AIT 9.30.12 10Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________ 
FORM 10-Q
 __________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2012
OR
o
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)
___________________________________________ 
Ohio
 
34-0117420
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
One Applied Plaza, Cleveland, Ohio
 
44115
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (216) 426-4000
(Former name, former address and former fiscal year, if changed since last report)
__________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.     Yes   x     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o     No   x
There were 42,045,761 (no par value) shares of common stock outstanding on October 15, 2012.


Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
 
  
  
 
 
Page
No.
Part I:
 
 
 
 
 
 
 
 
Item 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2:
 
 
Item 3:
 
 
Item 4:
 
 
 
 
 
Part II:
 
 
 
 
 
 
 
 
Item 1:
 
 
Item 2:
 
 
Item 6:
 
 
 
 
 
 
 
 

1

Table of Contents

PART I:
FINANCIAL INFORMATION

ITEM I:
FINANCIAL STATEMENTS

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(In thousands, except per share amounts)
 
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2012
 
2011
 
Net Sales
 
$
610,519

 
$
579,574

 
Cost of Sales
 
445,986

 
420,870

 
Gross Profit
 
164,533

 
158,704

 
Selling, Distribution and Administrative, including depreciation
 
120,215

 
115,437

 
Operating Income
 
44,318

 
43,267

 
Interest Expense, net
 
25

 
47

 
Other (Income) Expense, net
 
(459
)
 
1,932

 
Income Before Income Taxes
 
44,752

 
41,288

 
Income Tax Expense
 
15,220

 
14,906

 
Net Income
 
$
29,532

 
$
26,382

 
Net Income Per Share - Basic
 
$
0.70

 
$
0.62

 
Net Income Per Share - Diluted
 
$
0.70

 
$
0.61

 
Cash dividends per common share
 
$
0.21

 
$
0.19

 
Weighted average common shares outstanding for basic computation
 
41,966

 
42,397

 
Dilutive effect of potential common shares
 
511

 
564

 
Weighted average common shares outstanding for diluted computation
 
42,477

 
42,961

 
See notes to condensed consolidated financial statements.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
(In thousands)


 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2012
 
2011
 
Net income per the condensed statements of consolidated income
 
$
29,532

 
$
26,382

 
 
 
 
 
 
 
Other comprehensive income (loss), before tax:
 
 
 
 
 
Foreign currency translation adjustments
 
9,001

 
(3,042
)
 
Postemployment benefits:
 
 
 
 
 
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs
 
218

 
467

 
Unrealized gain (loss) on investment securities available for sale
 
23

 
(222
)
 
Total of other comprehensive income (loss), before tax
 
9,242

 
(2,797
)
 
Income tax expense related to items of other comprehensive income
 
94

 
98

 
Other comprehensive income (loss), net of tax
 
9,148

 
(2,895
)
 
Comprehensive income, net of tax
 
$
38,680

 
$
23,487

 
See notes to condensed consolidated financial statements.
 


2

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 
 
 
September 30,
2012
 
June 30,
2012
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
56,673

 
$
78,442

Accounts receivable, less allowances of $8,239 and $8,332
 
325,753

 
307,043

Inventories
 
268,960

 
228,506

Other current assets
 
35,709

 
51,771

Total current assets
 
687,095

 
665,762

Property, less accumulated depreciation of $152,184 and $148,623
 
84,357

 
83,103

Intangibles, net
 
90,087

 
84,840

Goodwill
 
94,626

 
83,080

Deferred tax assets
 
26,069

 
26,424

Other assets
 
19,533

 
18,974

TOTAL ASSETS
 
$
1,001,767

 
$
962,183

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
145,932

 
$
120,890

Compensation and related benefits
 
46,355

 
63,149

Other current liabilities
 
49,720

 
46,130

Total current liabilities
 
242,007

 
230,169

Postemployment benefits
 
34,940

 
39,750

Other liabilities
 
21,721

 
20,133

TOTAL LIABILITIES
 
298,668

 
290,052

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
 
150,900

 
150,070

Income retained for use in the business
 
764,045

 
743,360

Treasury shares—at cost (12,168 and 12,246 shares)
 
(226,425
)
 
