|
|
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
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net Sales
|
|
$
|
679,304
|
|
|
$
|
633,172
|
|
|
$
|
1,912,275
|
|
|
$
|
1,885,422
|
|
Cost of Sales
|
|
488,502
|
|
|
458,379
|
|
|
1,370,687
|
|
|
1,356,450
|
|
Gross Profit
|
|
190,802
|
|
|
174,793
|
|
|
541,588
|
|
|
528,972
|
|
Selling, Distribution and Administrative, including depreciation
|
|
145,335
|
|
|
143,031
|
|
|
415,247
|
|
|
417,822
|
|
Goodwill Impairment
|
|
—
|
|
|
64,794
|
|
|
—
|
|
|
64,794
|
|
Operating Income (Loss)
|
|
45,467
|
|
|
(33,032
|
)
|
|
126,341
|
|
|
46,356
|
|
Interest Expense, net
|
|
2,165
|
|
|
2,359
|
|
|
6,411
|
|
|
6,704
|
|
Other (Income) Expense, net
|
|
(47
|
)
|
|
65
|
|
|
(656
|
)
|
|
1,124
|
|
Income (Loss) Before Income Taxes
|
|
43,349
|
|
|
(35,456
|
)
|
|
120,586
|
|
|
38,528
|
|
Income Tax Expense
|
|
13,855
|
|
|
9,272
|
|
|
39,636
|
|
|
35,018
|
|
Net Income (Loss)
|
|
$
|
29,494
|
|
|
$
|
(44,728
|
)
|
|
$
|
80,950
|
|
|
$
|
3,510
|
|
Net Income (Loss) Per Share - Basic
|
|
$
|
0.76
|
|
|
$
|
(1.14
|
)
|
|
$
|
2.08
|
|
|
$
|
0.09
|
|
Net Income (Loss) Per Share - Diluted
|
|
$
|
0.75
|
|
|
$
|
(1.14
|
)
|
|
$
|
2.06
|
|
|
$
|
0.09
|
|
Cash dividends per common share
|
|
$
|
0.29
|
|
|
$
|
0.28
|
|
|
$
|
0.85
|
|
|
$
|
0.82
|
|
Weighted average common shares outstanding for basic computation
|
|
38,999
|
|
|
39,107
|
|
|
39,009
|
|
|
39,328
|
|
Dilutive effect of potential common shares
|
|
463
|
|
|
—
|
|
|
375
|
|
|
220
|
|
Weighted average common shares outstanding for diluted computation
|
|
39,462
|
|
|
39,107
|
|
|
39,384
|
|
|
39,548
|
|
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
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss) per the condensed statements of consolidated income
|
|
$
|
29,494
|
|
|
$
|
(44,728
|
)
|
|
$
|
80,950
|
|
|
$
|
3,510
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
8,132
|
|
|
13,014
|
|
|
(4,147
|
)
|
|
(21,245
|
)
|
Postemployment benefits:
|
|
|
|
|
|
|
|
|
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs
|
|
125
|
|
|
130
|
|
|
377
|
|
|
387
|
|
Unrealized gain (loss) on investment securities available for sale
|
|
11
|
|
|
39
|
|
|
77
|
|
|
(24
|
)
|
Total of other comprehensive income (loss), before tax
|
|
8,268
|
|
|
13,183
|
|
|
(3,693
|
)
|
|
(20,882
|
)
|
Income tax expense related to items of other comprehensive income
|
|
58
|
|
|
65
|
|
|
173
|
|
|
143
|
|
Other comprehensive income (loss), net of tax
|
|
8,210
|
|
|
13,118
|
|
|
(3,866
|
)
|
|
(21,025
|
)
|
Comprehensive income (loss), net of tax
|
|
$
|
37,704
|
|
|
$
|
(31,610
|
)
|
|
$
|
77,084
|
|
|
$
|
(17,515
|
)
|
See notes to condensed consolidated financial statements.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
June 30,
2016
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67,313
|
|
|
$
|
59,861
|
|
Accounts receivable, less allowances of $10,470 and $11,034
|
|
390,874
|
|
|
347,857
|
|
Inventories
|
|
344,743
|
|
|
338,221
|
|
Other current assets
|
|
33,181
|
|
|
35,582
|
|
Total current assets
|
|
836,111
|
|
|
781,521
|
|
Property, less accumulated depreciation of $165,956 and $161,466
|
|
106,773
|
|
|
107,765
|
|
Identifiable intangibles, net
|
|
168,404
|
|
|
191,240
|
|
Goodwill
|
|
205,341
|
|
|
202,700
|
|
Deferred tax assets
|
|
12,652
|
|
|
12,277
|
|
Other assets
|
|
17,410
|
|
|
16,522
|
|
TOTAL ASSETS
|
|
$
|
1,346,691
|
|
|
$
|
1,312,025
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
150,255
|
|
|
$
|
148,543
|
|
Current portion of long-term debt
|
|
4,012
|
|
|
3,247
|
|
Compensation and related benefits
|
|
57,615
|
|
|
57,187
|
|
Other current liabilities
|
|
58,683
|
|
|
65,306
|
|
Total current liabilities
|
|
270,565
|
|
|
274,283
|
|
Long-term debt
|
|
317,382
|
|
|
324,583
|
|
Postemployment benefits
|
|
20,226
|
|
|
21,322
|
|
Other liabilities
|
|
32,648
|
|
|
33,921
|
|
TOTAL LIABILITIES
|
|
640,821
|
|
|
654,109
|
|
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; 39,030 and 39,057 outstanding, respectively
|
|
10,000
|
|
|
10,000
|
|
Additional paid-in capital
|
|
163,448
|
|
|
162,529
|
|
Retained earnings
|
|
1,003,480
|
|
|
944,821
|
|
Treasury shares—at cost (15,183 and 15,156 shares)
|
|
(381,646
|
)
|
|
(373,888
|
)
|
Accumulated other comprehensive loss
|
|
(89,412
|
)
|
|
(85,546
|
)
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
705,870
|
|
|
657,916
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
1,346,691
|
|
|
$
|
1,312,025
|
|
See notes to condensed consolidated financial statements.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Cash Flows from Operating Activities
|
|
|
|
|
Net income
|
|
$
|
80,950
|
|
|
$
|
3,510
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization of property
|
|
11,364
|
|
|
12,041
|
|
Amortization of intangibles
|
|
18,387
|
|
|
19,065
|
|
Goodwill Impairment
|
|
—
|
|
|
64,794
|
|
Unrealized foreign exchange transactions loss
|
|
499
|
|
|
494
|
|
Amortization of stock options and appreciation rights
|
|
1,533
|
|
|
1,241
|
|
(Gain) loss on sale of property
|
|
(1,540
|
)
|
|
275
|
|
Other share-based compensation expense
|
|
2,836
|
|
|
2,073
|
|
Changes in operating assets and liabilities, net of acquisitions
|
|
(36,375
|
)
|
|
(15,294
|
)
|
Other, net
|
|
852
|
|
|
3,097
|
|
Net Cash provided by Operating Activities
|
|
78,506
|
|
|
91,296
|
|
Cash Flows from Investing Activities
|
|
|
|
|
Property purchases
|
|
(11,787
|
)
|
|
(9,441
|
)
|
Proceeds from property sales
|
|
2,724
|
|
|
372
|
|
Acquisition of businesses, net of cash acquired
|
|
(2,778
|
)
|
|
(56,142
|
)
|
Net Cash used in Investing Activities
|
|
(11,841
|
)
|
|
(65,211
|
)
|
Cash Flows from Financing Activities
|
|
|
|
|
Net (repayments) borrowings under revolving credit facility
|
|
(4,000
|
)
|
|
23,000
|
|
Long-term debt borrowings
|
|
—
|
|
|
125,000
|
|
Long-term debt repayments
|
|
(2,514
|
)
|
|
(97,826
|
)
|
Purchases of treasury shares
|
|
(8,242
|
)
|
|
(37,464
|
)
|
Dividends paid
|
|
(33,236
|
)
|
|
(32,342
|
)
|
Excess tax benefits from share-based compensation
|
|
—
|
|
|
59
|
|
Acquisition holdback payments
|
|
(7,694
|
)
|
|
(10,658
|
)
|
Taxes paid for shares withheld
|
|
(3,373
|
)
|
|
(937
|
)
|
Exercise of stock options and appreciation rights
|
|
306
|
|
|
413
|
|
Other, net
|
|
—
|
|
|
719
|
|
Net Cash used in Financing Activities
|
|
(58,753
|
)
|
|
(30,036
|
)
|
Effect of Exchange Rate Changes on Cash
|
|
(460
|
)
|
|
(2,587
|
)
|
Increase (decrease) in Cash and Cash Equivalents
|
|
7,452
|
|
|
(6,538
|
)
|
Cash and Cash Equivalents at Beginning of Period
|
|
59,861
|
|
|
69,470
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
67,313
|
|
|
$
|
62,932
|
|
See notes to condensed consolidated financial statements.
