UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2006 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Applied Plaza, 3301 Euclid Avenue, Cleveland, Ohio 44115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, without par value New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. X Yes No
----- -----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
Yes X No
- ----- -----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. X Yes No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
-----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer X Accelerated filer Non-accelerated filer
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes X No
----- -----
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter (December 31, 2005): $972,335,951.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 15, 2006
----- ------------------------------
Common Stock, without par value 44,139,290
DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the documents, portions of which are incorporated by
reference, and the Parts of this Form 10-K into which such portions are
incorporated:
(1) Applied Industrial Technologies, Inc. Annual Report to shareholders
for the fiscal year ended June 30, 2006, portions of which are
incorporated by reference into Parts I, II and IV of this Form 10-K;
and,
(2) Applied's Proxy Statement relating to the annual meeting of
shareholders to be held October 24, 2006, portions of which are
incorporated by reference into Parts II, III, and IV of this Form
10-K.
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TABLE OF CONTENTS
Page
----
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES 3
LITIGATION REFORM ACT
PART I
Item 1. Business 4
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments. 13
Item 2. Properties 13
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
EXECUTIVE OFFICERS OF THE REGISTRANT 15
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis 17
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
Item 9A. Controls and Procedures 19
Item 9B. Other Information 19
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 20
Item 13. Certain Relationships and Related Transactions 20
Item 14. Principal Accountant Fees and Services 20
PART IV
Item 15. Exhibits and Financial Statement Schedules 21
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 27
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 28
SIGNATURES 29
EXHIBITS
2
CAUTIONARY STATEMENT
UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE, CONTAINS
STATEMENTS THAT ARE FORWARD-LOOKING, BASED ON MANAGEMENT'S CURRENT EXPECTATIONS
ABOUT THE FUTURE. FORWARD-LOOKING STATEMENTS ARE OFTEN IDENTIFIED BY QUALIFIERS
SUCH AS "EXPECT," "BELIEVE," "PLAN," "INTEND," "WILL," "SHOULD," "COULD,"
"ANTICIPATE," "MAY," AND SIMILAR EXPRESSIONS. SIMILARLY, DESCRIPTIONS OF OUR
OBJECTIVES, STRATEGIES, PLANS, OR GOALS ARE ALSO FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS MAY DISCUSS, AMONG OTHER THINGS, EXPECTED GROWTH, FUTURE SALES,
FUTURE CASH FLOWS, FUTURE CAPITAL EXPENDITURES, FUTURE PERFORMANCE, AND THE
ANTICIPATION AND EXPECTATIONS OF APPLIED AND ITS MANAGEMENT AS TO FUTURE
OCCURRENCES AND TRENDS. APPLIED INTENDS THAT THE FORWARD-LOOKING STATEMENTS BE
SUBJECT TO THE SAFE HARBORS ESTABLISHED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 AND BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES,
REGULATIONS, AND RELEASES.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING
STATEMENTS. ALL FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS
REGARDING IMPORTANT RISK FACTORS, MANY OF WHICH ARE OUTSIDE APPLIED'S CONTROL.
ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS, AND THE MAKING OF THOSE STATEMENTS SHOULD NOT BE
REGARDED AS A REPRESENTATION BY APPLIED OR ANY OTHER PERSON THAT THE RESULTS
EXPRESSED IN THE STATEMENTS WILL BE ACHIEVED. IN ADDITION, APPLIED ASSUMES NO
OBLIGATION PUBLICLY TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER
BECAUSE OF NEW INFORMATION OR EVENTS, OR OTHERWISE, EXCEPT AS MAY BE REQUIRED BY
LAW.