(226,730
)
Accumulated other comprehensive income
 
4,579

 
(4,569
)
TOTAL SHAREHOLDERS’ EQUITY
 
703,099

 
672,131

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,001,767

 
$
962,183

See notes to condensed consolidated financial statements.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
 
 
September 30,
 
 
2012
 
2011
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
29,532

 
$
26,382

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of property
 
3,022

 
2,818

Amortization of intangibles
 
3,055

 
2,809

Unrealized foreign exchange transactions gain
 
(286
)
 

Amortization of stock options and appreciation rights
 
809

 
633

Gain on sale of property
 
(117
)
 
(386
)
Other share-based compensation expense
 
1,035

 
1,260

Changes in assets and liabilities, net of acquisitions
 
(13,456
)
 
(17,371
)
Other, net
 
353

 
256

Net Cash provided by Operating Activities
 
23,947

 
16,401

Cash Flows from Investing Activities
 
 
 
 
Property purchases
 
(3,892
)
 
(7,142
)
Proceeds from property sales
 
243

 
637

Net cash paid for acquisition of businesses, net of cash acquired
 
(35,409
)
 
(1,241
)
Net Cash used in Investing Activities
 
(39,058
)
 
(7,746
)
Cash Flows from Financing Activities
 
 
 
 
Purchases of treasury shares
 

 
(18,178
)
Dividends paid
 
(8,867
)
 
(8,099
)
Excess tax benefits from share-based compensation
 
1,168

 
149

Acquisition holdback payments
 
(760
)
 

Exercise of stock options and appreciation rights
 
36

 
84

Net Cash used in Financing Activities
 
(8,423
)
 
(26,044
)
Effect of Exchange Rate Changes on Cash
 
1,765

 
(485
)
Decrease in Cash and Cash Equivalents
 
(21,769
)
 
(17,874
)
Cash and Cash Equivalents at Beginning of Period
 
78,442

 
91,092

Cash and Cash Equivalents at End of Period
 
$
56,673

 
$
73,218

 
 
 
 
 
See notes to condensed consolidated financial statements.


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Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

  
1.
BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position of Applied Industrial Technologies, Inc. (the “Company”, or “Applied”) as of September 30, 2012, and the results of its operations for the three month periods ended September 30, 2012 and 2011 and its cash flows for the three months ended September 30, 2012 and 2011, have been included. The condensed consolidated balance sheet as of June 30, 2012 has been derived from the audited consolidated financial statements at that date. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2012.

Operating results for the three month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2013.

Inventory

The Company uses the last-in, first-out (LIFO) method of valuing U.S. inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination.

2.
BUSINESS COMBINATIONS

During the three month period ended September 30, 2012, the Company completed an acquisition to complement and extend its business over a broader geographic area. The Company acquired 100% of the outstanding stock of SKF Group's company-owned distribution business in Australia and New Zealand (“Applied Australia”). As one of the largest bearing suppliers in these markets, Applied Australia also distributes seals, lubrication products, and power transmission products. The acquired business is included in the Service Center Based Distribution segment from the acquisition date, August 1, 2012. The results of operations for this acquisition are not material for any period presented.

3.
GOODWILL AND INTANGIBLES

The changes in the carrying amount of goodwill for the Service Center Based Distribution segment for the three month period ended September 30, 2012 are as follows:

Balance at July 1, 2012
$
83,080

Goodwill acquired during the period
10,198

Other, primarily currency translation
1,348

Balance at September 30, 2012
$
94,626


At September 30, 2012, accumulated goodwill impairment losses, subsequent to fiscal year 2002, totaled $36,605 and related to the Fluid Power Businesses segment.


