
respectively. The increase in the weighted average interest rate reflects the
impact of the strengthening of the Canadian dollar during fiscal 2006 and 2005.
The Company terminated its interest rate swap agreements for favorable
settlements in prior years. The settlement gains are being amortized as a
reduction in interest expense of $0.8 million per year over the remaining life
of the notes through December 2007.
The Company manages interest rate risk through the use of a combination of fixed
rate long-term debt, variable rate borrowings under its committed revolving
credit agreement and interest rate swaps. At June 30, 2006, the Company had no
variable rate debt or interest rate swaps outstanding. See Note 7 to the
consolidated financial statements "Risk Management Activities" for additional
discussion on the Company's derivative activities.
The Company's working capital at June 30, 2006 was $370.0 million compared to
$345.8 million at June 30, 2005. The current ratio was 3.0 at June 30, 2006 and
2.9 at June 30, 2005. The increase in working capital at June 30, 2006 was
primarily due to the increase in receivables and inventory associated with the
expansion of our business and the timing of certain income tax and service
provider payments.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
The Company has a five-year committed revolving credit agreement expiring in
June 2010. This agreement provides for unsecured borrowings of up to $100.0
million. The Company had no borrowings outstanding under this facility at June
30, 2006. Unused lines under this facility, net of outstanding letters of
credit, totaling $92.3 million are available to fund future acquisitions or
other capital and operating requirements. The Company also has an uncommitted
long-term financing shelf facility, expiring in February 2007, that enables the
Company to borrow up to $100.0 million at its discretion with terms of up to
twelve years. The Company had no outstanding borrowings under this facility at
June 30, 2006.
The aggregate annual maturities of long-term debt are $50.0 million in fiscal
2008 and $25.0 million in fiscal 2011.
Management expects that cash provided from operations, available credit
facilities and the use of operating leases will be sufficient to finance normal
working capital needs, acquisitions, investments in properties, facilities and
equipment, and the purchase of additional Company common stock. Management also
believes that additional long-term debt and line of credit financing could be
obtained based on the Company's credit standing and financial strength.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates at a specific
point in time that affect the amounts reported in the consolidated financial
statements and disclosed in the accompanying notes. Note 1 to the consolidated
financial statements describes the significant accounting policies and methods
used in preparation of the consolidated financial statements. Estimates are used
for, but not limited to, determining the net carrying value of trade
receivables, inventories, supplier rebates receivable, goodwill, other
long-lived assets, recording self-insurance liabilities and other accrued
liabilities. Actual results could differ from these estimates. The following
critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the consolidated financial
statements.
LIFO INVENTORY VALUATION AND METHODOLOGY
U.S. inventories are valued at the lower of cost or market, using the last-in,
first-out (LIFO) method, and foreign inventories are valued using the average
cost method. The Company adopted the link chain dollar value LIFO method for
accounting for U.S. inventories in fiscal 1974. Approximately half of our
inventory dollars relate to LIFO layers added in the 1970s which results in a
$137.6 million excess of current cost over LIFO cost as reflected on our
consolidated balance sheet at June 30, 2006. The Company maintains five LIFO
pools based on the following product groupings: bearings, power transmission
products, rubber products, fluid power products and other products. LIFO layers
and/or liquidations are determined consistently year-to-year in a manner which
is in accordance with the guidance in the 1984 AICPA LIFO Issues Paper,
"Identification and Discussion of Certain Financial Accounting and Reporting
Issues Concerning LIFO Inventories." See Note 3 to the consolidated financial
statements for further information regarding inventories.
ALLOWANCES FOR SLOW-MOVING AND OBSOLETE INVENTORIES
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, most of 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.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of trade accounts receivable based on a
combination of factors. Initially, the Company estimates an allowance for
doubtful accounts as a percentage of net sales based on historical bad debt
experience. This initial estimate is adjusted based on recent trends of certain
customers and industries estimated to be a greater credit risk, trends within
the entire customer pool and as a result of changes in the overall aging of
accounts receivable. While 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.
IMPAIRMENT OF PROPERTY & EQUIPMENT, GOODWILL AND OTHER INTANGIBLE ASSETS
The Company evaluates property and equipment, goodwill and other intangible
assets for potential impairment indicators. The Company's judgments regarding
the existence of impairment indicators are based on legal factors, market
conditions and operational performance. Future events could cause the Company to
conclude that impairment indicators exist and that assets associated with a
particular operation are impaired. Evaluating the impairment also requires the
Company to estimate future operating results and cash flows which require
judgment by management. Any resulting impairment loss could have a material
adverse impact on the Company's financial condition and results of operations.
The Company performs an annual test of impairment on its goodwill as of January
1 or whenever conditions would
<PAGE>
14/15
indicate an evaluation should be completed. The Company also reviews its
long-lived assets for impairment whenever conditions would indicate an
evaluation should be completed. The Company utilizes discounted cash flow models
and market multiples for comparable businesses to determine fair value used in
the goodwill impairment evaluation. Management's estimates of fair value are
based upon factors such as projected future sales, price increases, and other
uncertain elements requiring significant judgments. While the Company uses
available information to prepare its estimates and to perform impairment
evaluations, actual results could differ significantly, resulting in future
impairment and losses related to recorded balances. As of June 30, 2006 and
2005, the Company had $66.8 million and $55.0 million, respectively, of goodwill
and other intangibles, representing the costs of acquisitions in excess of fair
values assigned to the underlying net assets of acquired companies. The Company
also had $70.8 million and $71.4 million in net property and equipment recorded
as of June 30, 2006 and 2005, respectively. Based upon the Company's analysis,
management believes these assets were not impaired as of June 30, 2006.
SUPPLIER PURCHASING PROGRAMS
The Company enters into agreements with certain suppliers that provide for
inventory purchase incentives. Although these agreements are unique to each
supplier, they are generally annual programs that provide for purchase
incentives to be earned upon achieving specified purchase volumes. These
percentages can increase or decrease based on changes in the volume of
purchases.
The Company accrues for the receipt of these inventory purchase incentives based
upon actual cumulative purchases of inventory and expected total purchases
through the life of the program. Each supplier program is analyzed at least
quarterly to determine the appropriateness of the amount estimated to be
received. Differences between our estimates and actual incentives subsequently
received have not been material.
All benefits under these supplier purchasing programs are recognized under the
Company's LIFO inventory accounting method as a reduction of cost of sales when
the inventories representing these purchases are recorded as cost of sales. The
Company's accounting for inventory purchase incentives is in accordance with
guidance issued by the FASB in EITF 02-16, "Accounting by a Customer (Including
a Reseller) for Certain Consideration Received from a Vendor." While management
believes the Company will continue to receive inventory purchase incentives,
there can be no assurance that suppliers will continue to provide comparable
amounts of incentives in the future.
SELF-INSURANCE LIABILITIES
The Company maintains business insurance programs with significant self-insured
retention, which cover workers' compensation, business automobile and general
product liability claims. The Company accrues estimated losses using actuarial
calculations, models and assumptions based on historical loss experience. The
Company maintains a self-insured health benefits plan, which provides medical
benefits to employees electing coverage under the plan. The Company maintains a
reserve for incurred but not reported medical claims based on historical
experience and other assumptions. The Company utilizes independent actuarial
firms to assist in determining the adequacy of all self-insurance liability
reserves. Although management believes that the estimated liabilities for
self-insurance are adequate, the estimates described above may not be indicative
of current and future losses. In addition, the actuarial calculations used to
estimate self-insurance liabilities are based on numerous assumptions, some of
which are subjective. The Company will continue to adjust its estimated
liabilities for self-insurance, as deemed necessary, in the event that future
loss experience differs from historical loss patterns.
PENSION & OTHER POSTEMPLOYMENT BENEFIT PLANS
The measurement of liabilities related to pension plans and other
post-employment benefit plans is based on management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and healthcare cost trend rates. The Company evaluates
these assumptions and adjusts them as necessary.
INCOME TAXES
As of June 30, 2006, the Company had recognized $19.7 million of net deferred
tax assets. Management believes that sufficient income will be earned in the
future to realize its deferred income tax assets. The realization of these
deferred tax assets can be impacted by changes to tax laws, statutory tax rates
and future taxable income levels.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48, which is an interpretation of
SFAS No. 109, "Accounting for Income Taxes," provides guidance on the manner in
which tax positions taken or to be taken on tax returns should be reflected in
an entity's financial statements prior to their resolution with taxing
authorities. The Company is required to adopt FIN 48 during the first quarter of
fiscal 2008. The Company is currently evaluating the requirements of FIN 48 and
has not yet determined the impact, if any, this interpretation will have on its
consolidated financial statements.
OTHER MATTERS
In each of the past three fiscal years, the Company has acquired distributors
thereby extending its business over a broader geographic area. In fiscal 2006,
the Company acquired two U.S. based distributors of industrial and fluid power
products for a combined purchase price of $28.6 million. In 2005, the Company
acquired a Canadian distributor of industrial products for a purchase price of
$6.6 million and in 2004 acquired a Mexican distributor of industrial products
for a price of $2.8 million.
Results of operations of all of the above acquisitions, which have all been
accounted for as purchases, are included in the accompanying consolidated
financial statements from their respective acquisition dates. The results of
operations for these acquisitions are not material for all years presented.
CAUTIONARY STATEMENT
UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This Annual Report to Shareholders, including Management's Discussion and
Analysis, contains statements that are forward-looking based on management's
current expectations about the future. Forward-looking statements are often
identified by qualifiers, such as "expect," "believe," "plan," "intend," "will,"
"should," "could," "anticipate" and similar expressions. 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. Accordingly, actual results may differ
materially from those expressed in the forward-looking statements, and the
making of such statements should not be regarded as a representation by the
Company or any other person that the results expressed in the statements will be
achieved. In addition, the Company undertakes no obligation publicly to update
or revise any forward-looking statements, whether because of new information or
events, or otherwise.