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
March 31, 2017
, and the results of its operations for the three and nine month periods ended
March 31, 2017
and
2016
and its cash flows for the
nine
month periods ended
March 31, 2017
and
2016
, have been included. The condensed consolidated balance sheet as of
June 30, 2016
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, 2016
.
Operating results for the three and
nine
month periods ended
March 31, 2017
are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending
June 30, 2017
.
Change in Accounting Principle - Share-based Payment Awards
In March 2016, the FASB issued its final standard on simplifying the accounting for share-based payment awards. This standard, issued as ASU 2016-09, simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification on the statement of cash flows, and accounting for forfeitures. This update is effective for annual and interim financial statement periods beginning after December 15, 2016, with early adoption permitted. The Company early adopted ASU 2016-09 in the first quarter of fiscal 2017.
The new standard requires prospective recognition of excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises be recognized in the income statement. Previously, these amounts were recognized in additional paid-in capital. Net excess tax benefits of
$1,264
and
$1,982
for the three and nine months ended
March 31, 2017
, respectively, were recognized as a reduction of income tax expense. In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares, resulting in an insignificant increase in diluted weighted average shares outstanding for the nine months ended
March 31, 2017
, which did not have a material impact on earnings per share.
The Company has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.
The standard requires that excess tax benefits from share based compensation awards be reported as operating activities in the consolidated statements of cash flows. Previously, these cash flows were included in financing activities. We have elected to apply this change on a prospective basis, resulting in an increase in net cash provided by operating activities and net cash used in financing activities of
$1,264
and
$1,982
for the three and nine months ended
March 31, 2017
, respectively.
ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows. Previously, these cash flows were included in operating activities. This change was required to be applied on a retrospective basis. As such, the consolidated statements of cash flows for the prior periods were revised. This change resulted in an increase in net cash provided by operating activities and in net cash used in financing activities of
$937
for the nine months ended
March 31, 2016
.
Change in Accounting Principle - Debt Issue Costs
In April 2015, the FASB issued its final standard on simplifying the presentation of debt issue costs. This standard, issued as ASU 2015-03, requires that all costs incurred to issue debt be presented in the balance sheet as a direct reduction from the carrying value of the debt, rather than as an asset. This update is effective for annual financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years. As required, the Company adopted ASU 2015-03 in the first quarter of fiscal 2017 and has applied the new standard retrospectively.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
The retrospective adoption of ASU 2015-03 resulted in the reclassification as of
June 30, 2016
of unamortized debt issue costs of
$105
from other current assets to a reduction of current portion of long-term debt and
$399
from other assets to a reduction of long-term debt on the Company's condensed consolidated balance sheets.
Change in Accounting Principle - Measurement-period Adjustments for Business Combinations
In September 2015, the FASB issued its final standard on simplifying the accounting for measurement-period adjustments for business combinations. This standard, issued as ASU 2015-16, requires that an entity that is the acquirer in a business combination that identifies adjustments to provisional amounts during the measurement period to recognize those adjustments in the reporting period in which the amounts are determined. This update further requires that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The update is effective for annual and interim financial statement periods beginning after December 15, 2015, and is applied prospectively to adjustments to provisional amounts that occur after the effective date of this update, with early adoption permitted. The Company adopted ASU 2015-16 in the first quarter of fiscal 2017. The adoption of this update did not have a material impact on the financial statements of the Company.
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.
Recently Issued Accounting Guidance
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers.
The standard, issued as ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." In August 2015, the FASB issued ASU 2015-14 to delay the effective date of ASU 2014-09 by one year. In accordance with the delay, the update is effective for annual and interim financial statement periods beginning after December 15, 2017. Early adoption is permitted, but not before financial statement periods beginning after December 15, 2016. In March 2016 the FASB issued ASU 2016-08 and ASU 2016-10, and in May 2016 the FASB issued ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue recognition model. The Company has not determined the collective impact of these pronouncements on its financial statements and related disclosures or the method of adoption.
In July 2015, the FASB issued its final standard on simplifying the measurement of inventory. This standard, issued as ASU 2015-11, specifies that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new standard does not apply to inventory that is measured using LIFO; therefore, it is not applicable to the Company's U.S. inventory values, but does apply to the Company's foreign inventories which are valued using the average cost method. The update is effective for annual and interim financial statement periods beginning after December 15, 2016, with earlier application permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should recognize the assets and liabilities that arise from leases." This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with earlier application permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In August 2016, the FASB issued its final standard on the classification of certain cash receipts and cash payments within the statement of cash flows. This standard, issued as ASU 2016-15, makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In October 2016, the FASB issued its final standard on the income tax consequences of intra-entity transfers of assets other than inventory. This standard, issued as ASU 2016-16, requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This update is effective for annual and interim financial statement periods beginning after December 15, 2017, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.
In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard, issued as ASU 2017-04, eliminates step 2 from the goodwill impairment test and instead requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. Upon adoption, the Company will apply this guidance prospectively to its annual and interim goodwill impairment tests and disclose the change in accounting principle.
In March 2017, the FASB issued its final standard on improving the presentation of net periodic pension and postretirement benefit costs. This standard, issued as ASU 2017-07, requires that an employer report the service cost component for defined benefit plans and postretirement plans in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This update is effective for annual financial statement periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. The Company has decided to early adopt this standard as of the beginning of fiscal 2018, and will apply the guidance retrospectively to all periods presented. The impact of the adoption of this guidance will result in the reclassification of the other components of net benefit cost from selling, distribution, and administrative expense to other (income) expense, net in the statements of consolidated income, resulting in an increase to operating income. There is no impact to income before income taxes or net income, so therefore no impact to net income per share. The amounts reclassified would result in an increase in operating income of
$201
and
$602
for three and nine months ended
March 31, 2017
, respectively, and
$242
and
$724
for the three and nine months ended
March 31, 2016
, respectively.
The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition.
Fiscal 2017 Acquisition
On March 3, 2017, the Company acquired substantially all of the net assets of Sentinel Fluid Controls ("Sentinel"), a distributor of hydraulic and lubrication components, systems and solutions operating from four locations - Toledo, OH, New Berlin, WI, Valparaiso, IN, and Indianapolis, IN. Sentinel is included in the Fluid Power Businesses segment.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
The purchase price for the acquisition was
$3,760
, net tangible assets acquired were
$3,130
, and intangibles including goodwill were
$630
based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes
$982
of acquisition holdback payments, included in other current liabilities and other liabilities on the condensed consolidated balance sheets, which will be paid plus interest at various times in the future. The Company funded the amount paid for the acquisition at closing using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's condensed consolidated financial statements.