4

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)


The Company’s intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
September 30, 2012
 
Amount
 
Accumulated
Amortization
 
Net Book
Value
Finite-Lived Intangibles:
 
 
 
 
 
 
Customer relationships
 
$
90,557

 
$
32,234

 
$
58,323

Trade names
 
25,822

 
8,017

 
17,805

Vendor relationships
 
15,894

 
4,878

 
11,016

Non-competition agreements
 
4,832

 
3,179

 
1,653

Total Finite-Lived Intangibles
 
137,105

 
48,308

 
88,797

Indefinite-Lived Trade Names
 
1,290

 
 
 
1,290

Total Intangibles
 
$
138,395

 
$
48,308

 
$
90,087


June 30, 2012
 
Amount
 
Accumulated
Amortization
 
Net Book
Value
Finite-Lived Intangibles:
 
 
 
 
 
 
Customer relationships
 
$
84,249

 
$
29,905

 
$
54,344

Trade names
 
25,677

 
7,428

 
18,249

Vendor relationships
 
13,605

 
4,500

 
9,105

Non-competition agreements
 
4,740

 
2,888

 
1,852

Total Finite-Lived Intangibles
 
128,271

 
44,721

 
83,550

Indefinite-Lived Trade Names
 
1,290

 
 
 
1,290

Total Intangibles
 
$
129,561

 
$
44,721

 
$
84,840


Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.

During the three month period ended September 30, 2012, the Company acquired intangible assets with an initial purchase price allocation and weighted-average life as follows:
 
 
Purchase Price Allocation
 
Weighted-Average Life
Customer relationships
 
$
5,314

 
10 years
Vendor relationships
 
2,137

 
10 years
Total Intangibles Acquired
 
$
7,451

 
10 years

Estimated future amortization expense by fiscal year (based on the Company’s intangible assets as of September 30, 2012) is as follows: $9,100 for the remainder of 2013, $10,700 for 2014, $9,800 for 2015, $9,000 for 2016, $8,400 for 2017 and $7,600 for 2018.

4.
FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at September 30, 2012 and June 30, 2012 totaled $10,567 and $10,322. These marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are included in other assets on the condensed consolidated balance sheets and their fair values were derived using quoted market prices (Level 1 in the fair value hierarchy).


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Table of Contents
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

5.
SHAREHOLDERS' EQUITY

Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:

 
 
Three Months Ended September 30,
 
 
 
2012
 
2011
 
 
 
Pre-Tax Amount
 
Tax Expense (Benefit)
 
Net Amount
 
Pre-Tax Amount
 
Tax Expense (Benefit)
 
Net Amount
 
Foreign currency translation adjustments
 
$
9,001

 
$

 
$
9,001

 
$
(3,042
)
 
$

 
$
(3,042
)
 
Postemployment benefits:
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs
 
218

 
85

 
133

 
467

 
180

 
287

 
Unrealized gain (loss) on investment securities available for sale
 
23

 
9

 
14

 
(222
)
 
(82
)
 
(140
)
 
Other comprehensive income (loss)
 
$
9,242

 
$
94

 
$
9,148

 
$
(2,797
)
 
$
98

 
$
(2,895
)
 

Antidilutive Common Stock Equivalents
In the three month period ended September 30, 2012 and 2011, respectively, stock options and stock appreciation rights related to the acquisition of 221 and 30 shares of common stock were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive.

6.    BENEFIT PLANS

The following table provides summary disclosures of the net periodic postemployment costs recognized for the Company’s postemployment benefit plans:
 
 
Pension Benefits
 
Retiree Health Care
Benefits
Three Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Components of net periodic cost:
 
 
 
 
 
 
 
 
Service cost
 
$
19

 
$
127

 
$
20

 
$
7

Interest cost
 
315

 
588

 
47

 
59

Expected return on plan assets
 
(101
)
 
(99
)
 
 
 
 
Recognized net actuarial loss (gain)
 
184

 
264

 
(13
)
 
(18
)
Amortization of prior service cost
 
21

 
185

 
27

 
35

Net periodic cost
 
$
438

 
$
1,065

 
$
81

 
$
83


The Company contributed $4,512 to its pension benefit plans and $56 to its retiree health care plans in the three months ended September 30, 2012. Expected contributions for the remainder of fiscal 2013 are $1,500 for the pension benefit plans to fund scheduled retirement payments and $190 for retiree health care plans.