Important risk factors include, but are not limited to, the following: risks
relating to the operations levels of our customers and the economic factors that
affect them; reduced demand for our products in targeted markets due to reasons
including consolidation in customer industries and the transfer of manufacturing
capacity to foreign countries; changes in customer preferences for products and
services of the nature and brands sold by us; changes in customer procurement
policies and practices; changes in the price for products and services relative
to the cost of providing them; loss of key supplier authorizations, lack of
product availability, or changes in supplier distribution programs; competitive
pressures; the cost of products and energy and other operating costs; disruption
of our information systems; our ability to retain and attract qualified sales
and customer service personnel; our ability to identify and complete future
acquisitions, integrate them effectively into our operations, and realize their
anticipated benefits; disruption of operations at our headquarters or
distribution centers; risks and uncertainties associated with our foreign
operations, including more volatile economic conditions, political instability,
cultural and legal differences, and currency exchange fluctuations; risks
related to legal proceedings to which we are a party; the variability and timing
of new business opportunities including acquisitions, alliances, customer
relationships, and supplier authorizations; the incurrence of debt and
contingent liabilities in connection with acquisitions; our ability to access
capital markets as needed; changes in accounting policies and practices;
organizational changes within the Company; the volatility of our stock price and
the resulting impact on our financial statements; adverse regulation and
legislation; and the occurrence of extraordinary events (including prolonged
labor disputes, natural events and acts of god, terrorist acts, fires, floods,
and accidents). Other factors and unanticipated events could also adversely
affect our business, financial condition, or results of operations. We discuss
certain of these matters more fully above in "Management's Discussion and
Analysis" as well as other of our filings with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the year ended June 30,
2006.
<PAGE>
16/17
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has evaluated its exposure to various market risk factors, including
but not limited to, interest rate, foreign currency exchange and commodity price
risks. The Company is primarily affected by market risk exposure through the
effect of changes in interest rates and, to a lesser extent, through the change
in exchange rates.
The Company manages interest rate risk through the use of a combination of fixed
rate long-term debt, variable rate borrowings under its committed revolving
credit agreement and interest rate swaps. The Company had no variable rate
borrowings under its committed revolving credit agreement and no interest rate
swap agreements outstanding at June 30, 2006. All the Company's outstanding debt
is currently at fixed interest rates at June 30, 2006 and scheduled for
repayment in December 2007 and beyond.
The Company mitigates its foreign currency exposure from the Canadian dollar
through the use of cross currency swap agreements as well as foreign-currency
denominated debt. Hedging of the U.S. dollar denominated debt, used to fund a
substantial portion of the Company's net investment in its Canadian operations,
is accomplished through the use of cross currency swaps. Any gain or loss on the
hedging instrument offsets the gain or loss on the underlying debt. Translation
exposures with regard to our Mexican business are not hedged, as our Mexican
activity is not material. For the year ended June 30, 2006, a uniform 10%
strengthening of the U.S. dollar relative to foreign currencies that affect the
Company would have resulted in a $0.7 million decrease in net income. A uniform
10% weakening of the U.S. dollar would have resulted in a $0.7 million increase
in net income.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
STATEMENTS OF CONSOLIDATED INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- ---------- ---------- ----------
<S> <C> <C> <C>
NET SALES $1,900,780 $1,717,055 $1,517,004
COST OF SALES 1,386,895 1,262,206 1,114,861
---------- ---------- ----------
513,885 454,849 402,143
SELLING, DISTRIBUTION AND ADMINISTRATIVE 398,293 366,881 350,695
---------- ---------- ----------
OPERATING INCOME 115,592 87,968 51,448
---------- ---------- ----------
INTEREST EXPENSE 5,523 5,816 5,814
INTEREST INCOME (2,313) (1,086) (405)
OTHER INCOME, NET (717) (3,101) (432)
---------- ---------- ----------
2,493 1,629 4,977
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 113,099 86,339 46,471
---------- ---------- ----------
INCOME TAX EXPENSE 40,800 31,000 15,000
---------- ---------- ----------
NET INCOME $ 72,299 $ 55,339 $ 31,471
========== ========== ==========
NET INCOME PER SHARE - BASIC $ 1.62 $ 1.24 $ 0.73
========== ========== ==========
NET INCOME PER SHARE - DILUTED $ 1.57 $ 1.20 $ 0.71
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
18/19
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, 2006 2005
- -------- -------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $106,428 $127,136
Accounts receivable, less allowances of $ 6,000 and
$6,500 231,524 202,226
Inventories 190,537 175,533
Other current assets 29,955 22,606
-------- --------
Total current assets 558,444 527,501
-------- --------
Property - at cost
Land 10,916 10,939
Buildings 68,136 66,834
Equipment 107,230 100,287
-------- --------
186,282 178,060
Less accumulated depreciation 115,488 106,619
-------- --------
Property - net 70,794 71,441
-------- --------
Goodwill 57,222 51,083
Other assets 44,211 40,145
-------- --------
TOTAL ASSETS $730,671 $690,170
======== ========
LIABILITIES
Current liabilities
Accounts payable $109,440 $ 99,047
Compensation and related benefits 54,852 51,971
Other current liabilities 24,139 30,677
-------- --------
Total current liabilities 188,431 181,695
Long-term debt 76,186 76,977
Other liabilities 51,232 38,211
-------- --------
TOTAL LIABILITIES 315,849 296,883
-------- --------
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 10,000 10,000
Additional paid-in capital 122,146 103,240
Income retained for use in the business 408,847 354,521
Treasury shares - at cost (10,146 and 9,211 shares) (130,967) (72,660)
Unearned restricted common stock compensation (825)
Accumulated other comprehensive income (loss) 4,796 (989)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 414,822 393,287
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $730,671 $690,170
======== ========
</TABLE>
See notes to consolidated financial statements.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 72,299 $ 55,339 $ 31,471
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 13,128 13,832 14,381
Deferred income taxes 1,000 (3,900) (5,700)
Stock-based compensation and amortization of intangibles
and other assets 4,158 3,429 2,483
Provision for losses on accounts receivable 1,953 1,958 2,527
(Gain) loss on sale of property (294) (1,427) 13
Amortization of gain on interest rate swap terminations (791) (790) (791)
Treasury shares contributed to employee
benefit and deferred compensation plans 8,937 9,506 6,497
Changes in current assets and liabilities, net of acquisitions:
Accounts receivable (17,067) (9,594) (17,443)
Inventories 2,103 (10,360) 4,208
Other current assets (8,514) (2,658) (11,114)
Accounts payable 2,223 22,510 7,597
Accrued expenses (9,282) 3,189 6,734
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 69,853 81,034 40,863
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property purchases (11,057) (9,208) (14,383)
Proceeds from property sales 1,244 4,020 1,374
Net cash paid for acquisition of businesses, net of cash
acquired of $968 in 2006 and $815 in 2004 (27,672) (5,914) (1,285)
Deposits and other (429) (1,437) (1,575)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (37,914) (12,539) (15,869)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments under revolving credit agreements - net (2,850)
Purchases of treasury shares (54,778) (14,596) (6,336)
Dividends paid (17,973) (12,740) (9,273)
Excess tax benefits from share-based compensation 16,400
Exercise of stock options 2,569 15,590 8,336
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (53,782) (11,746) (10,123)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,135 720 (283)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (20,708) 57,469 14,588
Cash and cash equivalents at beginning of year 127,136 69,667 55,079
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $106,428 $127,136 $ 69,667
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 31,337 $ 29,624 $ 20,434
Interest $ 5,290 $ 5,343 $ 5,379
</TABLE>
See notes to consolidated financial statements.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
20/21
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Income
Shares of Additional Retained for
For the Years Ended June 30, 2006, 2005 and Common Stock Common Paid-in Use in the
2004 Outstanding Stock Capital Business
- ------------------------------------------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE AT JULY 1, 2003 42,795 $ 10,000 $ 84,898 $289,724
Net income 31,471
Unrealized loss on cash flow hedge,
net of income tax of $(614)
Foreign currency translation
adjustment, net of income
tax of $(46)
TOTAL COMPREHENSIVE INCOME
Cash dividends - $.21 per share (9,273)
Purchases of common stock for treasury (653)
Treasury shares issued for:
Retirement Savings Plan contributions 515 1,713
Exercise of stock options 986 1,497
Deferred compensation plans 116 344
Restricted common stock awards 128 392
Compensation expense - stock options 1,586
Amortization of restricted common
stock compensation 9
Other 81
------ -------- -------- --------
BALANCE AT JUNE 30, 2004 43,886 10,000 90,520 311,922
Net income 55,339
Unrealized loss on cash flow hedge,
net of income tax of $(634)
Unrealized gain on investment securities
available for sale, net of income tax
of $42
Minimum pension liability, net of income
tax of $(1,643)
Foreign currency translation adjustment,
net of income tax of $693
TOTAL COMPREHENSIVE INCOME
Cash dividends - $.29 per share (12,740)
Purchases of common stock for treasury (911)
Treasury shares issued for:
Retirement Savings Plan
contributions 446 4,623
Exercise of stock options 1,467 4,934
Deferred compensation plans 114 728
Compensation expense - stock options and
appreciation rights 2,111
Amortization of restricted common
stock compensation 253
Other 71
------ -------- -------- --------
BALANCE AT JUNE 30, 2005 45,002 10,000 103,240 354,521
Net income 72,299
Unrealized gain on cash flow hedge,
net of income tax of $384
Unrealized gain on investment securities
available for sale, net of income tax
of $43
Reduction in minimum pension liability,
net of income tax of $282
Foreign currency translation adjustment,
net of income tax of $1,258
TOTAL COMPREHENSIVE INCOME
Cash dividends - $.40 per share (17,973)
Purchases of common stock for treasury (2,379)
Treasury shares issued for:
Retirement Savings Plan contributions 348 4,892
Exercise of stock options 1,088 11,279
Deferred compensation plans 21 269
Compensation expense - stock options and
appreciation rights 2,658
Amortization of restricted common
stock compensation 320
Reclassification of unearned restricted
stock compensation due to the adoption
of SFAS 123(R) (825)
Other (13) 313
------ -------- -------- --------
BALANCE AT JUNE 30, 2006 44,067 $ 10,000 $122,146 $408,847
====== ======== ======== ========
<CAPTION>
Unearned
Restricted Accumulated
Treasury Common Other Total
For the Years Ended June 30, 2006, 2005 and Shares Stock Comprehensive Shareholders'
2004 at Cost Compensation Income (Loss) Equity
- ------------------------------------------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JULY 1, 2003 $ (78,706) $ (114) $2,054 $307,856
Net income 31,471
Unrealized loss on cash flow hedge,
net of income tax of $(614) (776) (776)
Foreign currency translation