APPLIED BELIEVES ITS PRIMARY RISK FACTORS INCLUDE, BUT ARE NOT LIMITED TO,
THOSE IDENTIFIED IN "RISK FACTORS" AT PART I, ITEM 1A, AND IN "NARRATIVE
DESCRIPTION OF BUSINESS," AT PART I, ITEM 1, SECTION (C), IN THIS ANNUAL REPORT
ON FORM 10-K, AS WELL AS IN "MANAGEMENT'S DISCUSSION AND ANALYSIS" IN APPLIED'S
2006 ANNUAL REPORT TO SHAREHOLDERS. PLEASE READ THOSE DISCLOSURES CAREFULLY.
3
PART I.
ITEM 1. BUSINESS.
In this Annual Report on Form 10-K, "Applied" refers to Applied Industrial
Technologies, Inc., an Ohio corporation. References to "we," "us," "our," and
"the company" refer to Applied and its subsidiaries.
The company is one of North America's leading industrial product
distributors. In addition, we provide fluid power, mechanical, and rubber shop
services. We offer technical application support for our products and provide
creative solutions to help customers minimize downtime and reduce overall
procurement costs. Although we do not generally manufacture the products we
sell, we do assemble and repair various products and systems. Our customers are
primarily North American companies, who use our products to maintain and to
repair their machinery and equipment. We also sell for original equipment
manufacturing uses.
Applied and its predecessor companies have engaged in this business since
1923, when The Ohio Ball Bearing Company was formed. Applied reincorporated in
Ohio in 1988.
Applied's Internet address is www.applied.com. The following documents are
available free of charge at the investor relations area of our website:
- Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, together
with Section 16 insider beneficial stock ownership reports, all as
soon as reasonably practicable after they are electronically filed
with, or furnished to, the Securities and Exchange Commission
- Our Code of Business Ethics
- Our Board of Directors Governance Principles and Practices
- Charters for the Audit, Corporate Governance, and Executive
Organization & Compensation Committees of our Board of Directors
The information contained on our website is not incorporated into this
annual report on Form 10-K. The documents referenced above are also available in
print to any shareholder who sends a written request to our Vice President-Chief
Financial Officer & Treasurer at One Applied Plaza, 3301 Euclid Avenue,
Cleveland, Ohio 44115.
(a) General Development of Business.
In fiscal 2006, we continued to extend our geographic reach and product
offerings. After making several acquisitions in recent years outside the United
States, in September 2005 we acquired the assets of Spencer Industries, Inc., a
fluid power distributor serving the western United States with annualized sales
at the time of the acquisition of approximately $49 million. The business
operates as Spencer Fluid Power. In March 2006, we acquired Minnesota Bearing
Company, a distributor of bearings, power transmission components, and fluid
power products with locations throughout the upper Midwest and with annualized
sales at the time of the acquisition of
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approximately $35 million. We also secured new or expanded distribution
authorizations for various Parker Hannifin, Altra Industrial Motion, Rust-Oleum,
3M, and Sumitomo industrial product lines.
Additional information regarding developments in our business can be found
in our 2006 Annual Report to shareholders under the caption "Management's
Discussion and Analysis" on pages 10 through 16, which is incorporated here by
reference.
(b) Financial Information about Segments.
We have identified one reportable business segment, service center-based
distribution. This business provides customers with a wide range of industrial
products through a network of service centers stretching across North America.
We also offer technical support and provide creative solutions to help customers
minimize their production downtime and reduce overall procurement costs.
In addition to service center-based distribution, we operate specialized
fluid power companies that primarily sell products and services directly to
customers rather than through the industrial product service centers.
Segment financial information can be found in the 2006 Annual Report to
shareholders in note 12 to the consolidated financial statements on pages 32 and
33, and that information is incorporated here by reference.
(c) Narrative Description of Business.