7.
SEGMENT AND GEOGRAPHIC INFORMATION

The accounting policies of the Company’s reportable segments are the same as those used to prepare the condensed consolidated financial statements. Sales primarily from the Fluid Power Businesses segment to the Service Center Based Distribution segment of $3,735 and $4,247, in the three months ended September 30, 2012 and 2011, respectively, have been eliminated in the Segment Financial Information tables below.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)


Three Months Ended
 
Service Center Based Distribution
 
Fluid Power Businesses
 
Total
September 30, 2012
 
 
 
 
 
 
Net sales
 
$
497,826

 
$
112,693

 
$
610,519

Operating income for reportable segments
 
33,720

 
10,536

 
44,256

Assets used in business
 
787,028

 
214,739

 
1,001,767

Depreciation and amortization of property
 
2,564

 
458

 
3,022

Capital expenditures
 
3,714

 
178

 
3,892

 
 
 
 
 
 
 
September 30, 2011
 
 
 
 
 
 
Net sales
 
$
463,857

 
$
115,717

 
$
579,574

Operating income for reportable segments
 
29,394

 
11,236

 
40,630

Assets used in business
 
681,977

 
218,250

 
900,227

Depreciation and amortization of property
 
2,299

 
519

 
2,818

Capital expenditures
 
6,800

 
342

 
7,142


A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:
 
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2012
 
2011
 
Operating income for reportable segments
 
$
44,256

 
$
40,630

 
Adjustment for:
 
 
 
 
 
Intangible amortization—Service Center Based Distribution
 
1,223

 
877

 
Intangible amortization—Fluid Power Businesses
 
1,832

 
1,932

 
Corporate and other expense (income), net
 
(3,117
)
 
(5,446
)
 
Total operating income
 
44,318

 
43,267

 
Interest expense, net
 
25

 
47

 
Other (income) expense, net
 
(459
)
 
1,932

 
Income before income taxes
 
$
44,752

 
$
41,288

 

The change in corporate and other expense (income), net is due to changes in the levels and amounts of expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)


Net sales are presented in geographic areas based on the location of the company making the sale and are as follows:
 
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2012
 
2011
 
Geographic Areas:
 
 
 
 
 
United States
 
$
499,536

 
$
487,428

 
Canada
 
74,211

 
73,573

 
Other countries
 
36,772

 
18,573

 
Total
 
$
610,519

 
$
579,574

 
    
At September 30, 2012 the other countries consisted of Mexico, Australia and New Zealand whereas at September 30, 2011 it was only Mexico.

8.
OTHER (INCOME) EXPENSE , NET

Other (income) expense, net consists of the following:
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2012
 
2011
 
Unrealized (gain) loss on assets held in rabbi trust for a nonqualified deferred compensation plan
 
$
(441
)
 
$
1,380

 
Foreign currency transactions (gain) loss
 
(81
)
 
510

 
Other, net
 
63

 
42

 
Total other (income) expense, net
 
$
(459
)
 
$
1,932

 



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Table of Contents


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The accompanying condensed consolidated financial statements of the Company have been reviewed by the Company’s independent registered public accounting firm, Deloitte & Touche LLP, whose report covering their reviews of the condensed consolidated financial statements follows.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio

We have reviewed the accompanying condensed consolidated balance sheet of Applied Industrial Technologies, Inc. and subsidiaries (the “Company”) as of September 30, 2012, and the related condensed statements of consolidated income, consolidated comprehensive income and consolidated cash flows for the three month periods ended September 30, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of June 30, 2012, and the related statements of consolidated income, consolidated comprehensive income, consolidated shareholders’ equity, and consolidated cash flows for the year then ended (not presented herein); and in our report dated August 15, 2012, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2012 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/ Deloitte & Touche LLP         
 
Cleveland, Ohio
November 1, 2012



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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading industrial distributor serving MRO, OEM and government markets. Applied is an authorized source for a diverse range of products, including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion components, tools, safety products, and general maintenance and mill supply products.  The Company also provides customized shop services for mechanical, fabricated rubber and fluid power products, as well as services to meet storeroom management and maintenance training needs. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the first quarter of fiscal 2013, business was conducted in the United States, Canada, Mexico, Puerto Rico, Australia and New Zealand from 517 facilities.

The following is Management's Discussion and Analysis of significant factors which have affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed statements of consolidated income, consolidated comprehensive income and consolidated cash flows. When reviewing the discussion and analysis set forth below, please note that the majority of SKUs we sell in any given period were not necessarily sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume.