adjustment, net of income
tax of $(46) (157) (157)
--------
TOTAL COMPREHENSIVE INCOME 30,538
--------
Cash dividends - $.21 per share (9,273)
Purchases of common stock for treasury (6,336) (6,336)
Treasury shares issued for:
Retirement Savings Plan contributions 3,609 5,322
Exercise of stock options 6,839 8,336
Deferred compensation plans 831 1,175
Restricted common stock awards 893 (1,285)
Compensation expense - stock options 1,586
Amortization of restricted common
stock compensation 241 250
Other 81
--------- -------- ------ --------
BALANCE AT JUNE 30, 2004 (72,870) (1,158) 1,121 339,535
Net income 55,339
Unrealized loss on cash flow hedge,
net of income tax of $(634) (1,002) (1,002)
Unrealized gain on investment securities
available for sale, net of income tax
of $42 74 74
Minimum pension liability, net of income
tax of $(1,643) (2,858) (2,858)
Foreign currency translation adjustment,
net of income tax of $693 1,676 1,676
--------
TOTAL COMPREHENSIVE INCOME 53,229
--------
Cash dividends - $.29 per share (12,740)
Purchases of common stock for treasury (14,596) (14,596)
Treasury shares issued for:
Retirement Savings Plan
contributions 3,304 7,927
Exercise of stock options 10,656 15,590
Deferred compensation plans 851 1,579
Compensation expense - stock options and
appreciation rights 2,111
Amortization of restricted common
stock compensation 326 579
Other (5) 7 73
--------- -------- ------ --------
BALANCE AT JUNE 30, 2005 (72,660) (825) (989) 393,287
Net income 72,299
Unrealized gain on cash flow hedge,
net of income tax of $384 598 598
Unrealized gain on investment securities
available for sale, net of income tax
of $43 72 72
Reduction in minimum pension liability,
net of income tax of $282 542 542
Foreign currency translation adjustment,
net of income tax of $1,258 4,573 4,573
--------
TOTAL COMPREHENSIVE INCOME 78,084
--------
Cash dividends - $.40 per share (17,973)
Purchases of common stock for treasury (54,778) (54,778)
Treasury shares issued for:
Retirement Savings Plan contributions 3,583 8,475
Exercise of stock options (6,945) 4,334
Deferred compensation plans 193 462
Compensation expense - stock options and
appreciation rights 2,658
Amortization of restricted common
stock compensation 320
Reclassification of unearned restricted
stock compensation due to the adoption
of SFAS 123(R) 825
Other (360) (47)
--------- -------- ------ --------
BALANCE AT JUNE 30, 2006 $(130,967) $ 0 $4,796 $414,822
========= ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES
BUSINESS
Applied Industrial Technologies, Inc. and subsidiaries (the "Company") is one of
North America's leading distributors of industrial products. Industrial products
include bearings, power transmission components, fluid power components and
systems, industrial rubber products, linear components, tools, safety products,
general maintenance and a variety of mill supply products. Fluid power products
include hydraulic, pneumatic, lubrication and filtration components and systems.
The Company also provides mechanical, rubber shop and fluid power services. The
Company offers technical application support for these products and provides
solutions to help customers minimize downtime and reduce overall procurement
costs. Although the Company does not generally manufacture the products it
sells, it does assemble and repair certain products and systems. Most of the
Company's sales are in the maintenance and replacement markets to customers in a
wide range of industries, principally in North America.
CONSOLIDATION
The consolidated financial statements include the accounts of Applied Industrial
Technologies, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. The financial
results of the Company's Canadian subsidiary are included in the consolidated
financial statements based upon their fiscal year ended May 31. Prior to June
30, 2006, the Company was considered the primary beneficiary for iSource
Performance Materials, LLC (iSource) and included their accounts in the
consolidated financial statements. Effective June 30, 2006, the Company ended
its venture with iSource and is no longer the primary beneficiary. As of June
30, 2006, iSource's operating results and balances were no longer included in
the Company's consolidated financial statements.
FOREIGN CURRENCY
The financial statements of the Company's Canadian and Mexican subsidiaries are
measured using local currencies as their functional currencies. Assets and
liabilities are translated into U.S. dollars at current exchange rates, while
income and expenses are translated at average monthly exchange rates.
Translation gains and losses are included as components of accumulated other
comprehensive income in shareholders' equity. Transaction gains and losses
included in the statements of consolidated income were not material.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the period. Actual results may differ from the estimates and assumptions used in
preparing the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with maturities
of three months or less at the date of purchase to be cash equivalents. Cash and
cash equivalents are carried at cost, which approximates market value.
CONCENTRATION OF CREDIT RISK
The Company has a broad customer base representing many diverse industries doing
business throughout North America. As such, the Company does not believe that a
significant concentration of credit risk exists.
The Company maintains its cash and cash equivalents with federally insured
financial institutions. Deposits held with banks may exceed insurance limits.
These deposits may be redeemed upon demand.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of trade accounts receivable based on a
combination of factors. Initially, the Company estimates an allowance for
doubtful accounts as a percentage of net sales based on historical bad debt
experience. This initial estimate is adjusted based on recent trends of
customers and industries estimated to be a greater credit risk, trends within
the entire customer pool and changes in the overall aging of accounts
receivable. While the Company has a large customer base that is geographically
dispersed, a general economic downturn in any of the industry segments in which
the Company operates could result in higher than expected defaults, and
therefore, the need to revise estimates for bad debts.
<PAGE>
22/23
INVENTORIES
U.S. inventories are valued at the lower of cost or market, using the last-in,
first-out (LIFO) method, and foreign inventories are valued using the average
cost method. The Company adopted the link chain dollar value LIFO method of
accounting for U.S. inventories in fiscal 1974. At June 30, 2006, approximately
half of the Company's inventory dollars relate to LIFO layers added in the
1970s. The Company maintains five LIFO pools based on the following product
groupings: bearings, power transmission products, rubber products, fluid power
products and other products. LIFO layers and/or liquidations are determined
consistently year-to-year in a manner which is in accordance with the guidance
in the 1984 AICPA LIFO Issues Paper, "Identification and Discussion of Certain
Financial Accounting and Reporting Issues Concerning LIFO Inventories." See Note
3 for further information regarding inventories.
The Company evaluates the recoverability of its slow moving or obsolete
inventories at least quarterly. The Company estimates the recoverable cost of
such inventory by product type while considering factors such as its age,
historic and current demand trends, the physical condition of the inventory as
well as assumptions regarding future demand. The Company's ability to recover
its cost for slow moving or obsolete inventory can be affected by such factors
as general market conditions, future customer demand and relationships with
suppliers. Historically, the Company's inventories have demonstrated long shelf
lives, are not highly susceptible to obsolescence and are eligible for return
under various supplier return programs.
SUPPLIER PURCHASING PROGRAMS
The Company enters into agreements with certain suppliers providing for
inventory purchase incentives. The Company's inventory purchase incentive
arrangements are unique to each supplier and are generally annual programs
ending at either the Company's fiscal year end or the supplier's year end.
Incentives are received in the form of cash or credits against purchases upon
attainment of specified purchase volumes and are received monthly, quarterly or
annually based upon actual purchases for such period. The incentives are a
specified percentage of the Company's net purchases based upon achieving
specific purchasing volume levels. These percentages can increase or decrease
based on changes in the volume of purchases. The Company accrues for the receipt
of these inventory purchase incentives based upon cumulative purchases of
inventory. The percentage level utilized is based upon the estimated total
volume of purchases expected during the life of the program. Each supplier
program is analyzed, reviewed and reconciled each quarter as information becomes
available to determine the appropriateness of the amount estimated to be
received. Differences between estimates and actual incentives subse-quently
received have not been material. Benefits under these supplier purchasing
programs are recognized under the Company's LIFO inventory accounting method as
a reduction of cost of sales when the inventories representing these purchases
are recorded as cost of sales. The Company's accounting for inventory purchase
incentives is in accordance with guidance issued by the Financial Accounting
Standards Board ("FASB") in EITF 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor."
PROPERTY AND DEPRECIATION
Property and equipment are recorded at cost. Depreciation of buildings and
equipment is computed using the straight-line method over the estimated useful
lives of the assets and is included in selling, distribution and administrative
expenses in the accompanying statements of consolidated income. Buildings and
related improvements are depreciated over ten to thirty years and equipment is
depreciated over three to eight years. The carrying values of property and
equipment are reviewed for impairment on a quarterly basis or whenever events or
changes in circumstances indicate that the recorded value cannot be recovered
from undiscounted future cash flows. To analyze recov-erability, the Company
considers market values, where available, or will project undiscounted net
future cash flows over the remaining life of such assets. If these market values
or projected cash flows are less than the carrying amount, an impairment would
be recognized, resulting in a write-down of assets with a corresponding charge
to earnings. Impairment losses, if any, are measured based upon the difference
between the carrying amount and the fair value of the assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is recognized as the excess cost of an acquired entity over the net
amount assigned to assets acquired and liabilities assumed. Goodwill is not
amortized.
The Company recognizes acquired intangible assets such as noncompetition
agreements, customer relationships, exclusive supplier distribution agreements
and trademarks apart from goodwill. Amortization of intangible assets is
computed using the straight-line method over the estimated period of benefit and
is included in selling, distribution and administrative expenses in the
accompanying statements of consolidated income. The weighted-average
amortization period as of June 30, 2006 was 6 years for non-competition
agreements, 14 years for customer relationships, 12 years for exclusive supplier
distribution agreements and 10 years for trademarks.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(In thousands, except per share amounts)
Goodwill and other intangible assets are tested for impairment annually as of
January 1 or whenever changes in conditions indicate carrying value may not be
recoverable. Impairment exists when the carrying value of goodwill or other
intangible assets exceed their fair value. The results of the Company's annual
testing indicated no impairment.