Fiscal 2016 Acquisitions
On June 14, 2016, the Company acquired
100%
of the outstanding stock of Seals Unlimited ("Seals"), a distributor of sealing, fastener, and hose products located in Burlington, Ontario. On January 4, 2016, the Company acquired substantially all of the net assets of HUB Industrial Supply ("HUB"), a distributor of consumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Atlantic Fasteners Co., Inc. ("Atlantic Fasteners"), a distributor of C-Class consumables including industrial fasteners and related industrial supplies located in Agawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. On October 1, 2015, the Company acquired substantially all of the net assets of S.G. Morris Co. ("SGM"). SGM, headquartered in Cleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and West Virginia and is included in the Fluid Power Businesses segment. The total combined consideration for these acquisitions was approximately
$65,900
, net tangible assets acquired were
$22,700
, and intangibles including goodwill were
$43,200
based upon estimated fair values at the acquisition dates. The estimated fair values related to Seals are preliminary and subject to adjustment. The total combined consideration includes
$3,300
of acquisition holdback payments, of which
$1,250
was paid during the nine months ending
March 31, 2017
. The remaining balance of
$2,050
is included in other current liabilities and other liabilities on the condensed consolidated balance sheets, which will be paid plus interest at various times through October 2018. The Company funded the amounts paid for the acquisitions at closing using available cash and borrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not material in relation to the Company's condensed consolidated financial statements.
3. GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Fluid Power Businesses segment for the fiscal year ended
June 30, 2016
and the
nine
month period ended
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Centers
|
|
Fluid Power
|
|
Total
|
Balance at July 1, 2015
|
$
|
253,477
|
|
|
$
|
929
|
|
|
$
|
254,406
|
|
Goodwill acquired during the period
|
18,683
|
|
|
3,285
|
|
|
21,968
|
|
Impairment
|
(64,794
|
)
|
|
—
|
|
|
(64,794
|
)
|
Other, primarily currency translation
|
(8,880
|
)
|
|
—
|
|
|
(8,880
|
)
|
Balance at June 30, 2016
|
$
|
198,486
|
|
|
$
|
4,214
|
|
|
$
|
202,700
|
|
Goodwill added during the period
|
3,220
|
|
|
625
|
|
|
3,845
|
|
Other, primarily currency translation
|
(760
|
)
|
|
(444
|
)
|
|
(1,204
|
)
|
Balance at March 31, 2017
|
$
|
200,946
|
|
|
$
|
4,395
|
|
|
$
|
205,341
|
|
On July 1, 2016, the Company enacted a change in its management reporting structure which changed the composition of the Canada service center reporting unit. This triggering event required the Company to perform an interim goodwill impairment test for the Canada service center reporting unit. The Company performed step one of the goodwill impairment test for the Canada service center reporting unit as of July 1, 2016 and determined that the reporting unit had excess fair value of approximately
$8,000
or
5%
when compared to its carrying amount of approximately
$163,000
.
In conjunction with this management change,
$2,628
of goodwill was reallocated from the Canada service center reporting unit to the U.S. service center reporting unit based on the relative fair value as of July 1, 2016.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
The Company has six (6) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2017. The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts by at least
20%
as of January 1, 2017.
The fair values of the reporting units in accordance with step one of the goodwill impairment tests were determined using the Income and Market approaches. The Income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors. The Market approach utilized an analysis of comparable publicly traded companies.
The techniques used in the Company's impairment test incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key Level 3 based assumptions relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values.
At
March 31, 2017
and
June 30, 2016
, accumulated goodwill impairment losses, subsequent to fiscal year 2002, totaled
$64,794
related to the Service Center Based Distribution segment and
$36,605
related to the Fluid Power Businesses segment.
During the nine months ended
March 31, 2017
, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the HUB acquisition. The fair values of the customer relationships and trade names intangible assets were decreased by
$2,636
and
$584
, respectively, with a corresponding total increase to goodwill of
$3,220
. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of
$156
during the nine months ended
March 31, 2017
, which is recorded in selling, distribution and administrative expense on the condensed statements of consolidated income.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
The Company’s identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Finite-Lived Identifiable Intangibles:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
233,334
|
|
|
$
|
96,969
|
|
|
$
|
136,365
|
|
Trade names
|
|
43,646
|
|
|
18,440
|
|
|
25,206
|
|
Vendor relationships
|
|
14,046
|
|
|
8,784
|
|
|
5,262
|
|
Non-competition agreements
|
|
4,677
|
|
|
3,106
|
|
|
1,571
|
|
Total Identifiable Intangibles
|
|
$
|
295,703
|
|
|
$
|
127,299
|
|
|
$
|
168,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Finite-Lived Identifiable Intangibles:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
239,132
|
|
|
$
|
84,566
|
|
|
$
|
154,566
|
|
Trade names
|
|
44,430
|
|
|
16,099
|
|
|
28,331
|
|
Vendor relationships
|
|
14,042
|
|
|
8,003
|
|
|
6,039
|
|
Non-competition agreements
|
|
4,700
|
|
|
2,396
|
|
|
2,304
|
|
Total Identifiable Intangibles
|
|
$
|
302,304
|
|
|
$
|
111,064
|
|
|
$
|
191,240
|
|
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
Due to continued softness in the upstream oil and gas industry, management also assessed long-lived intangible assets related to the Reliance asset groups for impairment during the first and third quarters of fiscal 2017. For the assessment in the third quarter of fiscal 2017, the sum of the undiscounted cash flows exceeded the carrying values of the Reliance U.S. and Reliance Canada asset groups of
$15,657
and
$80,228
, respectively, by
149%
and
13%
, respectively, therefore, no impairment was recognized. Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. Further, continued adverse market conditions could result in the recognition of impairment if the Company determines that the fair values of its intangible assets have fallen below their carrying values.
Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of
March 31, 2017
) for the next five years is as follows:
$6,200
for the remainder of
2017
,
$22,400
for
2018
,
$20,600
for
2019
,
$18,800
for
2020
,
$17,300
for
2021
and
$14,900
for
2022
.
4. DEBT
Revolving Credit Facility & Term Loan
In December 2015, the Company entered into a five-year credit facility with a group of banks expiring in December 2020. This agreement provides for a
$125,000
unsecured term loan and a
$250,000
unsecured revolving credit facility. Fees on this facility range from
0.09%
to
0.175%
per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. At
March 31, 2017
and
June 30, 2016
, the Company had
$121,094
and
$123,438
, respectively, outstanding under the term loan, and
$29,000
and
$33,000
, respectively, outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of
$2,748
and
$2,707
to secure certain insurance obligations, totaled
$218,252
and
$214,293
at
March 31, 2017
and
June 30, 2016
, respectively, and are available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was
1.81%
as of
March 31, 2017
and
1.50%
as of
June 30, 2016
. The weighted average interest rate on the revolving credit facility outstanding was
2.03%
as of
March 31, 2017
and
1.44%
as of
June 30, 2016
.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of
$2,698
as of
March 31, 2017
and
June 30, 2016
, in order to secure certain insurance obligations.
Other Long-Term Borrowings
In April 2014, the Company assumed
$2,359
of debt as a part of the headquarters facility acquisition. The
1.5%
fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At
March 31, 2017
and
June 30, 2016
,
$1,726
and
$1,896
was outstanding, respectively.
At
March 31, 2017
and
June 30, 2016
, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of
$170,000
. The "Series C" notes have a principal amount of
$120,000
and carry a fixed interest rate of
3.19%
, and are due in equal principal payments in July 2020, 2021 and 2022. The "Series D" notes have a principal amount of
$50,000
and carry a fixed interest rate of
3.21%
, and are due in equal principal payments in October 2019 and 2023. As of
March 31, 2017
,
$50,000
in additional financing was available under this facility.
Unamortized debt issue costs of
$105
are included as a reduction of current portion of long-term debt on the condensed consolidated balance sheets as of
March 31, 2017
and
June 30, 2016
. Unamortized debt issue costs of
$321
and
$399
are included as a reduction of long-term debt on the condensed consolidated balance sheets as of
March 31, 2017
and
June 30, 2016
, respectively.
5. FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at
March 31, 2017
and
June 30, 2016
totaled
$10,078
and
$9,097
, respectively. These marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are included in other assets on the accompanying condensed consolidated balance sheets and their fair values are based upon quoted market prices in an active market (Level 1 in the fair value hierarchy).
The fair value of the debt outstanding under the shelf facility agreement with Prudential Investment Management approximated its carrying value at both
March 31, 2017
and
June 30, 2016
(Level 2 in the fair value hierarchy).