Overview. Our field operating structure is built on two primary platforms -
industrial products, and fluid power products and systems:
- Industrial Products. We distribute a wide range of products through
our service centers in 48 states, Puerto Rico, five Canadian
provinces, and six Mexican states. Customers primarily purchase our
products for scheduled maintenance of their machinery and equipment
and for emergency repairs. In addition, we operate regional fabricated
rubber shops, which modify and repair conveyor belts and make hose
assemblies in accordance with customer requirements, and rubber
service field crews, which install and repair belts and rubber linings
at customer locations. The industrial products business accounts for a
substantial majority of our field operations and sales dollars. While
the business operates in the U.S. using the Applied Industrial
Technologies trade name, we also are known as Bearing & Transmission,
B&T Rubber, Groupe GLM, and PV Hydraulique in Canada, Applied Mexico
in Mexico, and Rafael Benitez Carrillo in Puerto Rico.
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- Fluid Power. Our specialized fluid power businesses primarily market
their products and services directly to customers, but also through
the service center network. In addition to distributing fluid power
components, the businesses operate shops that assemble fluid power
systems and components, perform equipment repair, and offer technical
advice to customers. Customers include businesses purchasing for
maintenance, repair, and operations needs, as well as for original
equipment manufacturing applications. Our fluid power businesses
operate in various geographic areas of the U.S. and Canada under the
following names: Air and Hydraulics Engineering (Southeast), Air
Draulics Engineering (Mississippi Valley), Air-Hydraulic Systems
(upper Midwest), Applied Engineered Systems (Midwest), Dees Fluid
Power (Mid-Atlantic and Northeast), Elect-Air (West Coast), Engineered
Sales (Midwest), ESI Power Hydraulics (Midwest), HyPower (western
Canada), Kent Fluid Power (West Coast), and Spencer Fluid Power
(Northwest and West).
Products. We are one of North America's leading distributors of bearings,
power transmission components, fluid power components and systems, industrial
rubber products, linear components, tools, safety products, general maintenance
products and a variety of mill supply products. Fluid power products include
hydraulic, pneumatic, lubrication, and filtration components and systems.
These products are generally supplied to us by manufacturers whom we serve
as a non-exclusive distributor. The product suppliers also may provide us
product training, as well as sales and marketing support. Authorizations to
represent particular suppliers and product lines may vary by geographic region.
We believe our supplier relationships are generally good, and many have existed
for decades. The disruption of relationships with certain suppliers, or the
disruption of their own operations, could adversely affect our business.
Our product suppliers generally confine their direct sales activities to
large-volume transactions, mainly with original equipment manufacturers. The
suppliers generally do not sell maintenance and repair products directly to the
customer but instead refer the customer to us or another distributor. Of course,
there is no assurance that this practice will continue, however, and its
discontinuance could adversely affect our business.
Net sales by product category for the most recent three fiscal years is
detailed in the 2006 Annual Report to shareholders in note 12 to the
consolidated financial statements on page 33, and that information is
incorporated here by reference.
Services. Our service center associates advise and assist customers with
respect to product selection and application, and inventory management. We
consider this advice and assistance to be an integral part of our sales efforts.
Beyond traditional parts distribution services, we offer product and process
solutions involving multiple technologies, helping to reduce production
downtime, as well as overall procurement and maintenance costs for customers. By
providing high levels of service, product and industry expertise, and technical
support, while at the same time offering competitive pricing, we believe we
develop stronger, longer-lasting, and more profitable customer relationships.
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Our sales associates include customer sales and service representatives and
account managers, as well as product and industry specialists. Customer sales
and service representatives receive, process, and expedite customer orders,
provide product and pricing information, and assist account managers in serving
customers. Account managers make on-site calls to current and potential
customers to provide product and price information, identify customer
requirements, provide recommendations, and assist in implementing equipment
maintenance and storeroom management programs, including our automated storeroom
replenishment system, AppliedSTORE(R). Account managers also measure and
document for customers the value of cost savings and increased productivity
generated by our services and recommendations. Product and industry specialists
assist with applications in their areas of technical expertise.
We maintain product inventory levels at each service center tailored to the
local market. These inventories consist of standard items as well as other items
specific to local customers' immediate needs. Seven distribution centers
replenish service center inventories and also may ship products directly to
customers. The inventory maintained at our facilities allows us to satisfy our
customers' just-in-time product needs.