SELF-INSURANCE LIABILITY
The Company maintains business insurance programs with significant self-insured
retention, which cover workers' compensation, business automobile and general
product liability claims. The Company accrues estimated losses using actuarial
calculations, models and assumptions based on historical loss experience. The
Company maintains a self-insured health benefits plan, which provides medical
benefits to employees electing coverage under the plan. The Company maintains a
reserve for incurred but not reported medical claims based on historical
experience and other assumptions. The Company utilizes independent actuarial
firms to assist in determining the adequacy of all self-insurance liability
reserves.
REVENUE RECOGNITION
Sales are recognized when the sales price is fixed, collectibility is reasonably
assured and the product's title and risk of loss is transferred to the customer.
Typically, these conditions are met when the product is shipped to the customer.
The Company recognizes shipping and handling fees when products are shipped or
delivered to a customer, and includes such amounts in net sales. The Company
reports its sales net of the amount of actual sales returns and the amount of
reserves established for anticipated sales returns based on historical return
rates.
SHIPPING AND HANDLING COSTS
The Company records third party freight payments in cost of sales and internal
delivery costs in selling, distribution and administrative expenses in the
accompanying statements of consolidated income.
INCOME TAXES
Income taxes are determined based upon income and expenses recorded for
financial reporting purposes. Deferred income taxes are recorded for estimated
future tax effects of differences between the bases of assets and liabilities
for financial reporting and income tax purposes giving consideration to enacted
tax laws.
NET INCOME PER SHARE
The following is a computation of the basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- ------- ------- -------
<S> <C> <C> <C>
Net Income $72,299 $55,339 $31,471
======= ======= =======
Average Shares Outstanding
Weighted average common shares
outstanding for basic computation 44,620 44,481 43,286
Dilutive effect of common
stock equivalents 1,560 1,610 1,020
------- ------- -------
Weighted average common shares
outstanding for dilutive
computation 46,180 46,091 44,306
======= ======= =======
Net Income Per Share
Net Income Per Share - Basic $ 1.62 $ 1.24 $ 0.73
------- ------- -------
Net Income Per Share - Diluted $ 1.57 $ 1.20 $ 0.71
======= ======= =======
</TABLE>
Options to purchase 301, 516 and 860 shares of common stock were outstanding at
June 30, 2006, 2005 and 2004, respectively, but were not included in the
computation of diluted earnings per share for the fiscal years then ended as
they were anti-dilutive.
STOCK SPLITS
All share and per share data have been restated to reflect a 3-for-2 stock split
effective June 15, 2006 and a 3-for-2 stock split effective December 17, 2004.
STOCK-BASED COMPENSATION
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") effective July 1, 2003, utilizing the modified prospective
method provided under SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." Effective July 1, 2005, the Company adopted SFAS No.
123(R), "Share-Based Payment" ("SFAS No. 123(R)"), which is a revision of SFAS
No. 123. The adoption of SFAS No. 123(R) did not have a material impact on the
determination of stock based compensation expense. The Company follows the
transition guidance of SFAS No. 123(R) in determining the additional paid-in
capital pool.
Prior to the adoption of SFAS No. 123(R), all tax benefits resulting from the
exercise of stock awards were reported as operating cash flows in the Company's
statements of consolidated cash flows. In accordance with and effective upon the
adoption of SFAS No. 123(R), excess tax benefits for fiscal 2006 were reported
as financing cash flows in the Company's statements of consolidated cash flows.
Excess tax benefits for fiscal years 2005 and 2004 resulting from the exercise
of stock awards totaled $4,828 and $1,353, respectively, and are reported as
operating cash flows in the accompanying statements of consolidated cash flows.
<PAGE>
24/25
Also effective upon the adoption of SFAS No. 123(R), the amount of unearned
restricted common stock compensation for non-vested awards, previously reported
as a separate component of shareholder's equity, was eliminated against
additional paid-in capital.
TREASURY SHARES
Shares of common stock repurchased by the Company are recorded at cost as
treasury shares and result in a reduction of shareholders' equity in the
consolidated balance sheets. The Company uses the weighted average cost method
for determining the cost of shares reissued. The difference between the cost of
the shares and the reissuance price is added to or deducted from additional
paid-in capital.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48, which is an interpretation of
SFAS No. 109, "Accounting for Income Taxes," provides guidance on the manner in
which tax positions taken or to be taken on tax returns should be reflected in
an entity's financial statements prior to their resolution with taxing
authorities. The Company is required to adopt FIN 48 during the first quarter of
fiscal 2008. The Company is currently evaluating the requirements of FIN 48 and
has not yet determined the impact, if any, this interpretation may have on its
consolidated financial statements.
NOTE 2: BUSINESS COMBINATIONS
In each of the past three fiscal years, the Company has acquired distributors to
complement and extend its business over a broader geographic area. In fiscal
2006, the Company acquired two U.S. based distributors of industrial and fluid
power products for a combined purchase price of $28,639. In 2005, the Company
acquired a Canadian distributor of industrial products for a purchase price of
$6,599 and in 2004 acquired a Mexican distributor of industrial products for a
price of $2,800.
Results of operations of all of the above acquisitions, which have all been
accounted for as purchases, are included in the accompanying consolidated
financial statements from their respective acquisition dates. The results of
operations for these acquisitions are not material for all years presented.
NOTE 3: INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 2006 2005
- -------- -------- --------
<S> <C> <C>
U.S. inventories at current cost $279,619 $271,140
Foreign inventories at average cost 48,547 40,694
-------- --------
328,166 311,834
Less: Excess of current cost over
LIFO cost for U.S. inventories 137,629 136,301
-------- --------
Inventories on consolidated balance sheet $190,537 $175,533
======== ========
</TABLE>
Reductions in certain U.S. inventories during fiscal 2006 and 2004 resulted in
the liquidation of LIFO inventory quantities carried at lower costs prevailing
in prior years. The effect of these liquidations increased gross profit by
$1,647 and $672, net income by $1,013 and $420 and net income per share by $0.02
and $0.01 during fiscal 2006 and 2004, respectively. There were no LIFO layer
liquidations during fiscal 2005.
NOTE 4: GOODWILL & OTHER INTANGIBLES
The changes in the carrying amount of goodwill for the years ended June 30, 2006
and 2005, are as follows:
<TABLE>
<CAPTION>
Service Center Based
Distribution Segment Other Total
-------------------- ----- -------
<S> <C> <C> <C>
Balance at July 1, 2004 $49,852 $49,852
Goodwill acquired during the year 734 734
Currency translation adjustment 497 497
------- -------
Balance at June 30, 2005 51,083 51,083
Goodwill acquired during the year 4,801 $259 5,060
Currency translation adjustment 1,079 1,079
------- ---- -------
Balance at June 30, 2006 $56,963 $259 $57,222
======= ==== =======
</TABLE>
The Company's intangible assets resulting from business combinations are
included in other assets in the consolidated balance sheets and are amortized
over their estimated useful lives and consist of the following:
<TABLE>
<CAPTION>
Accumulated Net Book
June 30, 2006 Amount (a) Amortization Value
- ------------- ---------- ------------ --------
<S> <C> <C> <C>
Non-competition agreements $ 750 $ 380 $ 370
Customer relationships 8,397 954 7,443
Exclusive supplier distribution
agreements 1,127 305 822
Trademarks 1,163 174 989
------- ------ ------
$11,437 $1,813 $9,624
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Accumulated Net Book
June 30, 2005 Amount (a) Amortization Value
- ------------- ---------- ------------ --------
<S> <C> <C> <C>
Non-competition agreements $ 930 $ 513 $ 417
Customer relationships 3,050 454 2,596
Exclusive supplier distribution
agreements 678 101 577
Trademarks 318 13 305
------ ------ ------
$4,976 $1,081 $3,895
====== ====== ======
</TABLE>
(a) Amounts include the impact of foreign currency translation.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(In thousands, except per share amounts)
During fiscal 2006, the Company recorded intangible assets of $200 for
non-competition agreements, $4,890 for customer relationships, $290 for
exclusive supplier distribution agreements and $750 for trade names in
connection with the acquisition of two U.S. distributors of industrial products
(see Note 2).
During fiscal 2005, the Company recorded intangible assets of $83 for
non-competition agreements, $331 for trade names and $580 for customer
relationships in connection with the acquisition of a Canadian distributor of
industrial products (see Note 2).
Amortization expense for other intangible assets totaled $732, $993 and $826 in
fiscal 2006, 2005 and 2004, respectively. Amortization of other intangible
assets at June 30, 2006 is expected to be $950 for 2007, $800 for 2008, $750 for
2009, $700 for 2010 and $700 for 2011.
NOTE 5: OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, 2006 2005
- -------- ------- -------
<S> <C> <C>
Accrued postemployment benefits $27,514 $26,314
Other 23,718 11,897
------- -------
Total $51,232 $38,211
======= =======
</TABLE>
NOTE 6: DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
June 30, 2006 2005
- -------- ------- -------
<S> <C> <C>
7.98% Private placement debt,
due at maturity in November 2010 $25,000 $25,000
6.60% Senior $50,000 unsecured
term notes, due at maturity in
December 2007, including effects
of interest rate swaps (see Note 7) 51,186 51,977
------- -------
Total $76,186 $76,977
======= =======
</TABLE>
The aggregate annual maturities of long-term debt over the next five years as of
June 30, 2006 include $50,000 in fiscal 2008 and $25,000 in 2011.
Based upon current market rates for debt of similar maturities, the Company's
long-term debt had an estimated fair value of $77,305 and $80,209 as of June 30,
2006 and 2005, respectively.
In June 2005, the Company replaced its existing revolving credit facility with a
new five year committed revolving credit facility with a group of banks. This
agreement provides for unsecured borrowings of up to $100,000 at various
interest rate options, none of which is in excess of the banks' prime rate at
interest determination dates. Fees on this facility range from .10% to .20% per
year on the average amount of the total revolving credit commitments during the
year. Unused lines under this facility, net of outstanding letters of credit
($7,686 for securing certain insurance obligations), totaled $92,314 at June 30,
2006 and are available to fund future acquisitions or other capital and
operating requirements. The Company had no borrowings outstanding under this
facility at June 30, 2006.