Overview
Consolidated sales for the quarter ended September 30, 2012 increased $30.9 million or 5.3% compared to the prior year quarter, with acquisitions contributing $19.5 million or 3.4% and an unfavorable foreign currency translation of $5.8 million reducing sales by 1.0%. Operating margin decreased to 7.3% of sales from 7.5% for the prior year quarter largely driven by a decrease in our gross margin. Net income of $29.5 million increased 11.9% compared to the prior year quarter. Shareholders' equity was $703.1 million at September 30, 2012, up from the June 30, 2012 level of $672.1 million. The current ratio was 2.8 to 1 at September 30, 2012 and 2.9 to 1 at June 30, 2012.

Applied monitors several economic indices that have been key indicators for industrial economic activity in the United States. These include the Industrial Production and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and require replacement parts. Our sales tend to lag the MCU by up to six months.

In the September quarter, Industrial Production declined at an annual rate of .4%. The MCU for September was 76.8, down from the June 2012 reading of 77.5. The ISM PMI averaged 51.5 in the September quarter, an improvement from 49.7 in the June quarter, and above 50 (its expansionary threshold).

The number of Company associates was 4,868 at September 30, 2012, 4,664 at June 30, 2012, and 4,686 at September 30, 2011. The number of operating facilities totaled 517 at September 30, 2012 and 476 at June 30, 2012.


Results of Operations

Three Months Ended September 30, 2012 and 2011

The following table is included to aid in review of Applied's condensed statements of consolidated income.
 
 
Three Months Ended September 30,
 
Change in $'s Versus Prior Period % Increase
 
 
As a Percent of Net Sales
 
 
 
2012
 
2011
 
Net Sales
 
100.0
%
 
100.0
%
 
5.3
%
Gross Profit
 
26.9
%
 
27.4
%
 
3.7
%
Selling, Distribution & Administrative
 
19.7
%
 
19.9
%
 
4.1
%
Operating Income
 
7.3
%
 
7.5
%
 
2.4
%
Net Income
 
4.8
%
 
4.6
%
 
11.9
%


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


During the quarter ended September 30, 2012, sales increased $30.9 million or 5.3% compared to the prior year quarter, with acquisitions accounting for $19.5 million or 3.4%, and foreign currency translation decreasing sales by $5.8 million or 1.0%. There were 63 selling days in the quarter ended September 30, 2012 versus 64 selling days in the quarter ended September 30, 2011.

Sales from our Service Center Based Distribution segment, which, operates primarily in MRO markets, increased $34.0 million or 7.3% during the quarter from the same period in the prior year, primarily attributed to expansion in the industrial economy. Acquisitions within this segment increased sales by $19.5 million or 4.2%.

Sales from our Fluid Power Businesses segment, which operates primarily in OEM markets, decreased $3.0 million or 2.6% during the quarter from the same period in the prior year, primarily attributed to weakness within one of our Fluid Power Businesses.

Sales in our U.S. operations were up $12.1 million or 2.5% with acquisitions adding $0.3 million or 0.1% . Sales from our Canadian operations increased $0.6 million or 0.9%, with acquisitions adding $4.7 million or 6.4% and an unfavorable foreign currency translation decreasing Canadian sales by $2.8 million or 3.9%. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $18.2 million or 98.0% above the prior year. 20.0% of this increase, or $3.7 million relates to our Mexican operations. This increase consisted of a $6.7 million increase in local currency sales partially offset by an unfavorable foreign currency translation of $3.0 million .

During the quarter ended September 30, 2012, industrial products and fluid power products accounted for 72.1% and 27.9%, respectively, of sales as compared to 70.6% and 29.4%, respectively, for the same period in the prior year.

Our gross profit margin for the quarter was 26.9%, as compared to the prior year's quarter of 27.4%. The slight decrease can largely be attributed to small margin decreases from competitive pressures in the Service Center Based Distribution and Fluid Power businesses.

Selling, distribution and administrative expense (SD&A) consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, legal, and facility related expenses. SD&A was 19.7% of sales in the quarter ended September 30, 2012 compared to 19.9% in the prior year quarter. On an absolute basis, SD&A increased $4.8 million or 4.1% compared to the prior year quarter. Acquisitions have contributed a $5.7 million increase in SD&A expenses. ERP project spending in 2013 is in line with our estimates.