Timely delivery of products is an integral part of our service,
particularly when customers require products for emergency repairs to their
machinery or equipment. Service centers and distribution centers use the most
effective method of transportation available to meet customer needs, including
our own delivery vehicles, dedicated third-party transportation providers, as
well as both surface and air common carrier and courier services. Customers can
also pick up items at our service centers.
Our information systems enhance our ability to serve customers. While we
have long transacted with customers through electronic data interchange (EDI),
customers can also turn to our website at www.applied.com to search for products
in a comprehensive electronic database, research product attributes, view
prices, check inventory levels, place orders, and track order status. We also
interface with certain customers' technology platforms and plant maintenance
systems.
Along with our electronic capabilities, we support our service center
network with paper catalogs. The Applied Maintenance America(SM) product catalog
facilitates customers' purchases of general maintenance and safety products, and
tools. Our Fluid Power Connection(R) catalog does the same for hydraulic and
pneumatic components. Products from both specialty catalogs are also available
at www.applied.com.
We supplement the service center product offering with our
MaintenancePro(R) fee-based technical training seminars. These courses provide
customer personnel with information on maintenance, troubleshooting, component
application, and failure analysis in the areas of hydraulics and pneumatics,
lubrication, bearings, and power transmission.
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In addition to distributing products, we offer shop services in select
geographic areas. Our fabricated rubber shops modify and repair conveyor belts
and provide hose assemblies (also available at select service centers and
distribution centers) in accordance with customer requirements. We also provide
field crews that install and repair belts and rubber lining, primarily at
customer locations. Among the other services we offer, either performed by us
directly or by third party providers, are the rebuilding and assembly of speed
reducers, pumps, valves, cylinders, and electric and hydraulic motors, and
custom machining.
Our specialized fluid power businesses generally operate independently of
the industrial service centers, but as product distributors, share the same
focus on customer service. Product and application recommendations, inventory
availability, and delivery speed are all key to the businesses' success. The
fluid power businesses distinguish themselves from most component distributors
by offering engineering, design, system fabrication, installation, and repair
services. Each business has account managers with extensive technical knowledge,
who handle sophisticated projects for customers primarily within the business's
geographic region. The businesses also provide technical support to our service
centers.
Markets. We purchase from over 2,000 product manufacturers and resell the
products to many thousands of customers in a wide variety of industries,
including agriculture and food processing, automotive, chemical processing,
forest products, industrial machinery and equipment, mining, primary metals,
transportation, and utilities, as well as to government agencies. Customers
range from the largest concerns in North America, with whom we may have
multiple-location relationships, to the smallest. We are not significantly
dependent on a single customer or group of customers, the loss of which would
have a material adverse effect on our business as a whole, and no single
customer accounts for more than 4% of our net sales.
Competition. We consider our business to be highly competitive. In
addition, our markets present few economic or technological barriers to entry,
contributing to a high fragmentation of market share in our industry.
Longstanding supplier and customer relationships, geographic coverage, name
recognition, and our associates' experience and training do, however, support
our competitive position. Competition is based generally on breadth and quality
of product and service offerings, product availability, price, ease of product
selection and ordering, catalogs, online capability, and having a local
presence.
Our principal competitors are other bearing, power transmission, industrial
rubber, fluid power, linear motion, and general maintenance and safety product
distributors, and, to a lesser extent, mill supply and catalog companies. These
competitors include local, regional, national, and multinational operations. We
also compete with original equipment manufacturers and their distributors in the
sale of maintenance and replacement components. Some competitors have greater
financial resources than we do. The identity and number of our competitors vary
throughout the geographic and product markets we serve.
8
Although we are one of the leading distributors in North America for the
major product categories we carry, our market share for those products in any
given geographic area may be relatively small compared to the portion of the
market served by original equipment manufacturers and other distributors.