During February 2004, the Company entered into an agreement with Prudential
Insurance Company, expiring in February 2007, for an uncommitted shelf facility
that enables the Company to borrow up to $100,000 in additional long-term
financing at the Company's sole discretion with terms of up to twelve years. At
June 30, 2006, there was no borrowing under this agreement.
The revolving credit facility, private placement debt and senior unsecured term
notes contain restrictive covenants regarding liquidity, tangible net worth,
financial ratios and other covenants. At June 30, 2006, the most restrictive of
these covenants required that the Company have consolidated income before
interest and taxes at least equal to 300% of net interest expense. At June 30,
2006, the Company was in compliance with all covenants.
NOTE 7: RISK MANAGEMENT ACTIVITIES
The Company is exposed to market risks, primarily resulting from changes in
interest rates and currency exchange rates. To manage these risks, the Company
may enter into derivative transactions pursuant to the Company's written policy.
These transactions are accounted for in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company does
not hold or issue derivative financial instruments for trading purposes.
During fiscal 2002, the Company entered into two interest rate swap agreements
with two banks which effectively converted the fixed interest rate on the 6.60%
senior unsecured term notes to a floating variable rate based on LIBOR. In
October 2001 and August 2002, the Company terminated the swap agreements for
favorable settlements of $2,000 and $2,500, respectively. These settlement gains
are being amortized as a reduction in interest expense of approximately $790 per
year over the remaining life of the notes through December 2007. The effect of
the swap agreements was to decrease interest expense by $791 in fiscal 2006,
$790 in 2005 and $791 in 2004.
<PAGE>
26/27
In November 2000, the Company entered into two 10-year cross-currency swap
agreements to manage its foreign currency risk exposure on private placement
borrowings related to its wholly owned Canadian subsidiary. The cross-currency
swaps effectively convert $25,000 of debt, and the associated interest payments,
from 7.98% fixed rate U.S. dollar denominated debt to 7.75% fixed rate Canadian
dollar denominated debt. The terms of the two cross-currency swaps mirror the
terms of the private placement borrowings.
The Company has designated one of the cross-currency swaps, with a $20,000 U.S.
notional amount, as a foreign currency cash flow hedge. The fair value of the
cross-currency swap was a liability of $8,401 and $6,022 at June 30, 2006 and
2005, respectively. These liabilities were recorded in other liabilities and the
related unrealized losses are included in accumulated other comprehensive income
(net of tax). The second cross-currency swap, however, has not been designated
as a hedging instrument under the hedge accounting provisions of SFAS No. 133.
The fair value of this cross-currency swap was a liability of $2,100 and $1,505
at June 30, 2006 and 2005, respectively. Changes in the fair value of this
derivative instrument are recorded in earnings as a component of other income,
net.
NOTE 8: INCOME TAXES
PROVISION
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- ------- ------- -------
<S> <C> <C> <C>
CURRENT
Federal $31,100 $28,200 $17,500
State 3,600 3,700 2,800
Foreign 5,100 3,000 400
------- ------- -------
Total current 39,800 34,900 20,700
------- ------- -------
DEFERRED
Federal 900 (4,500) (5,900)
State 400 (100) (600)
Foreign (300) 700 800
------- ------- -------
Total deferred 1,000 (3,900) (5,700)
------- ------- -------
Total $40,800 $31,000 $15,000
======= ======= =======
</TABLE>
The exercise of non-qualified stock options and stock appreciation rights during
fiscal 2006, 2005, and 2004 resulted in $16,155, $4,575 and $1,353,
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 in fiscal 2006 and 2005 resulted in $245 and $253, 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 is a reconciliation between the federal statutory income tax rate
and the Company's effective tax rate:
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- ---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Effects of:
State and local income taxes 2.4 2.8 3.1
Foreign income taxes (.7) (.7) (1.4)
Non-deductible expenses .1 .3 .1
Deductible dividend (.6) (.5) (.6)
Non-taxable life insurance
settlement (1.2)
Income tax examinations (.1) (2.8)
Other, net .2 (1.1)
---- ---- ----
Effective tax rate 36.1% 35.9% 32.3%
==== ==== ====
</TABLE>
BALANCE SHEET
The significant components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
June 30, 2006 2005
- -------- ------- -------
<S> <C> <C>
Inventories $(5,471) $(5,121)
Depreciation and differences in property bases (2,598) (3,840)
Compensation liabilities not currently deductible 20,091 18,410
Reserves not currently deductible 7,998 9,650
Goodwill and other intangibles 1,296 4,480
Canadian net operating loss carryforwards,
expiring 2015 151 47
State and other net operating loss carryforwards 271 339
Other (2,045) 136
------- -------
Net deferred tax asset $19,693 $24,101
======= =======
</TABLE>
At June 30, 2006, $6,169 of the net deferred tax asset was included in other
current assets and $13,524 was included in other assets in the accompanying
consolidated balance sheet.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(In thousands, except per share amounts)
NOTE 9: SHAREHOLDERS' EQUITY
STOCK-BASED INCENTIVE PLANS
The 1997 Long-Term Performance Plan (the "1997 Plan"), which expires in 2012,
provides for granting of stock options, stock appreciation rights ("SARs"),
stock awards, cash awards, and such other awards or combination thereof as the
Executive Organization and Compensation Committee 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 during regularly
scheduled meetings. The number of shares of common stock which may be awarded in
each fiscal year under the 1997 Plan is two percent (2%) of the total number of
shares of common stock outstanding on the first day of each year for which the
plan is in effect. Common stock available for distribution under the 1997 Plan,
but not distributed, may be carried over to the following year. Shares available
for future grants at June 30, 2006 and 2005 were 2,050 and 753, respectively.
STOCK OPTION AND APPRECIATION RIGHTS
SARs and non-qualified stock options are granted with an exercise price equal to
the market price of the Company's common stock at the date of grant. SAR and
stock option awards generally vest over four years of continuous service and
have 10-year contractual terms.
Compensation expense related to stock options and SARs recorded for the years
ended June 30, 2006, 2005, and 2004 was $2,658, $2,111, and $1,586,
respectively. Such amounts are included in selling, distribution and
administrative expense in the accompanying statement of consolidated income.
Compensation expense for stock options and SARs has been determined using the
Black-Scholes option pricing model. Determining the appropriate fair value of
stock-based awards requires management to select a fair value model and make
certain estimates and assumptions. The weighted average assumptions used for SAR
and stock option grants issued in fiscal 2006, 2005 and 2004 are:
<TABLE>
<CAPTION>
2006 2005 2004
---- ---- ----
<S> <C> <C> <C>
Expected life, in years 7.2 8.0 7.3
Risk free interest rate 4.3% 3.9% 3.8%
Dividend yield 1.4% 2.0% 2.9%
Volatility 42.3% 31.5% 31.7%
</TABLE>
The expected life is based upon historical exercise experience of the officers,
other key associates and members of the Board of Directors currently awarded
stock-based compensation. The risk free interest rate is based upon the U.S.
Treasury zero-coupon bonds with remaining terms equal to the expected life of
the stock options and SARs. The assumed dividend yield has been estimated based
upon the Company's historical results and expectations for changes in dividends
and stock prices. The volatility assumption is calculated based upon historical
daily price observations of the Company's common stock for a period equal to the
expected life.
It has been the Company's practice to issue shares from Treasury to satisfy
requirements of SAR and option exercises. SARs are redeemable solely in Company
common stock. The exercise price of option awards may be settled by the holder
with cash or by tendering Company common stock. A summary of stock option and
SAR activity is presented below:
2006
<TABLE>
<CAPTION>
Weighted
Average
Exercise
(Share amounts in thousands) Shares Price
------ --------
<S> <C> <C>
Outstanding, beginning of year 4,302 $ 8.68
Granted 306 23.40
Exercised (2,103) 7.76
Expired/canceled (19) 14.04
------ ------
Outstanding, end of year 2,486 11.23
====== ======
Exercisable at end of year 1,381 $ 9.85
====== ======
Weighted average fair
value of SARs and options
granted during year $10.29
======
</TABLE>
2005
<TABLE>
<CAPTION>
Weighted
Average
Exercise
(Share amounts in thousands) Shares Price
------ --------
<S> <C> <C>
Outstanding, beginning of year 5,253 $ 7.87
Granted 516 13.80
Exercised (1,455) 7.57
Expired/canceled (12) 7.76
------ ------
Outstanding, end of year 4,302 8.68
====== ======
Exercisable at end of year 2,763 $ 8.18
====== ======
Weighted average fair value
of SARs and options
granted during year $ 4.67
======
</TABLE>
2004
<TABLE>
<CAPTION>
Weighted
Average
Exercise
(Share amounts in thousands) Shares Price
------ --------
<S> <C> <C>
Outstanding, beginning of year 5,567 $7.51
Granted 720 9.61
Exercised (981) 7.11
Expired/canceled (53) 8.23
----- -----
Outstanding, end of year 5,253 7.87
===== =====
Exercisable at end of year 3,419 $7.74
===== =====
Weighted average fair value
of SARs and options granted
during year $2.76
=====
</TABLE>
<PAGE>
28/29
The weighted average remaining contractual term for SARs/options outstanding and
exercisable at June 30, 2006 were 6.4 and 5.4 years, respectively. The aggregate
intrinsic value of SARs/options outstanding and exercisable at June 30, 2006
were $32,292 and $19,846, respectively. The aggregate intrinsic value of the
SARs/options exercised during fiscal 2006, 2005 and 2004 was $41,966, $12,891,
and $3,241, respectively.
A summary of the status of the Company's nonvested stock options and SARs at
June 30, 2006 is presented below:
2006
<TABLE>
<CAPTION>
Weighted
Average
Grant-Date
(Share amounts in thousands) Shares Fair Value
- ---------------------------- ------ ----------
<S> <C> <C>
Nonvested, beginning of year 1,539 $ 2.88
Granted 306 10.29
Vested (721) 3.31
Expired/canceled (19) 5.14
----- ------
Nonvested, end of year 1,105 $ 4.61
===== ======
</TABLE>
As of June 30, 2006, unrecognized compensation cost related to stock options and
SARs amounted to $2,497. That cost is expected to be recognized over a weighted
average period of 2.7 years. The total fair value of shares vested during fiscal
2006, 2005, and 2004 was $2,388, $2,125, and $2,613, respectively.