The revolving credit facility and the term loan contain variable interest rates and their carrying values approximated fair value at both
March 31, 2017
and
June 30, 2016
(Level 2 in the fair value hierarchy).
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
6. SHAREHOLDERS' EQUITY
Accumulated Other Comprehensive (Loss) Income
Changes in the accumulated other comprehensive (loss) income, are comprised of the following amounts shown net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
Foreign currency translation adjustment
|
|
|
Unrealized gain on securities available for sale
|
|
|
Postemployment benefits
|
|
|
Total Accumulated other comprehensive income (loss)
|
|
Balance at December 31, 2016
|
|
$
|
(93,964
|
)
|
|
$
|
11
|
|
|
$
|
(3,669
|
)
|
|
$
|
(97,622
|
)
|
Other comprehensive income
|
|
8,132
|
|
|
1
|
|
|
—
|
|
|
8,133
|
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
—
|
|
|
—
|
|
|
77
|
|
|
77
|
|
Net current-period other comprehensive income
|
|
8,132
|
|
|
1
|
|
|
77
|
|
|
8,210
|
|
Balance at March 31, 2017
|
|
$
|
(85,832
|
)
|
|
$
|
12
|
|
|
$
|
(3,592
|
)
|
|
$
|
(89,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
Foreign currency translation adjustment
|
|
|
Unrealized (loss) gain on securities available for sale
|
|
|
Postemployment benefits
|
|
|
Total Accumulated other comprehensive income (loss)
|
|
Balance at December 31, 2015
|
|
$
|
(91,503
|
)
|
|
$
|
(45
|
)
|
|
$
|
(2,766
|
)
|
|
$
|
(94,314
|
)
|
Other comprehensive income
|
|
13,014
|
|
|
25
|
|
|
—
|
|
|
13,039
|
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
—
|
|
|
—
|
|
|
79
|
|
|
79
|
|
Net current-period other comprehensive income
|
|
13,014
|
|
|
25
|
|
|
79
|
|
|
13,118
|
|
Balance at March 31, 2016
|
|
$
|
(78,489
|
)
|
|
$
|
(20
|
)
|
|
$
|
(2,687
|
)
|
|
$
|
(81,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2017
|
|
|
Foreign currency translation adjustment
|
|
|
Unrealized (loss) gain on securities available for sale
|
|
|
Postemployment benefits
|
|
|
Total Accumulated other comprehensive income (loss)
|
|
Balance at July 1, 2016
|
|
$
|
(81,685
|
)
|
|
$
|
(38
|
)
|
|
$
|
(3,823
|
)
|
|
$
|
(85,546
|
)
|
Other comprehensive (loss) income
|
|
(4,147
|
)
|
|
50
|
|
|
—
|
|
|
(4,097
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
—
|
|
|
—
|
|
|
231
|
|
|
231
|
|
Net current-period other comprehensive (loss) income
|
|
(4,147
|
)
|
|
50
|
|
|
231
|
|
|
(3,866
|
)
|
Balance at March 31, 2017
|
|
$
|
(85,832
|
)
|
|
$
|
12
|
|
|
$
|
(3,592
|
)
|
|
$
|
(89,412
|
)
|
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2016
|
|
|
Foreign currency translation adjustment
|
|
|
Unrealized loss on securities available for sale
|
|
|
Postemployment benefits
|
|
|
Total Accumulated other comprehensive income (loss)
|
|
Balance at July 1, 2015
|
|
$
|
(57,244
|
)
|
|
$
|
(4
|
)
|
|
$
|
(2,923
|
)
|
|
$
|
(60,171
|
)
|
Other comprehensive loss
|
|
(21,245
|
)
|
|
(16
|
)
|
|
—
|
|
|
(21,261
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
—
|
|
|
—
|
|
|
236
|
|
|
236
|
|
Net current-period other comprehensive (loss) income
|
|
(21,245
|
)
|
|
(16
|
)
|
|
236
|
|
|
(21,025
|
)
|
Balance at March 31, 2016
|
|
$
|
(78,489
|
)
|
|
$
|
(20
|
)
|
|
$
|
(2,687
|
)
|
|
$
|
(81,196
|
)
|
Other Comprehensive Income (Loss)
Details of other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
Pre-Tax Amount
|
|
Tax Expense
|
|
Net Amount
|
|
Pre-Tax Amount
|
|
Tax Expense (Benefit)
|
|
Net Amount
|
Foreign currency translation adjustments
|
|
$
|
8,132
|
|
|
$
|
—
|
|
|
$
|
8,132
|
|
|
$
|
13,014
|
|
|
$
|
—
|
|
|
$
|
13,014
|
|
Postemployment benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs
|
|
125
|
|
|
48
|
|
|
77
|
|
|
130
|
|
|
51
|
|
|
79
|
|
Unrealized gain on investment securities available for sale
|
|
11
|
|
|
10
|
|
|
1
|
|
|
39
|
|
|
14
|
|
|
25
|
|
Other comprehensive income
|
|
$
|
8,268
|
|
|
$
|
58
|
|
|
$
|
8,210
|
|
|
$
|
13,183
|
|
|
$
|
65
|
|
|
$
|
13,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
Pre-Tax Amount
|
|
Tax Expense
|
|
Net Amount
|
|
Pre-Tax Amount
|
|
Tax Expense (Benefit)
|
|
Net Amount
|
Foreign currency translation adjustments
|
|
$
|
(4,147
|
)
|
|
$
|
—
|
|
|
$
|
(4,147
|
)
|
|
$
|
(21,245
|
)
|
|
$
|
—
|
|
|
$
|
(21,245
|
)
|
Postemployment benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs
|
|
377
|
|
|
146
|
|
|
231
|
|
|
387
|
|
|
151
|
|
|
236
|
|
Unrealized gain (loss) on investment securities available for sale
|
|
77
|
|
|
27
|
|
|
50
|
|
|
(24
|
)
|
|
(8
|
)
|
|
(16
|
)
|
Other comprehensive (loss) income
|
|
$
|
(3,693
|
)
|
|
$
|
173
|
|
|
$
|
(3,866
|
)
|
|
$
|
(20,882
|
)
|
|
$
|
143
|
|
|
$
|
(21,025
|
)
|
Anti-dilutive Common Stock Equivalents
In the nine month periods ended
March 31, 2017
and
2016
, stock options and stock appreciation rights related to
270
and
775
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.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
7. 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 March 31
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Components of net periodic cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
31
|
|
|
$
|
23
|
|
|
$
|
7
|
|
|
$
|
5
|
|
Interest cost
|
|
173
|
|
|
216
|
|
|
16
|
|
|
18
|
|
Expected return on plan assets
|
|
(115
|
)
|
|
(122
|
)
|
|
—
|
|
|
—
|
|
Recognized net actuarial loss (gain)
|
|
218
|
|
|
228
|
|
|
(45
|
)
|
|
(52
|
)
|
Amortization of prior service cost
|
|
22
|
|
|
21
|
|
|
(68
|
)
|
|
(67
|
)
|
Net periodic cost
|
|
$
|
329
|
|
|
$
|
366
|
|
|
$
|
(90
|
)
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Retiree Health Care
Benefits
|
Nine Months Ended March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Components of net periodic cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
94
|
|
|
$
|
69
|
|
|
$
|
21
|
|
|
$
|
17
|
|
Interest cost
|
|
519
|
|
|
648
|
|
|
48
|
|
|
56
|
|
Expected return on plan assets
|
|
(345
|
)
|
|
(368
|
)
|
|
—
|
|
|
—
|
|
Recognized net actuarial loss (gain)
|
|
654
|
|
|
685
|
|
|
(136
|
)
|
|
(158
|
)
|
Amortization of prior service cost
|
|
65
|
|
|
64
|
|
|
(203
|
)
|
|
(203
|
)
|
Net periodic cost
|
|
$
|
987
|
|
|
$
|
1,098
|
|
|
$
|
(270
|
)
|
|
$
|
(288
|
)
|
The Company contributed
$600
to its pension benefit plans and
$135
to its retiree health care plans in the
nine
months ended
March 31, 2017
. Expected contributions for the remainder of fiscal 2017 are
$150
for the pension benefit plans to fund scheduled retirement payments and
$45
for retiree health care plans.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
8. SEGMENT AND GEOGRAPHIC INFORMATION
The accounting policies of the Company’s reportable segments are generally the same as those used to prepare the condensed consolidated financial statements. Intercompany sales primarily from the Fluid Power Businesses segment to the Service Center Based Distribution segment of