Backlog Orders and Seasonality. Because of our product resources and
distribution network, we do not have a substantial backlog of orders, nor are
backlog orders significant at any given time. Our business has exhibited minor
seasonality - in particular, sales per day during the first half of our fiscal
year have tended to be slightly lower compared with the second half due, in
part, to the impact of customer plant shutdowns and holidays.
Patents, Trademarks, and Licenses. Customer recognition of our service
marks and trade names, including Applied Industrial Technologies(R), Applied(R),
and AIT(R), is an important contributing factor to our sales. Patents and
licenses are not of material importance to our business.
Raw Materials and General Business Conditions. Our operations are dependent
on general industrial and economic conditions and would be adversely affected by
the unavailability of raw materials to our suppliers, prolonged labor disputes
experienced by suppliers or customers, or by any recession or depression that
has an adverse effect on North American industrial activity generally or on key
customer industries served by us.
Number of Employees. On July 31, 2006, we had 4,683 employees.
Working Capital. Our working capital position is discussed in "Management's
Discussion and Analysis" in the 2006 Annual Report to shareholders on pages 12
through 14.
We require substantial working capital related to accounts receivable and
inventories. Significant amounts of inventory are carried to meet rapid delivery
requirements of customers. We generally require payments for sales on account
within 30 days. Returns are not considered to have a material effect on our
working capital requirements. We believe these practices are generally
consistent among companies in our industry.
Environmental Laws. We believe that compliance with laws regulating the
discharge of materials into the environment or otherwise relating to
environmental protection will not have a material adverse effect on our capital
expenditures, earnings, or competitive position.
(d) Financial Information about Geographic Areas.
We believe our U.S. operations' export sales during the fiscal year ended
June 30, 2006, and prior fiscal years, were less than 2% of net sales, and were
not concentrated in a specific geographic area.
Additional information regarding our foreign operations, including
information about revenues and long-lived assets, is included in the 2006 Annual
Report to shareholders in note 12 to
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the consolidated financial statements on page 33 and in "Quantitative and
Qualitative Disclosures About Market Risk" on page 17 and that information is
incorporated here by reference.
ITEM 1A. RISK FACTORS.
In addition to other information set forth in this report, you should
carefully consider the following factors that could materially affect our
business, financial condition, or results of operations. The risks described
below are not the only risks facing our company. Additional risks not currently
known to us, risks that could apply to any issuer, or risks that we currently
deem immaterial, may also impact our business and operations.
RISKS RELATED TO OUR BUSINESS
LOSS OF KEY SUPPLIER AUTHORIZATIONS, LACK OF PRODUCT AVAILABILITY, OR
CHANGES IN SUPPLIER DISTRIBUTION PROGRAMS COULD ADVERSELY AFFECT OUR SALES AND
EARNINGS. Our business is dependent on maintaining an immediately available
supply of a sufficient quantity of various products to meet customer demand. Of
our overall dollar volume of product purchases in fiscal 2006, almost half was
purchased from our top 10 suppliers. Many of our relationships with key product
suppliers are longstanding, but are terminable by either party. The loss of key
supplier authorizations, or a substantial decrease in the availability of
products from these suppliers, could have a material adverse effect on our
business. Supply interruptions could arise from shortages of raw materials,
labor disputes or weather conditions affecting suppliers' production,
transportation disruptions, or other reasons beyond our control. Furthermore, we
cannot be certain that particular products will be available to us, or available
in quantities sufficient to meet customer demand. Limitations on our access to
products could put us at a competitive disadvantage.
In addition, as a distributor, we face the risk of key product suppliers
changing their relationships with distributors generally, or Applied in
particular, in a manner that adversely impacts our business. For example, key
suppliers could change the prices we must pay for their products relative to
other distributors or relative to competing products, geographic or product line
breadth of distributor authorizations, purchase incentive programs, product
purchase or stocking expectations, or other aspects of our relationships.