RESTRICTED STOCK
Restricted stock award recipients are entitled to receive dividends on, and have
voting rights with respect to their respective shares, but are restricted from
selling or transferring the shares prior to vesting. Restricted stock awards
generally vest 25% each year. The aggregate fair market value of the restricted
stock is considered unearned compensation at the time of grant and is amortized
over the vesting period.
At June 30, 2006 and 2005, the Company had 63 and 96 shares of restricted stock
outstanding at weighted average prices of $10.14 and $10.04 per share,
respectively. During fiscal 2006, restricted stock was granted at an average
grant price of $23.97 per share. Unamortized compensation related to unvested
restricted stock awards aggregated $515 and $825 at June 30, 2006 and 2005,
respectively. The unamortized compensation cost related to restricted stock is
expected to be amortized over the remaining vesting period of 2.4 years.
LONG TERM PERFORMANCE GRANTS
The Committee also makes annual awards of three-year performance grants to key
officers. A target payout is established at the beginning of each three-year
performance period. The actual payout at the end of the period is calculated
relative to the target level based upon the Company's achievement of objective
sales growth, return on sales, and total shareholder return. Total shareholder
return is generally calculated based upon the increase in the Company's common
stock price, including dividend reinvestment, over the performance period as
compared to the Company's peers, as defined. Payouts are made in cash, common
stock, or a combination thereof, as determined by the Committee at the end of
the performance period.
During fiscal 2006, 2005 and 2004, the Company recorded $540, $784, and $690,
respectively, of compensation expense for achievement relative to the total
shareholder return-based goals of the Company's performance grants. At June 30,
2006 and 2005, the Company had accrued $1,308 and $1,500, respectively, for
compensation relative to these goals. At June 30, 2006 and 2005, potential
compensation expense related to the outstanding performance grants aggregated
$1,234 and $853, respectively. This compensation expense is expected to be
recognized over the remaining performance period of 1.7 years.
SHAREHOLDERS' RIGHTS
In 1998 the Company's Board of Directors adopted a Shareholder Rights Plan and
declared a dividend distribution of one preferred share purchase right for each
outstanding share of Company common stock. The rights become exercisable only if
a person or group acquires beneficial ownership or commences a tender or
exchange offer for 20% or more of the Company's common stock, unless the tender
or exchange offer is for all outstanding shares of the Company upon terms
determined by the Company's continuing directors to be in the best interests of
the Company and its shareholders. When exercisable, the rights would entitle the
holders (other than the acquirer) to buy shares of the Company's common stock
having a market value equal to two times the right's exercise price or, in
certain circumstances, to buy shares of the acquiring company having a market
value equal to two times the right's exercise price.
TREASURY SHARES
At June 30, 2006, 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.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(In thousands, except per share amounts)
NOTE 10: BENEFIT PLANS
RETIREMENT SAVINGS PLAN
Substantially all U.S. associates participate in the Applied Industrial
Technologies, Inc. Retirement Savings Plan. The Company makes a discretionary
profit-sharing contribution to the Retirement Savings Plan generally based upon
a percentage of the Company's U.S. income before income taxes and before the
amount of the contribution (5% for fiscal 2006, 2005 and 2004). The Company also
partially matches 401(k) contributions by participants, who may elect to
contribute up to 50% of their compensation. The matching contribution is made
with the Company's common stock and is determined quarterly using rates based on
achieving pre-determined quarterly earnings per share levels (ranging from 25%
to 100% of the first 6% of compensation contributed to the plan).
The Company's expense for contributions to the above plan was $11,365, $9,947
and $6,808 during fiscal 2006, 2005 and 2004, respectively.
DEFERRED COMPENSATION PLANS
The Company has deferred compensation plans that enable certain associates of
the Company to defer receipt of a portion of their compensation and non-employee
directors to defer receipt of director fees. The Company funds these deferred
compensation liabilities by making contributions to rabbi trusts. Contributions
consist of Company common stock and investments in money market and mutual
funds.
POSTEMPLOYMENT BENEFIT PLANS
The Company provides the following postemployment benefits:
Supplemental Executive Retirement Benefit Plan
The Company has a non-qualified pension plan to provide supplemental retirement
benefits to certain officers. Benefits are payable at retirement based upon a
percentage of the participant's compensation.
Qualified Defined Benefit Retirement Plan
The Company has a qualified defined benefit retirement plan that provides
benefits to certain hourly associates at retirement. The benefits are based on
length of service and date of retirement. These associates do not participate in
the Retirement Savings Plan.
Salary Continuation Benefits
The Company has agreements with certain retirees to pay monthly retirement
benefits for a period not in excess of 15 years. The discount rates used in
determining the benefit obligation were 5.8% and 5.0% at June 30, 2006 and 2005,
respectively.
Retiree Medical Benefits
The Company provides health care benefits to eligible retired associates who
elect to pay the Company a specified monthly premium. Premium payments are based
upon current insurance rates for the type of coverage provided and are adjusted
annually. Certain monthly health care premium payments are partially subsidized
by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the
Company assumed the obligation for a post-retirement medical benefit plan which
provides health care benefits to eligible retired associates at no cost to the
individual.
The changes in benefit obligations, plan assets and funded status for the plans
described above were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------- -----------------
2006 2005 2006 2005
-------- -------- ------- -------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at
beginning of the year $ 32,035 $ 25,640 $ 5,209 $ 5,011
Service cost 1,450 1,274 55 48
Interest cost 1,601 1,638 253 292
Plan participants'
contributions 28 24
Benefits paid (832) (1,174) (265) (354)
Amendments 258
Actuarial loss (gain)
during year 816 4,399 (1,299) 188
-------- -------- ------- -------
Benefit obligation
at June 30 $ 35,070 $ 32,035 $ 3,981 $ 5,209
======== ======== ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan
assets at
beginning of year $ 4,831 $ 4,472
Actual return on plan
assets 515 445
Employer contribution 740 1,088 $ 237 $ 330
Plan participants'
contributions 28 24
Benefits paid (832) (1,174) (265) (354)
-------- -------- ------- -------
Fair value of plan
assets at June 30 $ 5,254 $ 4,831 $ 0 $ 0
======== ======== ======= =======
RECONCILIATION OF
FUNDED STATUS:
Funded status $(29,817) $(27,204) $(3,981) $(5,209)
Unrecognized
net loss (gain) 11,011 10,929 (837) 490
Unrecognized prior
service cost 3,970 4,597 98 146
-------- -------- ------- -------
Accrued benefit cost
at June 30 $(14,836) $(11,678) $(4,720) $(4,573)
======== ======== ======= =======
</TABLE>
<PAGE>
30/31
The weighted-average actuarial assumptions at June 30 used to determine benefit
obligations for the plans were as follows:
<TABLE>
<CAPTION>
Pension Other
Benefits Benefits
----------- -----------
2006 2005 2006 2005
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 5.8% 5.0% 5.8% 5.0%
Expected return
on plan assets 8.0% 8.0% N/A N/A
Rate of compensation
increase 5.5% 5.5% N/A N/A
</TABLE>
The amounts recognized on the balance sheet at June 30 were as follows:
<TABLE>
<CAPTION>
Pension Other
Benefits Benefits
--------------------- -------------------
2006 2005 2006 2005
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Prepaid benefit cost $ 1,782 $ 1,883
Accrued benefit
liability (23,697) (22,658) $(4,720) $(4,573)
Intangible asset 3,403 4,597
Accumulated other
comprehensive
income 3,676 4,500
-------- -------- ------- -------
Net amount recognized $(14,836) $(11,678) $(4,720) $(4,573)
======== ======== ======= =======
</TABLE>
The accumulated benefit obligations were $28,560 and $25,606 at June 30, 2006
and 2005, respectively.
The following table provides information for pension plans with an accumulated
benefit obligation and projected benefit obligation in excess of plan assets:
<TABLE>
<CAPTION>
Pension Benefits
-----------------
2006 2005
------- -------
<S> <C> <C>
Projected benefit obligations $35,070 $32,035
Accumulated benefit obligations 28,560 25,606
Fair value of plan assets at end
of year 5,254 4,831
</TABLE>
The net periodic pension costs are as follows:
<TABLE>
<CAPTION>
Pension Benefits
------------------------
2006 2005 2004
------ ------ ------
<S> <C> <C> <C>
Service cost $1,450 $1,274 $1,051
Interest cost 1,601 1,638 1,250
Expected return on plan assets (381) (353) (315)
Recognized net actuarial loss 784 479 220
Amortization of prior service
cost 627 627 590
------ ------ ------
Net periodic pension cost $4,081 $3,665 $2,796
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Other
Benefits
-----------
2006 2005 2004
---- ---- ----
<S> <C> <C> <C>
Service cost $ 55 $ 48 $ 57
Interest cost 253 292 304
Recognized net actuarial loss 28 14 19
Amortization of prior service
cost 49 49 49
---- ---- ----
Net periodic pension cost $385 $403 $429
==== ==== ====
</TABLE>
The assumed health care cost trend rates used in measuring the accumulated
benefit obligation for post-retirement benefits other than pensions were 10% as
of June 30, 2006 and 9% as of June 30, 2005, decreasing to 5% by 2012 and 2010,
respectively. A one-percentage point change in the assumed health care cost
trend rates would have had the following effects as of June 30, 2006 and for the
year then ended:
<TABLE>
<CAPTION>
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total service and
interest cost components
of periodic expense $ 51 $ (41)
Effect on post-retirement
benefit obligation $553 $(456)
==== =====
</TABLE>
OBLIGATIONS AND FUNDED STATUS PLAN ASSETS
Applied Industrial Technologies, Inc.'s Qualified Defined Benefit Retirement
Plan weighted average asset allocation and target allocation are as follows:
<TABLE>
<CAPTION>
Percentage of Pension Plan
Target Assets At Fiscal Year End
Allocation ----------------------------------
2007 2006 2005
---------- ---------- --------------
<S> <C> <C> <C>
Asset Category:
Equity Securities 60% 66% 62%
Debt Securities 33% 34% 32%
Other 7% 0% 6%
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
Equity securities do not include any Applied Industrial Technologies, Inc.
common stock.