$6,757
and
$5,574
, in the three months ended
March 31, 2017
and
2016
, respectively, and
$17,285
and
$16,032
in the nine months ended
March 31, 2017
and 2016, respectively, have been eliminated in the Segment Financial Information tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Service Center Based Distribution
|
|
Fluid Power Businesses
|
|
Total
|
March 31, 2017
|
|
|
|
|
|
|
Net sales
|
|
$
|
554,933
|
|
|
$
|
124,371
|
|
|
$
|
679,304
|
|
Operating income for reportable segments
|
|
34,258
|
|
|
14,052
|
|
|
48,310
|
|
Depreciation and amortization of property
|
|
3,556
|
|
|
321
|
|
|
3,877
|
|
Capital expenditures
|
|
3,218
|
|
|
1,859
|
|
|
5,077
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
Net sales
|
|
$
|
524,074
|
|
|
$
|
109,098
|
|
|
$
|
633,172
|
|
Operating income for reportable segments
|
|
22,465
|
|
|
9,701
|
|
|
32,166
|
|
Depreciation and amortization of property
|
|
3,710
|
|
|
321
|
|
|
4,031
|
|
Capital expenditures
|
|
3,472
|
|
|
232
|
|
|
3,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Service Center Based Distribution
|
|
Fluid Power Businesses
|
|
Total
|
March 31, 2017
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,569,204
|
|
|
$
|
343,071
|
|
|
$
|
1,912,275
|
|
Operating income for reportable segments
|
|
80,540
|
|
|
37,031
|
|
|
117,571
|
|
Assets used in business
|
|
1,120,403
|
|
|
226,288
|
|
|
1,346,691
|
|
Depreciation and amortization of property
|
|
10,398
|
|
|
966
|
|
|
11,364
|
|
Capital expenditures
|
|
9,460
|
|
|
2,327
|
|
|
11,787
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,565,587
|
|
|
$
|
319,835
|
|
|
$
|
1,885,422
|
|
Operating income for reportable segments
|
|
79,767
|
|
|
28,708
|
|
|
108,475
|
|
Assets used in business
|
|
1,124,228
|
|
|
210,111
|
|
|
1,334,339
|
|
Depreciation and amortization of property
|
|
11,023
|
|
|
1,018
|
|
|
12,041
|
|
Capital expenditures
|
|
8,783
|
|
|
658
|
|
|
9,441
|
|
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating income for reportable segments
|
|
$
|
48,310
|
|
|
$
|
32,166
|
|
|
$
|
117,571
|
|
|
$
|
108,475
|
|
Adjustment for:
|
|
|
|
|
|
|
|
|
Intangible amortization—Service Center Based Distribution
|
|
4,672
|
|
|
5,284
|
|
|
14,104
|
|
|
14,568
|
|
Intangible amortization—Fluid Power Businesses
|
|
1,384
|
|
|
1,457
|
|
|
4,283
|
|
|
4,497
|
|
Goodwill Impairment—Service Center Based Distribution
|
|
—
|
|
|
64,794
|
|
|
—
|
|
|
64,794
|
|
Corporate and other (income) expense, net
|
|
(3,213
|
)
|
|
(6,337
|
)
|
|
(27,157
|
)
|
|
(21,740
|
)
|
Total operating income (loss)
|
|
45,467
|
|
|
(33,032
|
)
|
|
126,341
|
|
|
46,356
|
|
Interest expense, net
|
|
2,165
|
|
|
2,359
|
|
|
6,411
|
|
|
6,704
|
|
Other (income) expense, net
|
|
(47
|
)
|
|
65
|
|
|
(656
|
)
|
|
1,124
|
|
Income (loss) before income taxes
|
|
$
|
43,349
|
|
|
$
|
(35,456
|
)
|
|
$
|
120,586
|
|
|
$
|
38,528
|
|
The change in corporate and other (income) expense, net is due to changes in the amounts and levels of certain supplier support benefits and expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.
Net sales are presented in geographic areas based on the location of the facility shipping the product and are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Geographic Areas:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
576,211
|
|
|
$
|
537,931
|
|
|
$
|
1,612,772
|
|
|
$
|
1,585,699
|
|
Canada
|
|
65,527
|
|
|
60,553
|
|
|
190,312
|
|
|
194,434
|
|
Other countries
|
|
37,566
|
|
|
34,688
|
|
|
109,191
|
|
|
105,289
|
|
Total
|
|
$
|
679,304
|
|
|
$
|
633,172
|
|
|
$
|
1,912,275
|
|
|
$
|
1,885,422
|
|
Other countries consist of Mexico, Australia and New Zealand.
9. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan
|
|
$
|
(446
|
)
|
|
$
|
(75
|
)
|
|
$
|
(890
|
)
|
|
$
|
104
|
|
Foreign currency transactions loss
|
|
544
|
|
|
307
|
|
|
202
|
|
|
978
|
|
Other, net
|
|
(145
|
)
|
|
(167
|
)
|
|
32
|
|
|
42
|
|
Total other (income) expense, net
|
|
$
|
(47
|
)
|
|
$
|
65
|
|
|
$
|
(656
|
)
|
|
$
|
1,124
|
|
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
10. SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to
March 31, 2017
through the date the financial statements were issued.
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
March 31, 2017
, and the related condensed statements of consolidated income and consolidated comprehensive income for the three-month and
nine
-month periods ended
March 31, 2017
and 2016, and consolidated cash flows for the nine-month periods ended
March 31, 2017
and 2016. 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, 2016
, and the related statements of consolidated income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated August 24, 2016, 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, 2016
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
|
April 28, 2017
|
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
With more than 5,500 employees across North America, Australia and New Zealand, Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading industrial distributor serving MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial and fluid power applications, as well as customized mechanical, fabricated rubber and fluid power shop services. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the
third
quarter of fiscal
2017
, business was conducted in the United States, Canada, Mexico, Puerto Rico, Australia and New Zealand from
560
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 consolidated balance sheets, 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 (Stock Keeping Units) 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
March 31, 2017
increased
$46.1 million
or
7.3%
compared to the prior year quarter, with acquisitions increasing sales by
$2.5 million
or
0.4%
and
favorable
foreign currency translation of
$0.4 million
increasing
sales by
0.1%
. Operating margin of
6.7%
of sales was up from a negative operating margin of
5.2%
for the same quarter in the prior year due to a non-cash impairment charge recorded during the prior year quarter totaling $64.8 million. The Company had net income of
$29.5 million
for the quarter ended
March 31, 2017
compared to a net loss of
$44.7 million
for the prior year quarter. Shareholders' equity was $
705.9 million
at
March 31, 2017
,
up
from the
June 30, 2016
level of
$657.9 million
. The current ratio was
3.1
to 1 at
March 31, 2017
and
2.8
to 1 at
June 30, 2016
.
Applied monitors several economic indices that have been key indicators for industrial economic activity in the United States. These include the Industrial Production (IP) 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.