AN INCREASE IN COMPETITION COULD DECREASE SALES OR EARNINGS. We operate in
a highly competitive industry. We compete primarily with multinational,
national, regional, and local distributors of industrial machinery parts,
equipment, and supplies. Competition is largely focused in the local service
area and is generally based on product line breadth, product availability,
service capabilities, and price. Some existing competitors have, and new market
entrants may have, greater financial resources than we do. To the extent
existing or future competitors seek to gain or retain market share by reducing
prices, we may be required to lower our prices for products or services, thereby
adversely affecting financial results.
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INCREASES IN PRODUCT AND ENERGY COSTS COULD REDUCE OUR PROFITABILITY.
Recent price increases in commodity materials, such as steel, have resulted in
industrial product manufacturers increasing the prices of products we
distribute. In addition, a portion of our distribution costs is comprised of
fuel and freight costs, which have increased significantly in recent years. Our
ability to pass on increases in our costs depends on market conditions. Raising
our prices could result in decreased sales volume, which could significantly
reduce our profitability.
A DISRUPTION OF OUR INFORMATION SYSTEMS COULD INCREASE EXPENSES, DECREASE
SALES, OR OTHERWISE REDUCE EARNINGS. Our ability to transact business has become
increasingly reliant on our information systems. We depend on information
systems to process customer orders, manage inventory and accounts receivable
collections, purchase products, ship products to our customers on a timely
basis, maintain cost-effective operations, and provide superior service to our
customers. A serious, prolonged disruption of our information systems could
materially impair fundamental business processes.
OUR BUSINESS DEPENDS ON OUR ABILITY TO RETAIN AND ATTRACT QUALIFIED SALES
AND CUSTOMER SERVICE PERSONNEL. There are significant costs associated with
hiring and training sales and customer service professionals. We greatly benefit
from having employees who are familiar with the products we sell and their
applications, as well as our customer and supplier relationships. We could be
adversely affected by a shortage of available skilled workers or the loss of a
significant number of our sales or customer service professionals, including
through retirement as the workforce ages.
FUTURE ACQUISITIONS ARE A KEY COMPONENT OF OUR ANTICIPATED GROWTH. WE MAY
NOT BE ABLE TO IDENTIFY OR COMPLETE FUTURE ACQUISITIONS, INTEGRATE THEM
EFFECTIVELY INTO OUR OPERATIONS, OR REALIZE THEIR ANTICIPATED BENEFITS. Many
industries we serve are mature. As a result, our growth in recent years has
resulted in substantial part from the acquisition of other businesses. While we
wish to continue to acquire businesses, we may not be able to identify and
negotiate suitable acquisitions, obtain financing for them on satisfactory
terms, or otherwise complete acquisitions in the future. In addition, existing
or future competitors, including financial buyers, may increasingly seek to
compete with us for acquisitions, which could have the effect of increasing the
price and reducing the number of suitable opportunities.
We seek acquisition opportunities that complement and expand our
operations. However, substantial costs, delays, or other difficulties related to
integrating acquisitions into our operations could adversely affect our business
or financial results. We could face significant challenges in consolidating
functions and integrating procedures, information technology, personnel, and
operations in a timely and efficient manner.
Further, even if we integrate successfully our operations with our
acquisitions, we may not be able to realize the cost savings, sales increases,
or other benefits that we anticipate from these acquisitions, either as to
amount or in the time frame we expect. Our ability to realize anticipated
benefits may be affected by a number of factors, including the following: our
ability to reduce duplicative expenses and inventory effectively, and to
consolidate facilities; the
11
incurrence of significant integration costs or charges in order to achieve those
benefits; and our ability to retain key product supplier authorizations and
customer relationships. In addition, future acquisitions could place significant
demand on administrative, operational, and financial resources.