Operating income increased 2.4% or $1.1 million, and as a percent of sales decreased to 7.3% from 7.5% during the prior year quarter. The quarterly increase in operating income primarily reflects higher sales levels. The decline in the operating margin percentage is driven by a lower gross margin percentage in the quarter offset somewhat by improved leverage of our SD&A expenses over a larger base, as we lowered our SD&A as a percent of sales to 19.7% versus 19.9% in the first quarter of fiscal 2012.

Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.8% in the current year quarter, from 6.3% in the prior year quarter. This increase is primarily attributable to higher sales levels without a commensurate increase in SD&A. SD&A as a percentage of sales has decreased (representing a 0.4% decrease as a percentage of sales).

The Fluid Power Businesses operating margins decreased to 9.3% in the current year quarter from 9.7% in the prior year quarter. While the segment experienced a decline in sales from the prior year quarter, it also reduced its SD&A to a level commensurate with the lower sales level.  The reduction in operating margin is attributable to a 0.4% gross profit margin decline as a percentage of sales.

Other income was $0.5 million in the quarter which included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.4 million and net favorable foreign currency transaction gains of $0.1 million. During the prior year quarter other expense was $1.9 million which included unrealized losses on investments held by non-qualified deferred compensation trusts of $1.4 million and net unfavorable foreign currency transaction losses of $0.5 million.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


The effective income tax rate was 34.0% for the quarter ended September 30, 2012 compared to 36.1% for the quarter ended September 30, 2011. The impact of lower effective tax rates in foreign jurisdictions favorably reduced our rate when compared to the U.S. federal statutory rate by approximately 2.3% in the quarter. We expect our full year tax rate to be in the 34.0% to 34.5% range.

As a result of the factors addressed above, net income increased $3.2 million or 11.9% compared to the prior year quarter. Net income per share was $0.70 per share for the quarter ended September 30, 2012, compared to $0.61 in the prior year quarter.


Liquidity and Capital Resources

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At September 30, 2012 and at September 30, 2011, we had no outstanding borrowings. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, cash provided from operations, and the use of operating leases will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company's credit standing and financial strength.

The Company's working capital at September 30, 2012 was $445.1 million, compared to $435.6 million at June 30, 2012. The current ratio was 2.8 to 1 at September 30, 2012 and 2.9 to 1 at June 30, 2012.

In the first quarter, the Company acquired SKF's company-owned distribution businesses in Australia and New Zealand for cash consideration. The Company funded this acquisition from its available cash.


Net Cash Flows
The following table is included to aid in review of Applied's condensed statements of consolidated cash flows; all amounts are in thousands.
 
 
Three Months Ended September 30,
Net Cash Provided by (Used in):
 
2012
 
2011
Operating Activities
 
$
23,947

 
$
16,401

Investing Activities
 
(39,058
)
 
(7,746
)
Financing Activities
 
(8,423
)
 
(26,044
)
Exchange Rate Effect
 
1,765

 
(485
)
Decrease in Cash and Cash Equivalents
 
$
(21,769
)
 
$
(17,874
)

Net cash provided by operating activities was $23.9 million for the three months ended September 30, 2012 as compared to $16.4 million for the same period a year ago. Improved net income generated $3.2 million of operating cash flow with the remainder being generated by lower increases in working capital.

Net cash used in investing activities during the three months ended September 30, 2012 was $39.1 million; $3.9 million was used for capital expenditures (including capitalized costs associated with our ERP project) and $35.4 million for acquisitions. These uses of cash were partially offset by $0.2 million of proceeds from property sales. In the three months ended September 30, 2011, investing activities used $7.7 million including $1.2 million for acquisitions and $7.1 million for capital expenditures. These uses of cash were partially offset by $0.6 million of proceeds from property sales.