The MCU (total industry) and IP indices have been slowly increasing since June 2016. The MCU for
March
2017 was 76.1, which is up slightly from the December 2016 revised reading of 76.0. The ISM PMI registered 57.2 in
March
; up from a revised December 2016 reading of 54.5, and remaining above 50 (its expansionary threshold). The indices for the months during the current quarter were as follows:
|
|
|
|
|
|
Index Reading
|
Month
|
MCU
|
PMI
|
IP
|
January 2017
|
75.7
|
56.0
|
103.0
|
February 2017
|
75.7
|
57.7
|
103.3
|
March 2017
|
76.1
|
57.2
|
102.9
|
The number of Company employees was
5,564
at
March 31, 2017
,
5,569
at
June 30, 2016
, and
5,635
at
March 31, 2016
. The number of operating facilities totaled
560
at
March 31, 2017
,
559
at
June 30, 2016
, and
563
at
March 31, 2016
.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three months Ended
March 31, 2017
and 2016
The following table is included to aid in review of Applied's condensed statements of consolidated income.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
Change in $'s Versus Prior Period - % Increase
|
|
|
As a Percent of Net Sales
|
|
|
|
2017
|
|
2016
|
|
Net Sales
|
|
100.0
|
%
|
|
100.0
|
%
|
|
7.3
|
%
|
Gross Profit
|
|
28.1
|
%
|
|
27.6
|
%
|
|
9.2
|
%
|
Selling, Distribution & Administrative
|
|
21.4
|
%
|
|
22.6
|
%
|
|
1.6
|
%
|
Operating Income
|
|
6.7
|
%
|
|
(5.2
|
)%
|
|
N/M
|
|
Net Income
|
|
4.3
|
%
|
|
(7.1
|
)%
|
|
N/M
|
|
During the quarter ended
March 31, 2017
, sales
increased
$46.1 million
or
7.3%
compared to the prior year quarter, with sales from acquisitions adding
$2.5 million
or
0.4%
and favorable foreign currency translation accounting for
$0.4 million
or
0.1%
. There were
64
selling days in the quarter ended
March 31, 2017
and
63.5
selling days in the quarter ended
March 31, 2016
. Excluding the impact of businesses acquired and prior to the impact of currency translation, sales increased $43.2 million or 6.8% during the quarter. This consisted of an increase from our traditional core operations of 4.3%, of which 0.8% is due to the additional half sales day. The upstream oil and gas-focused subsidiaries had an increase of 51.1% in the current quarter versus the prior year quarter, which contributed an increase of 2.5% to the consolidated increase.
Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets,
increased
$30.8 million million or
5.9%
. Acquisitions within this segment
increased
sales by
$1.3 million
or
0.3%
, and favorable foreign currency translation increased sales by $0.5 million or 0.1%. Excluding the impact of businesses acquired and favorable currency translation, sales increased $29.0 million or 5.5%, of which 2.9% is from our upstream oil and gas-focused subsidiaries, 1.8% is within our traditional core operations, and 0.8% is due to one half additional sales day.
Sales from our Fluid Power Businesses segment, which operates primarily in OEM markets,
increased
$15.3 million
or
14.0%
during the quarter from the same period in the prior year. Acquisitions within this segment increased sales by
$1.2 million
or
1.1%
, and unfavorable foreign currency translation decreased sales by $0.1 million or 0.1%. Excluding the impact of businesses acquired and favorable currency translation, sales increased $14.2 million or 13.0% due to an increase from operations of 12.2% and an increase of 0.8% due to the impact of one half additional sales day.
Sales in our U.S. operations were
up
$38.3 million
or
7.1%
as acquisitions added
$1.2 million
or
0.2%
. Excluding the impact of businesses acquired, U.S. sales were up $37.1 million or 6.9%, of which 3.5% is from our traditional core operations, 2.6% is from the upstream oil and gas-focused subsidiaries, and 0.8% is due to one half additional sales day. Sales from our Canadian operations
increased
$5.0 million
or
8.2%
, with sales from acquisitions adding
$1.3 million
or
2.2%
and favorable foreign currency translation accounting for an increase of $2.4 million or 4.0%. Excluding the impact of businesses acquired and prior to the impact of currency translation, Canadian sales increased $1.3 million or 2.0%, driven by an increase of 3.0% from our upstream oil and gas-focused subsidiaries, offset by a decrease of 2.6% from within our traditional core operations. One additional sales day accounted for a 1.6% increase in Canadian sales. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, increased $2.8 million or
8.3%
compared to the same quarter in the prior year. Unfavorable foreign currency translation decreased other country sales by $
2.0 million
or
5.8%
. Prior to the impact of currency translation, other country sales were up $4.8 million or 14.1% compared to the same quarter in the prior year driven by an increase from operations of 10.8% and two additional sales days accounted for an increase of 3.3%.
During the quarter ended
March 31, 2017
, industrial products and fluid power products accounted for 70.5% and 29.5%,
respectively, of sales as compared to 72.7% and 27.3%, respectively, for the same period in the prior year.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our gross profit margin was
28.1%
for the quarter ended
March 31, 2017
and
27.6%
for the quarter ended
March 31, 2016
. The gross profit margin for the prior quarter was negatively impacted by $3.6 million of restructuring expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for the upstream oil and gas-focused operations.
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
21.4%
of sales in the quarter ended
March 31, 2017
compared to
22.6%
in the prior year quarter. SD&A
increased
$2.3 million
or
1.6%
compared to the prior year quarter. Additional SD&A from businesses acquired added $0.8 million or 0.6% of SD&A expenses including $0.1 million associated with intangibles amortization. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter ended
March 31, 2017
by
$0.4 million
or
0.3%
compared to the prior year quarter. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased $1.1 million or 0.7% during the quarter ended
March 31, 2017
compared to the prior year quarter. Excluding the impact of acquisitions, total compensation increased $3.0 million for the quarter ended
March 31, 2017
compared to the prior year quarter as a result of merit increases and improved Company performance. Also, excluding the impact of acquisitions, healthcare expense increased $1.4 million for the quarter ended
March 31, 2017
compared to the prior year quarter due to increased costs for health care claims. These increases were offset by severance expense and other restructuring charges related to consolidating facilities of $3.4 million of SD&A included the quarter ended
March 31, 2016
that did not reoccur in the current quarter. All other expenses within SD&A were up $0.1 million.
Operating income
increased
$78.5 million
and as a percent of sales increased to
6.7%
from a negative
5.2%
during the same quarter in the prior year. These increases are primarily due to the Company recognizing a non-cash goodwill impairment charge of $64.8 million and restructuring charges of $7.0 million in the third quarter of fiscal 2016, that did not reoccur in the current year quarter, as well as higher sales volume in the current year quarter.
Operating income as a percentage of sales for the Service Center Based Distribution segment
increased
to
6.2%
in the current year quarter from
4.3%
in the prior year quarter. This increase is primarily attributable to the $7.0 million of restructuring charges recorded to costs of sales and SD&A during the quarter ended
March 31, 2016
that did not reoccur in the current quarter, as well as higher sales volume in the current year quarter.
Operating income as a percentage of sales for the Fluid Power Business segment
increased
to
11.3%
in the current year quarter from
8.9%
in the prior year quarter. This increase is due to the increase in sales, primarily from our U.S. operations in this segment.
Other income in the quarter consists of unrealized gains on investments held by non-qualified deferred compensation trusts of
$0.4 million
and
$0.1 million
of income from other items, offset by
$0.5 million
net unfavorable foreign currency transaction losses. During the prior year quarter, other expense was
$0.1 million
which included
$0.3 million
net unfavorable foreign currency transaction losses, offset by unrealized gains on investments held by non-qualified deferred compensation trusts of
$0.1 million
, and $0.1 million of income from other items.
The effective income tax rate was
32.0%
for the quarter ended
March 31, 2017
compared to a negative
26.2%
for the quarter ended
March 31, 2016
. The negative effective tax rate in the prior year quarter is due to the recording of $64.8 million of goodwill impairment during the prior year quarter, of which $61.3 million was not tax deductible. The goodwill impairment decreased the effective tax rate for the quarter ended
March 31, 2016
by 61.2%. The decrease in the effective tax rate, adjusted for goodwill impairment, is primarily due to the adoption of ASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be recognized in the income statement. During the quarter ended
March 31, 2017
, $1.3 million of net excess tax benefits were recognized as a reduction of income tax expense, which decreased the effective tax rate for the quarter ended
March 31, 2017
by 2.9%. Because the Company's adoption of the new standard has had a favorable impact on the effective income tax rate, we now expect our full year tax rate for fiscal 2017 to be in the 33.0% to 34.0% range.