The Company has established an investment policy and regularly monitors the
performance of the assets of the trust maintained in conjunction with the
Qualified Defined Benefit Retirement Plan. The strategy implemented by the
trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term
objectives and invest the pension assets in accordance with ERISA and fiduciary
standards. The long-term primary objectives are to provide for a reasonable
amount of long-term capital, without undue exposure to risk; to protect the
Qualified Defined Benefit Retirement Plan assets from erosion of purchasing
power; and to provide investment results that meet or exceed the actuarially
assumed long-term rate of return. The expected long-term rate of return on
assets assumption was developed by considering the historical returns and the
future expectations for returns of each asset class as well as the target asset
allocation of the pension portfolio.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(In thousands, except per share amounts)
CASH FLOWS
EMPLOYER CONTRIBUTIONS
The Company expects to contribute $1,200 to its retirement benefit plans and
$300 to its other benefit plans in 2007.
ESTIMATED FUTURE BENEFIT PAYMENTS
The Company expects to make the following benefit payments, which reflect
expected future service:
<TABLE>
<CAPTION>
During Fiscal Years Pension Benefits Other Benefits
- ------------------- ---------------- --------------
<S> <C> <C>
2007 $ 1,300 $ 300
2008 1,300 300
2009 7,900 300
2010 1,300 300
2011 14,500 300
2012 through 2016 6,600 1,300
</TABLE>
NOTE 11 : LEASES
The Company leases its corporate headquarters facility along with certain
service center and distribution center facilities, vehicles and equipment under
non-cancelable lease agreements accounted for as operating leases. The minimum
annual rental commitments under non-cancelable operating leases as of June 30,
2006 are as follows:
<TABLE>
<S> <C>
2007 $17,900
2008 13,500
2009 10,500
2010 7,000
2011 4,100
Thereafter 13,100
-------
Total minimum lease payments $66,100
=======
</TABLE>
Rental expenses incurred for operating leases, principally from leases for real
property, vehicles and computer equipment were $26,700 in fiscal 2006, $25,500
in 2005 and $26,900 in 2004.
NOTE 12: SEGMENT INFORMATION
The Company has identified one reportable segment: Service Center Based
Distribution. 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 "Other" column consists of the aggregation of all
other non-Service Center Based Distribution operations that sell directly to
customers, including separate fluid power operations.
The accounting policies of the Company's reportable segment and its other
businesses are the same as those described in Note 1. Sales between the Service
Center Based Distribution segment and the Company's other businesses have been
eliminated.
Segment Financial Information:
<TABLE>
<CAPTION>
Service Center
Based Distribution Other Total
------------------ -------- ----------
<S> <C> <C> <C>
YEAR ENDED JUNE 30, 2006
Net sales $1,725,392 $175,388 $1,900,780
Operating income 111,774 11,849 123,623
Assets used in the business 670,619 60,052 730,671
Depreciation 12,019 1,109 13,128
Capital expenditures 10,310 747 11,057
---------- -------- ----------
YEAR ENDED JUNE 30, 2005
Net sales $1,601,531 $115,524 $1,717,055
Operating income 83,059 7,183 90,242
Assets used in the business 660,616 29,554 690,170
Depreciation 13,135 697 13,832
Capital expenditures 8,789 419 9,208
---------- -------- ----------
YEAR ENDED JUNE 30, 2004
Net sales $1,419,386 $ 97,618 $1,517,004
Operating income 55,737 4,127 59,864
Assets used in the business 572,617 24,224 596,841
Depreciation 13,704 677 14,381
Capital expenditures 14,098 285 14,383
---------- -------- ----------
</TABLE>
<PAGE>
32/33
A reconciliation from the segment operating profit to the consolidated balance
is as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- -------- ------- -------
<S> <C> <C> <C>
Operating income for
reportable segment $111,774 $83,059 $55,737
Other operating income 11,849 7,183 4,127
Adjustments for:
Amortization expense
of intangibles 732 993 826
Corporate and other expense,
net (a) 7,299 1,281 7,590
-------- ------- -------
Total operating income 115,592 87,968 51,448
Interest expense, net 3,210 4,730 5,409
Other income, net 717 3,101 432
-------- ------- -------
Income before income taxes $113,099 $86,339 $46,471
======== ======= =======
</TABLE>
(a) The change in corporate and other expense, net is due to various changes in
the levels and amounts of expenses being allocated to the segments. The
expenses being allocated include miscellaneous corporate charges for
working capital, logistics support and other items.
Net sales by product category are as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Industrial $1,554,589 $1,442,308 $1,281,037
Fluid power (b) 346,191 274,747 235,967
---------- ---------- ----------
Net sales $1,900,780 $1,717,055 $1,517,004
========== ========== ==========
</TABLE>
(b) The fluid power product category includes sales of hydraulic, pneumatic,
lubrication and filtration components, and systems and repair services
through the Company's service centers as well as the fluid power
businesses.
Net sales are presented in the geographic area in which the Company's customers
are located. Information by geographic area is as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- ---------- ---------- ----------
<S> <C> <C> <C>
NET SALES:
United States $1,686,066 $1,539,143 $1,386,135
Canada 194,594 160,396 119,424
Other 20,120 17,516 11,445
---------- ---------- ----------
Total $1,900,780 $1,717,055 $1,517,004
========== ========== ==========
LONG-LIVED ASSETS:
United States $ 115,935 $ 106,346 $ 113,923
Canada 18,445 16,699 13,002
Other 3,260 3,374 3,481
---------- ---------- ----------
Total $ 137,640 $ 126,419 $ 130,406
========== ========== ==========
</TABLE>
Long-lived assets are comprised of property and equipment, goodwill and other
intangible assets.
NOTE 13: COMMITMENTS AND CONTINGENCIES
In connection with the construction and lease of its corporate headquarters
facility, the Company has guaranteed repayment of a total of $5,678 of taxable
development revenue bonds issued by Cuyahoga County and the Cleveland-Cuyahoga
County Port Authority. These bonds were issued with a 20-year term and are
scheduled to mature in March 2016. Any default, as defined in the guarantee
agreements, would obligate the Company for the full amount of the outstanding
bonds through maturity. Due to the nature of the guarantee, the Company has not
recorded any liability on the financial statements.
In the event of a default and subsequent payout under any or all guarantees, the
Company maintains the right to pursue all legal options available to mitigate
its exposure.
The Company is a party to various pending judicial and administrative
proceedings. Based on circumstances currently known, the Company does not
believe that any liabilities that may result from these proceedings are
reasonably likely to have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
NOTE 14: OTHER INCOME, NET
Other income, net consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30, 2006 2005 2004
- ------------------- ----- ------- -----
<S> <C> <C> <C>
Unrealized loss on cross
currency swap $ 595 $ 901 $ 355
Unrealized gain on deferred
compensation trusts (869) (518) (781)
Benefit from payouts on
corporate-owned life
insurance policies (2,945)
Gain on sale of investments
available for sale (166)
Other (443) (373) (6)
----- ------- -----
Total other income, net $(717) $(3,101) $(432)
===== ======= =====
</TABLE>
The Company is the owner and beneficiary under life insurance policies acquired
in conjunction with a fiscal 1998 acquisition, with benefits in force of $13,910
and a net cash surrender value of $2,522 at June 30, 2006.
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
DELOITTE.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF APPLIED INDUSTRIAL TECHNOLOGIES,
INC.
We have audited the accompanying consolidated balance sheets of Applied
Industrial Technologies, Inc. and subsidiaries (the "Company") as of June 30,
2006 and 2005, and the related statements of consolidated income, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Applied Industrial Technologies,
Inc. and subsidiaries at June 30, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2006, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective July
1, 2005, the Company changed its method of accounting for stock-based
compensation to conform to Statement of Financial Accounting Standards No.
123(R), "Share-Based Payment."
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of June 30, 2006, 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 18, 2006 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
Deloitte & Touche LLP
Cleveland, Ohio
August 18, 2006
<PAGE>
34/35
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Management of Applied Industrial Technologies, Inc. is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed by, or under the
supervision of, the Chairman & Chief Executive Officer and the Vice President,
Chief Financial Officer & Treasurer, and effected by the Company's Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with
generally accepted accounting principles.
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 generally accepted accounting
principles, 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, 2006. This evaluation
was based on the criteria set forth in the Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, Management determined that the
Company's internal control over financial reporting was effective as of June 30,
2006.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of June 30, 2006 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
August 18, 2006
/s/ David L. Pugh
- ----------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
/s/ Bill L. Purser
- ----------------------------------------
Bill L. Purser
President & Chief Operating Officer
/s/ Mark O. Eisele
- ----------------------------------------
Mark O. Eisele
Vice President, Chief Financial Officer
& Treasurer
/s/ Daniel T. Brezovec
- ----------------------------------------
Daniel T. Brezovec
Corporate Controller
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF APPLIED INDUSTRIAL TECHNOLOGIES,
INC.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Applied
Industrial Technologies, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of June 30, 2006, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of June 30, 2006, is fairly stated,
in all material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
June 30, 2006, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet and
the related statements of consolidated income, shareholders' equity and cash
flows as of and for the year ended June 30, 2006 of the Company and our report
dated August 18, 2006, expressed an unqualified opinion on those financial
statements.