Net cash used in financing activities was $8.4 million for the three months ended September 30, 2012. Financing activities included $8.9 million used to pay dividends as well as $0.8 million for acquisition holdback payments, offset by $1.2 million from tax benefits from share based compensation. During the same period in the prior year, financing activities used $26.0 million of cash; repurchases of 640,000 shares of treasury stock were for $18.2 million and paid dividends used $8.1 million.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



ERP Project
In the second quarter of fiscal 2011, Applied commenced its ERP (SAP) project to transform the Company's technology platforms and enhance its business information and transaction systems for future growth. We continue to expect spending in fiscal year 2013 to reach $19.0 million to $21.0 million ($4.0 million to $5.0 million capital and $15.0 million to $16.0 million expense). We have deployed our solution in a portion of our Canadian operations. U.S. deployments have started in the second quarter with further deployments planned for fiscal 2013 and 2014.

Share Repurchases
The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. We did not acquire any shares of treasury stock in the three months ended September 30, 2012. At September 30, 2012, we had authorization to repurchase an additional 1,142,800 shares. During the three months ended September 30, 2011, we acquired 640,000 shares of treasury stock for $18.2 million.

Borrowing Arrangements
We have a $150.0 million revolving credit facility with a group of banks expiring in May 2017. There are no borrowings outstanding under this facility at September 30, 2012. At September 30, 2012, unused capacity under this facility, net of outstanding letters of credit, was $140.9 million and is available to fund future acquisitions or other capital and operating requirements.

We also have an uncommitted long-term financing shelf facility which expires in February 2013 and enables us to borrow up to $100.0 million with terms of up to fifteen years. At September 30, 2012, there were no outstanding borrowings under this agreement.

Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable:
 
 
September 30,
June 30,
 
 
2012
2012
Accounts receivable, gross
 
$
333,992

$
315,375

Allowance for doubtful accounts
8,239

8,332

Accounts receivable, net
$
325,753

$
307,043

Allowance for doubtful accounts, % of gross receivables
2.5
%
2.6
%
 
 
 
 
 
 
For the three months ended September 30,
 
 
2012
2011
Provision for losses on accounts receivable
$
224

$
819

Provision as a % of net sales
 
0.04
%
0.1
%

Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables for each of the Company's locations.

On a consolidated basis, DSO was 47.3 at September 30, 2012 versus 45.2 at June 30, 2012. Accounts receivable increased 6.1% this year, compared to a 5.3% increase in sales in the three months ended September 30, 2012. We primarily attribute the increase in DSO to higher sales to large contract accounts.

Less than 1.7% of our accounts receivable balances are more than 90 days past due. On an overall basis, our provision for losses from uncollected receivables represents 0.04% of our sales in the three months ended September 30, 2012. Historically, this percentage is around 0.15%. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.



13

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Inventory Analysis
Inventories are valued at the lower of cost or market, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis and uses inventory valued at current costs. The annualized inventory turnover for the period ended September 30, 2012 was 4.4 versus 4.6 at June 30, 2012. We believe our inventory turnover ratio in fiscal 2013 will remain similar to the fiscal 2012 levels.


Cautionary Statement Under Private Securities Litigation Reform Act

Management's Discussion and Analysis and other sections of this report, including documents incorporated by reference, contain 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," "would," "anticipate," "estimate," "forecast," "may," and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.

Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company's control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.

Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; risks and uncertainties associated with executing our strategic business plan; changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems; our ability to implement our ERP system in a timely, cost-effective, and competent manner, and to capture its planned benefits while maintaining an adequate internal control environment; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries and the transfer of manufacturing capacity to foreign countries; our ability to retain and attract qualified sales and customer service personnel and other skilled professionals; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability and timing of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations, including volatile economic conditions, political instability, cultural and legal differences, and currency exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in accounting policies and practices; organizational changes within the Company; the volatility of our stock price and the resulting impact on our consolidated financial statements; risks related to legal proceedings to which we are a party; adverse regulation and legislation, including potential changes in tax regulations (e.g., those affecting the use of the LIFO inventory accounting method and the taxation of foreign-sourced income); and the occurrence of extraordinary events (including prolonged labor disputes, natural events and acts of God, terrorist acts, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect our business, financial condition or results of operations. We discuss certain of these matters more fully in our Annual Report on Form 10-K for the year ended June 30, 2012 .



14

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



For quantitative and qualitative disclosures about market risk, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended June 30, 2012.