As a result of the factors discussed above, net income
increased
$74.2 million
or
165.9%
compared to the prior year quarter. Net income per share was
$0.75
per share for the quarter ended
March 31, 2017
, compared to net loss per share of
$1.14
per share for the quarter ended
March 31, 2016
.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine months Ended
March 31, 2017
and 2016
The following table is included to aid in review of Applied's condensed statements of consolidated income.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
Change in $'s Versus Prior Period - % Increase
|
|
|
As a Percent of Net Sales
|
|
|
|
2017
|
|
2016
|
|
Net Sales
|
|
100.0
|
%
|
|
100.0
|
%
|
|
1.4
|
%
|
Gross Profit
|
|
28.3
|
%
|
|
28.1
|
%
|
|
2.4
|
%
|
Selling, Distribution & Administrative
|
|
21.7
|
%
|
|
22.2
|
%
|
|
(0.6
|
)%
|
Operating Income
|
|
6.6
|
%
|
|
2.5
|
%
|
|
N/M
|
|
Net Income
|
|
4.2
|
%
|
|
0.2
|
%
|
|
N/M
|
|
During the nine months ended
March 31, 2017
, sales
increased
$26.9 million
or
1.4%
compared to the same period in the prior year, with sales from acquisitions adding
$25.7 million
or
1.4%
, offset by a decrease due to unfavorable foreign currency translation of
$5.2 million
or
0.3%
. There were
189
selling days in the nine months ended
March 31, 2017
and
189.5
selling days in the nine months ended
March 31, 2016
. Excluding the impact of businesses acquired and prior to the impact of currency translation, sales were up $6.4 million or 0.3% during the period, driven by an increase of 0.9% within our traditional core operations, offset by a decrease of 0.3% from our upstream oil and gas-focused subsidiaries, and a
0.3%
decrease due to one half less sales day.
Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets,
increased
$3.6 million
or
0.2%
during the nine months ended March 31, 2017 from the same period in the prior year. Acquisitions within this segment
increased
sales by $18.0 million or
1.2%
, while unfavorable foreign currency translation decreased sales by $4.1 million or 0.3%. Excluding the impact of businesses acquired and prior to the unfavorable currency translation impact, sales decreased $10.3 million or 0.7%, of which 0.4% is from our upstream oil and gas-focused subsidiaries, and 0.3% is due to one half less sales day. Sales within our traditional core operations were flat in the current period compared to the prior period.
Sales from our Fluid Power Businesses segment, which operates primarily in OEM markets,
increased
$23.3 million or
7.3%
during the nine months ended March 31, 2017 from the same period in the prior year. Acquisitions within this segment
increased
sales by
$7.7 million
or
2.4%
, while unfavorable foreign currency translation decreased sales by $1.1 million or 0.4%. Excluding the impact of businesses acquired and prior to the unfavorable currency translation impact, sales increased $16.7 million or 5.3%, driven by an increase from operations of 5.6%, offset by a decrease of 0.3% due to one half less sales day.
During the nine months ended March 31, 2017, sales in our U.S. operations were
up
$27.1 million
or
1.7%
, while acquisitions added
$21.5 million
or
1.4%
. Excluding the impact of businesses acquired, U.S. sales were up $5.6 million or 0.3%, of which 0.5% is from our traditional core operations and 0.1% is from our upstream oil and gas-focused subsidiaries, offset by a 0.3% decrease due to one half less sales day. Sales from our Canadian operations
decreased
$4.1 million
or
2.1%
, while acquisitions added
$4.2 million
or
2.2%
and
favorable
foreign currency translation
increased
Canadian sales by
$2.5 million
or
1.3%
. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, Canadian sales were down
$10.8 million or 5.6%, of which 3.6% is related to the upstream oil and gas-focused subsidiaries, and 2.0% is within the traditional core operations. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, increased
$3.9 million
or
3.7%
compared to the same period in the prior year. Unfavorable foreign currency translation decreased other country sales by
$7.7 million
or
7.3%
. Prior to the impact of currency translation, other country sales were up $11.6 million or 11.0% during the period, driven by an increase from operations of 10.7% in addition to an increase of 0.3% due to the impact of one additional sales day.
During the nine months ended
March 31, 2017
, industrial products and fluid power products accounted for 72.0% and 28.0%, respectively, of sales as compared to 73.0% and 27.0% respectively, for the same period in the prior year.
Our gross profit margin for the period was
28.3%
compared to
28.1%
in the prior year period. The gross profit margin for the prior period was negatively impacted by $3.6 million of restructuring expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for the upstream oil and gas-focused operations.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
21.7%
of sales for the nine months ended
March 31, 2017
, compared to
22.2%
of sales for the prior year period. SD&A
decreased
$2.6 million
or
0.6%
compared to the prior year period. Changes in foreign currency exchange rates had the effect of decreasing SD&A during the nine months ended
March 31, 2017
by
$0.3 million
or
0.1%
compared to the prior year period. Additional SD&A from businesses acquired in the current year added $6.9 million or 1.6% of SD&A expenses, including $0.9 million associated with intangibles amortization. Excluding the impact of businesses acquired and the favorable currency translation impact, SD&A declined $9.2 million or 2.1% during the nine months ended
March 31, 2017
compared to the same period in the prior year. The nine months ended
March 31, 2016
included severance expense and other restructuring charges related to consolidating facilities of $4.4 million of SD&A that did not reoccur in the current year period. Further, efforts to minimize expense were led by efforts to control headcount. Excluding the effect of acquisitions, overall headcount was down by approximately 107 associates from March 2016 to March 2017. Excluding the impact of acquisitions, total compensation was down $1.2 million for the nine months ended
March 31, 2017
compared to the prior year period. Also, excluding the impact of acquisitions, bad debt expense decreased $2.2 million for the nine months ended
March 31, 2017
compared to the prior year period, due to improvement in aged receivables. Further, the Company recorded a gain of $1.6 million in the nine months ended
March 31, 2017
related to the sale of five buildings during the period. All other expenses within SD&A were up $0.2 million.
Operating income
increased
$80.0 million
or
172.5%
, and as a percent of sales increased to
6.6%
from
2.5%
in the prior year period. These increases are primarily due to the Company recognizing a non-cash goodwill impairment charge of $64.8 million and restructuring charges of $8.0 million in the nine months ending
March 31, 2016
that did not reoccur in the current year period, as well as higher sales volume in the current year period.
Operating income as a percentage of sales for the Service Center Based Distribution segment was
5.1%
in the current and prior year periods.
Operating income as a percentage of sales for the Fluid Power Business segment
increased
to
10.8%
in the current year period from
9.0%
in the prior year period. This increase is due to the increase in sales, primarily from our U.S. operations in this segment.
Other income was
$0.7 million
in the nine months ended
March 31, 2017
which included unrealized gains on investments held by non-qualified deferred compensation trusts of
$0.9 million
, offset by net unfavorable foreign currency transaction losses of
$0.2 million
. During the prior year period, other expense was
$1.1 million
, which included net unfavorable foreign currency transaction losses of
$1.0 million
and unrealized losses on investments held by non-qualified deferred compensation trusts of
$0.1 million
.
The effective income tax rate was
32.9%
for the nine months ended
March 31, 2017
compared to
90.9%
for the prior year period ended
March 31, 2016
. The decrease in the effective tax rate is due to the recording of $64.8 million of goodwill impairment during the prior period, of which $61.3 million was not tax deductible. The goodwill impairment increased the effective tax rate for the nine month period ended
March 31, 2016
by 56.0%. The remaining decrease in the effective tax rate is primarily due to the adoption of ASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be recognized in the income statement. During the nine months ended
March 31, 2017
, $2.0 million of net excess tax benefits were recognized as a reduction of income tax expense, which decreased the effective income tax rate for the quarter ended
March 31, 2017
by 1.6%. Because the Company's adoption of the new standard has had a favorable impact on the effective income tax rate, we now expect our full year tax rate for fiscal 2017 to be in the 33.0% to 34.0% range.