Deloitte & Touche LLP
Cleveland, Ohio
August 18, 2006
<PAGE>
36/37
QUARTERLY OPERATING RESULTS & MARKET DATA UNAUDITED
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Per Common Share (B) (C)
------------------------------------
Net Price Range
Net Gross Operating Net Income- Cash ---------------
Sales Profit Income Income Diluted Dividend High Low
---------- -------- --------- ------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2006 (A)
FIRST QUARTER $ 443,205 $122,304 $ 27,802 $16,850 $0.36 $ 0.08 $25.03 $21.33
SECOND QUARTER 456,180 121,397 25,214 15,294 0.33 0.10 24.54 20.41
THIRD QUARTER 497,198 136,815 32,085 19,990 0.43 0.10 31.15 22.50
FOURTH QUARTER 504,197 133,369 30,491 20,165 0.44 0.12 31.67 21.97
---------- -------- -------- ------- ----- ------
$1,900,780 $513,885 $115,592 $72,299 $1.57 $ 0.40
========== ======== ======== ======= ===== ======
2005 (A)
First Quarter $ 413,126 $109,522 $ 21,503 $13,040 $0.29 $ 0.06 $15.89 $11.73
Second Quarter 404,139 103,948 17,223 9,980 0.22 0.06 21.33 14.83
Third Quarter 446,470 119,293 24,080 16,336 0.35 0.08 20.01 15.19
Fourth Quarter 453,320 122,086 25,162 15,983 0.34 0.08 22.60 16.13
---------- -------- -------- ------- ----- ------
$1,717,055 $454,849 $ 87,968 $55,339 $1.20 $ 0.29
========== ======== ======== ======= ===== ======
2004 (A)
First Quarter $ 361,146 $ 93,477 $ 8,996 $ 4,832 $0.11 $0.053 $10.22 $ 8.78
Second Quarter 359,711 95,166 9,250 5,133 0.12 0.053 11.05 8.83
Third Quarter 391,053 104,423 14,880 10,611 0.24 0.053 11.63 8.75
Fourth Quarter 405,094 109,077 18,322 10,895 0.24 0.053 13.49 9.98
---------- -------- -------- ------- ----- ------
$1,517,004 $402,143 $ 51,448 $31,471 $0.71 $0.213
========== ======== ======== ======= ===== ======
</TABLE>
(A) Cost of sales for interim financial statements are computed using estimated
gross profit percentages which are adjusted throughout the year based upon
available information. Adjustments to actual cost are primarily made based
upon the annual physical inventory and the effect of year-end inventory
quantities on LIFO costs. Reductions in year end inventories during the
fiscal years ended June 30, 2006 and 2004 resulted in liquidations of LIFO
inventory quantities carried at lower costs prevailing in prior years. The
effect of these liquidations for the years ended June 30, 2006 and 2004
increased gross profit by $1,647 and $672, net income by $1,013 and $420
and diluted net income per share by $0.02 and $0.01, respectively. There
were no LIFO layer liquidations in fiscal 2005.
(B) On August 15, 2006 there were 6,249 shareholders of record including 3,938
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 15, 2006 was $22.56 per share.
(C) All per share data have been restated to reflect three-for-two stock splits
on June 15, 2006 and December 17, 2004
Applied Industrial Technologies, Inc. and Subsidiaries
<PAGE>
10 YEAR SUMMARY
(Dollars in thousands, except per share amounts and statistical data)
<TABLE>
<CAPTION>
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS -
YEAR ENDED JUNE 30
Net sales $1,900,780 $1,717,005 $1,517,004 $1,464,367 $1,446,596
Operating income 115,592 87,968 51,448 36,254 30,834
Income before cumulative effect
of accounting change 72,299 55,339 31,471 19,832 14,755
Net income 72,299 55,339 31,471 19,832 2,655
Per share data (B)
Income before cumulative effect
of accounting change
Basic 1.62 1.24 0.73 0.47 0.34
Diluted 1.57 1.20 0.71 0.46 0.34
Net income
Basic 1.62 1.24 0.73 0.47 0.06
Diluted 1.57 1.20 0.71 0.46 0.06
Cash dividend 0.40 0.29 0.21 0.21 0.21
YEAR-END POSITION - JUNE 30
Working capital $ 370,013 $ 345,806 $ 286,022 $ 259,359 $ 250,644
Long-term debt 76,186 76,977 77,767 78,558 83,478
Total assets 730,671 690,170 596,841 553,404 534,566
Shareholders' equity 414,822 393,287 339,535 307,856 298,147
YEAR-END STATISTICS - JUNE 30
Current ratio 3.0 2.9 2.9 2.8 2.9
Operating facilities 452 440 434 440 449
Shareholders of record (A) 6,192 6,079 6,154 6,157 6,455
</TABLE>
(A) Includes participant-shareholders in the Applied Industrial Technologies,
Inc. Retirement Savings Plan, and since 1998, shareholders in the Company's
direct stock purchase program.
(B) All per share data have been restated to reflect three-for-two stock splits
effective June 15, 2006 and December 17, 2004.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>l22078aexv21.txt
<DESCRIPTION>EX-21
<TEXT>
<PAGE>
EXHIBIT 21
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2006
SUBSIDIARIES
(as of June 30, 2006)
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation or Organization
---- -----------------------------
<S> <C>
* Air and Hydraulics Engineering, Incorporated Alabama
* Air-Hydraulic Systems, Inc. Minnesota
* Air Draulics Engineering Co. Tennessee
AIT Limited Partnership Ontario, Canada
Applied Industrial Technologies Ltd. Canada (Federal)
Applied Industrial Technologies -- CA LLC Delaware
Applied Industrial Technologies -- CAPITAL LLC Delaware
Applied Industrial Technologies -- DBB, Inc. Ohio
Applied Industrial Technologies -- Dixie, Inc. Tennessee
Applied Industrial Technologies -- Indiana LLC Ohio
Applied Industrial Technologies -- Mainline, Inc. Wisconsin
Applied Industrial Technologies - MBC, Inc. Minnesota
Applied Industrial Technologies -- PA LLC Pennsylvania
Applied Industrial Technologies -- PACIFIC LLC Delaware
Applied Industrial Technologies -- TX LP Delaware
* Applied Mexico, S.A. de C.V. Mexico
(97%-owned by subsidiaries of Applied Industrial
Technologies, Inc.)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Applied Mexico Holdings, S.A. de C.V. Mexico
Applied - Michigan, Ltd. Ohio
Applied Nova Scotia Company Nova Scotia, Canada
* Atelier PV Hydraulique 2004 Inc. Canada (Federal)
BER International, Inc. Barbados
Bearing Sales & Service, Inc. Washington
Bearings Pan American, Inc. Ohio
Dynavest Nova Scotia Company Nova Scotia, Canada
* ESI Acquisition Corporation Ohio
(d/b/a Engineered Sales, Inc., ESI Power Hydraulics,
and Applied Engineered Systems)
* International Supply Consortium, Inc. Delaware
(33-1/3% owned by Applied Industrial Technologies, Inc.)
Iowa Bearing Co. Iowa
* Le Groupe GLM (2005) Inc. Canada (Federal)
* Rafael Benitez Carrillo Inc. Puerto Rico
* Spencer Fluid Power, Inc. Ohio
The Ohio Ball Bearing Company Ohio
</TABLE>
* Operating companies that do not conduct business under Applied Industrial
Technologies trade name
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>l22078aexv23.txt
<DESCRIPTION>EX-23
<TEXT>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.
333-124574, 33-53361, 33-53401, 33-65509, 333-83809, and 333-69002 of Applied
Industrial Technologies, Inc. (the "Company") on Forms S-8 of our reports dated
August 18, 2006, relating to the financial statements and financial statement
schedule of the Company and management's report on the effectiveness of internal
control over financial reporting, appearing in and incorporated by reference in
this Annual Report on Form 10-K of Applied Industrial Technologies, Inc. for the
year ended June 30, 2006. Our report relating to the consolidated financial
statements of the Company includes an explanatory paragraph concerning the
adoption of the new accounting standard effective July 1, 2005.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 25, 2006
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>6
<FILENAME>l22078aexv24.txt
<DESCRIPTION>EX-24
<TEXT>
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: 8/17/06 /s/ William G. Bares
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: 8/17/06 /s/ T. A. Commes
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: 8/18/06 /s/ Peter A. Dorsman
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: August 17, 2006 /s/ L. Thomas Hiltz
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: 8/21/2006 /s/ Edith Kelly-Green
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: 8/17/06 /s/ John F. Meier
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: 8/17/06 /s/ J. M. Moore
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: 8/18/06 /s/ Jerry Sue Thornton
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: August 23, 2006 /s/ Peter C. Wallace
----------------------------------------
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or
officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby
constitutes and appoints Fred D. Bauer and Mark O. Eisele, and each of them, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in either or both of
them, to sign for the undersigned and in his or her respective name as director
and/or officer of the Corporation, the Corporation's Annual Report for the
fiscal year ended June 30, 2006 on Form 10-K to be filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, and the rules and
regulations issued thereunder, hereby ratifying and confirming all acts taken by
such agents and attorneys-in-fact, or any one of them, as herein authorized.
Date: 8/17/06 /s/ Stephen E. Yates
----------------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>7
<FILENAME>l22078aexv31.txt
<DESCRIPTION>EX-31
<TEXT>
<PAGE>
EXHIBIT 31
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2006
CERTIFICATIONS
I, David L. Pugh, Chairman & Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Applied Industrial
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
<PAGE>
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 28, 2006
/s/ David L. Pugh
----------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
I, Mark O. Eisele, Vice President-Chief Financial Officer & Treasurer, certify
that:
1. I have reviewed this annual report on Form 10-K of Applied Industrial
Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
<PAGE>
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 28, 2006
/s/ Mark O. Eisele
----------------------------------------
Mark O. Eisele
Vice President-Chief Financial Officer &
Treasurer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>8
<FILENAME>l22078aexv32.txt
<DESCRIPTION>EX-32
<TEXT>
<PAGE>
EXHIBIT 32
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2006
[The following certification accompanies the Annual Report on Form 10-K for the
year ended June 30, 2006, and is not filed, as provided in applicable SEC
releases.]
CERTIFICATIONS PURSUANT TO 18 U.S.C. 1350
In connection with the Form 10-K (the "Report") of Applied Industrial
Technologies, Inc. (the "Company") for the period ending June 30, 2006, we,
David L. Pugh, Chairman & Chief Executive Officer, and Mark O. Eisele, Vice
President-Chief Financial Officer & Treasurer of the Company, certify that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ David L. Pugh /s/ Mark O. Eisele
- ------------------------------------- ----------------------------------------
David L. Pugh Mark O. Eisele
Chairman & Chief Executive Vice President-Chief Financial Officer
Officer & Treasurer
Dated: August 28, 2006
[A signed original of this written statement has been provided to Applied
Industrial Technologies, Inc. and will be retained by Applied Industrial
Technologies, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.]
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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