15

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES



The Company's management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective.
The Company has undertaken a multi-year ERP (SAP) project to transform the Company's technology platforms and enhance its business information and transaction systems. The Company began to implement SAP in parts of its Canadian businesses to support both accounting and operating activities. The implementation, at operating locations is expected to continue, through the end of calendar year 2013. All changes in the Company's key business applications and financial processes, as a result of the continuing implementation of SAP are being evaluated by management. The Company is designing effective processes and internal controls to address changes in the Company's internal control over financial reporting as a result of the SAP implementation.
Other than as described above, there have not been any changes in internal control over financial reporting during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


16

Table of Contents

PART II.
OTHER INFORMATION

ITEM 1.
Legal Proceedings

The Company is a party to pending legal proceedings with respect to various product liability, commercial, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss, the Company believes, based on circumstances currently known, that the likelihood is remote that the ultimate resolution of any of these proceedings will have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.


ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases in the quarter ended September 30, 2012 were as follows:

Period
(a) Total Number of Shares
(b) Average Price Paid per Share ($)
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)(2)
July 1, 2012 to July 31, 2012
0

0
1,142,800

August 1, 2012 to August 31, 2012
0

0
1,142,800

September 1, 2012 to September 30, 2012
0

0
1,142,800

Total
0

0
1,142,800



(1)
On October 25, 2011, the Board of Directors authorized the purchase of up to 1.5 million shares of the Company's common stock. The Company publicly announced the authorization that day. Purchases can be made in the open market or in privately negotiated transactions.

(2)
During the quarter the Company purchased one hundred eighty-two shares in connection with the vesting of stock awards.

17

Table of Contents



ITEM 6.    Exhibits
Exhibit No.
  
Description
3.1
  
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).
 
 
3.2
  
Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to the Company’s Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).
 
 
4.1
  
Certificate of Merger of Bearings, Inc. (Ohio) (now named Applied Industrial Technologies, Inc.) 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 the Company’s Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).
 
 
4.2
  
Private Shelf Agreement dated as of November 27, 1996, between the Company and Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America), conformed to show all amendments (filed as Exhibit 4.2 to the Company’s Form 10-Q for the quarter ended March 31, 2010, SEC File No. 1-2299, and incorporated here by reference).
 
 
4.3
  
Credit Agreement dated as of May 15, 2012, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 4 to Applied's Form 8-K dated May 17, 2012, SEC File No. 1-2299, and incorporated here by reference).
 
 
 
10.1
 
Management Incentive Plan General Terms (filed as Exhibit 10.01 to the Company's Form 8-K dated August 9, 2012, SEC File No. 1-2299, and incorporated here by reference).
 
 
 
10.2
 
Stock Appreciation Rights Award Terms and Conditions (filed as Exhibit 10.02 to the Company's Form 8-K dated August 9, 2012, SEC File No. 1-2299, and incorporated here by reference).
 
 
 
10.3
 
Restricted Stock Units Terms and Conditions (filed as Exhibit 10.03 to the Company's Form 8-K dated August 9, 2012, SEC File No. 1-2299, and incorporated here by reference).
 
 
 
10.4
 
Performance Shares Terms and Conditions (filed as Exhibit 10.04 to the Company's Form 8-K dated August 9, 2012, SEC File No. 1-2299, and incorporated here by reference).
 
 
 
15
  
Independent Registered Public Accounting Firm’s Awareness Letter.
 
 
31
  
Rule 13a-14(a)/15d-14(a) certifications.
 
 
32
  
Section 1350 certifications.
 
 
101.INS
  
XBRL Instance Document
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document

The Company 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 the Company’s reasonable expenses in furnishing the exhibit.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


 
 
 APPLIED INDUSTRIAL TECHNOLOGIES, INC.
 
 
(Company)
 
 
 
Date:
November 1, 2012
By:   /s/ Neil A.Schrimsher
 
 
Neil A. Schrimsher
 
 
Chief Executive Officer
 
 
 
 
 
 
Date:
November 1, 2012
By:  /s/ Mark O. Eisele
 
 
Mark O. Eisele
 
 
Vice President-Chief Financial Officer & Treasurer



19