As a result of the factors addressed above, net income
increased
$77.4 million
compared to the prior year period. Net income per share was
$2.06
per share for the nine months ended
March 31, 2017
compared to
$0.09
per share in the prior year period. The prior period results include negative impacts on earnings per share of $1.62 per share for goodwill impairment charges and $0.14 per share for restructuring charges. Net income per share was favorably impacted due to lower weighted average common shares outstanding as a result of our share repurchase program.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At
March 31, 2017
, we had $321.8 million in outstanding borrowings. At
June 30, 2016
, we had $328.3 million in 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, 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 holds, from time to time, relatively significant cash and cash equivalent balances in tax jurisdictions outside of the United States. The following table shows the Company's total cash as of
March 31, 2017
by tax jurisdiction.
|
|
|
|
|
|
Country
|
|
Amount
|
United States
|
|
$
|
28,414
|
|
Canada
|
|
26,047
|
|
Other countries
|
|
12,852
|
|
Total
|
|
$
|
67,313
|
|
To the extent cash in foreign countries is distributed to the U.S., it could become subject to U.S. income taxes. Foreign tax credits may be available to offset all or a portion of such taxes. At
March 31, 2017
, all foreign earnings are considered permanently reinvested.
The Company's working capital at
March 31, 2017
was
$565.5 million
, compared to
$507.2 million
at
June 30, 2016
. The current ratio was
3.1
to 1 at
March 31, 2017
and
2.8
to 1 at
June 30, 2016
.
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.
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
Net Cash Provided by (Used in):
|
|
2017
|
|
2016
|
Operating Activities
|
|
$
|
78,506
|
|
|
$
|
91,296
|
|
Investing Activities
|
|
(11,841
|
)
|
|
(65,211
|
)
|
Financing Activities
|
|
(58,753
|
)
|
|
(30,036
|
)
|
Exchange Rate Effect
|
|
(460
|
)
|
|
(2,587
|
)
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
7,452
|
|
|
$
|
(6,538
|
)
|
Net cash provided by operating activities was
$78.5 million
for the
nine
months ended
March 31, 2017
as compared to
$91.3 million
provided by operating activities in the prior period. The decrease in cash provided by operating activities during the
nine
months ended
March 31, 2017
is related to increased inventory and receivable levels due to increasing sales compared to the prior period.
Net cash used in investing activities during the
nine
months ended
March 31, 2017
is less than the prior period as there were fewer dollars spent on acquisitions in the current period.
Net cash used by financing activities was
$58.8 million
for the
nine
months ended
March 31, 2017
versus
$30.0 million
in the prior period. Lower borrowing needs, primarily due to fewer dollars spent on acquisitions, contributed to the increase in cash used in financing activities. We had $6.5 million of net debt payments in the current period compared to $50.2 million of net borrowings in the prior year period. Also, cash was used in the current period for the purchase of treasury shares in the amount of $8.2 million and dividends paid in the amount of $33.2 million. In the prior period, $37.5 million of cash was used for the purchase of treasury shares and $32.3 million of cash was used for the payment of dividends. Further, $7.7 million of cash was used in the current period to make acquisition holdback payments, while $10.7 million was used in the prior year period.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 acquired 45,000 shares of treasury stock on the open market in the three months ended
March 31, 2017
for $2.8 million. During the
nine
months ended
March 31, 2017
we acquired 162,500 shares of treasury stock for $8.2 million. At
March 31, 2017
, we had authorization to repurchase an additional 1,450,000 shares. During the
nine
months ended
March 31, 2016
, we acquired 951,100 shares of treasury stock on the open market for $37.5 million.
Borrowing Arrangements
In December 2015, the Company entered into a five-year credit facility with a group of banks expiring in December 2020. This agreement provides for a
$125.0 million
unsecured term loan and a
$250.0 million
unsecured revolving credit facility. Fees on this facility range from
0.09%
to
0.175%
per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. At
March 31, 2017
and
June 30, 2016
, the Company had
$121.1 million
and
$123.4 million
, respectively, outstanding under the term loan, and
$29.0 million
and
$33.0 million
, respectively, outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of
$2.7 million
and
$2.7 million
to secure certain insurance obligations, totaled
$218.3 million
and
$214.3 million
at
March 31, 2017
and
June 30, 2016
, respectively, and are available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was
1.81%
as of
March 31, 2017
and
1.50%
as of
June 30, 2016
. The weighted average interest rate on the revolving credit facility outstanding was
2.03%
as of
March 31, 2017
and
1.44%
as of
June 30, 2016
.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of
$2.7 million
as of
March 31, 2017
and
June 30, 2016
, in order to secure certain insurance obligations.
In April 2014, the Company assumed
$2.4 million
of debt as a part of the headquarters facility acquisition. The
1.5%
fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At
March 31, 2017
and
June 30, 2016
,
$1.7 million
and
$1.9 million
was outstanding, respectively.
At
March 31, 2017
and
June 30, 2016
, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of
$170.0 million
. The "Series C" notes have a principal amount of
$120.0 million
and carry a fixed interest rate of
3.19%
, and are due in equal principal payments in July 2020, 2021 and 2022. The "Series D" notes have a principal amount of
$50.0 million
and carry a fixed interest rate of
3.21%
, and are due in equal principal payments in October 2019 and 2023. As of
March 31, 2017
,
$50.0 million
in additional financing was available under this facility.
The revolving credit facility and unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At
March 31, 2017
, the most restrictive of these covenants required that the Company have net indebtedness less than 3.25 times consolidated income before interest, taxes, depreciation and amortization. At
March 31, 2017
, the Company's indebtedness was less than two times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all covenants at
March 31, 2017
.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Accounts Receivable Analysis
The following tables are included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable:
|
|
|
|
|
|
|
|
|
March 31,
|
June 30,
|
|
2017
|
2016
|
Accounts receivable, gross
|
$
|
401,344
|
|
$
|
358,891
|
|
Allowance for doubtful accounts
|
10,470
|
|
11,034
|
|
Accounts receivable, net
|
$
|
390,874
|
|
$
|
347,857
|
|
Allowance for doubtful accounts, % of gross receivables
|
2.6
|
%
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Provision for losses on accounts receivable
|
|
$
|
533
|
|
|
$
|
1,621
|
|
|
$
|
1,924
|
|
|
$
|
4,069
|
|
Provision as a % of net sales
|
|
0.08
|
%
|
|
0.26
|
%
|
|
0.10
|
%
|
|
0.22
|
%
|
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 51.8 at
March 31, 2017
versus 49.4 at
June 30, 2016
. Accounts receivable
increased
12.4%
this year, compared to a
1.4%
increase
in sales in the
nine
months ended
March 31, 2017
.
Approximately
1.8%
of our accounts receivable balances are more than 90 days past due at
March 31, 2017
and 2.7% at
June 30, 2016
. On an overall basis, our provision for losses from uncollected receivables represents
0.10%
of our sales in the
nine
months ended
March 31, 2017
, and the provision for losses from uncollected receivables represents
0.08%
of sales for the
three
months ended
March 31, 2017
. Historically, this percentage is around 0.10% to 0.15%. The decrease in the provision as a percentage of sales for the nine months ended
March 31, 2017
relates to reserves required in the prior year period for our subsidiaries focused on upstream oil and gas customers due to the downturn in the energy markets. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels, and that past due balances will decline in the remainder of fiscal 2017.
Inventory Analysis
Inventories are valued at the average cost method, 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 believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs was 3.7 for the period ended
March 31, 2017
and 3.6 for the period ended
June 30, 2016
. We believe our inventory turnover ratio at the end of the year will be similar or slightly better than the ratio at March 31, 2017.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Under Private Securities Litigation Reform Act
Management’s Discussion and Analysis contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.
Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability, or changes in supplier distribution programs; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems and risks relating to the security of those systems and the data stored in or transmitted through them; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries; our ability to retain and attract qualified sales and customer service personnel and other skilled executives, managers and professionals; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability, timing and nature 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; our ability to maintain effective internal control over financial reporting; 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, both enacted and under consideration, including with respect to federal tax policy (e.g., 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, power outages, telecommunication outages, terrorist acts, earthquakes, extreme weather events, other natural disasters, 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 and other risk factors more fully throughout this Form 10-Q 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, 2016
.
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, 2016
.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure 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.
Changes in Internal Control Over Financial Reporting
There have not been any changes in internal control over financial reporting during the
nine
months ended
March 31, 2017
that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.