AN INTERRUPTION OF OPERATIONS AT OUR HEADQUARTERS OR DISTRIBUTION CENTERS
COULD ADVERSELY IMPACT OUR BUSINESS. Our business is highly dependent on
maintaining operations at our headquarters and distribution centers. A serious,
prolonged interruption of operations due to power outages, terrorist attack,
earthquake, hurricane, fire, flood or other natural disaster, or other
interruption could have a material adverse effect on our business and financial
results.
OUR GROWTH OUTSIDE THE UNITED STATES INCREASES OUR EXPOSURE TO GLOBAL
ECONOMIC AND POLITICAL CONDITIONS. Our foreign operations contributed 11.3% of
our sales in 2006. If we continue to grow outside the U.S., the risks associated
with exposure to more volatile economic conditions, political instability,
cultural and legal differences in conducting business, and currency fluctuations
will increase.
WE ARE SUBJECT TO LITIGATION RISK DUE TO THE NATURE OF OUR BUSINESS, WHICH
MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. From time to time, we are
involved in lawsuits or other legal proceedings that arise from business
transactions. These may, for example, relate to product liability claims,
commercial disputes, or employment matters. In addition, we could face claims
over other matters, such as claims arising from our status as a government
contractor or corporate or securities law matters. The defense and ultimate
outcome of lawsuits or other legal proceedings may result in higher operating
expenses, which could have a material adverse effect on our business, financial
condition, or results of operations.
RISKS RELATED TO OUR INDUSTRY
OUR BUSINESS DEPENDS HEAVILY UPON THE OPERATING LEVELS OF OUR CUSTOMERS AND
THE ECONOMIC FACTORS THAT AFFECT THEM. Some of the primary markets for the
products and services we sell are subject to cyclical fluctuations that affect
demand for goods that our customers produce. Consequently, the demand for our
services and products has been and will continue to be influenced by most of the
same economic factors that affect the demand for and production of customers'
goods. When customers or prospective customers reduce their production levels in
response to lower demand for their products, they have less need for our
products and services. Also during periods of economic slowdown, our credit
losses could increase. In addition, because some customers are moving portions
of operations overseas in order to reduce manufacturing costs, our ability to
continue to serve those customers may be impaired and the size of our overall
market opportunity in North America may be diminished.
THE CONSOLIDATION OCCURRING IN OUR CUSTOMERS' AND SUPPLIERS' INDUSTRIES
COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL RESULTS. In recent years, we
have witnessed increased consolidation among our product suppliers and
customers. As customer industries consolidate, a greater proportion of our sales
could be derived from larger, national contracts, which could
12
adversely impact the amount and volatility of our earnings. In addition,
consolidation increases the risk of larger customers seeking to purchase
industrial parts, equipment, and supplies directly from product manufacturers
rather than through distributors. Similarly, continued consolidation among our
product suppliers could reduce our ability to negotiate favorable pricing and
other commercial terms for our inventory purchases.
OTHER RISKS
In addition to the risks identified above, other risks we face include, but
are not limited to, the following:
- changes in customer preferences for products and services of the
nature and brands sold by Applied;
- changes in the market prices for products and services relative to the
cost of providing them;
- changes in customer procurement policies and practices;
- changes in product manufacturer sales policies and practices;
- changes in operating expenses;
- the variability and timing of new business opportunities including
acquisitions, alliances, customer relationships, and supplier
authorizations;
- the incurrence of debt and contingent liabilities in connection with
acquisitions;
- our ability to access capital markets as needed;
- volatility of our stock price and the resulting impact on our
financial statements;
- changes in accounting policies and practices;
- organizational changes within the company; and,
- adverse regulation and legislation.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
We believe that having a local presence is important to serving our
customers, so we maintain service centers and other operations in local markets
throughout North America. At June 30, 2006 we owned real properties at 149
locations and leased 278 locations. Certain properties house more than one
company operation.
Our principal owned real properties (each of which has more than 25,000
square feet of floor space) at June 30, 2006 were:
13
- the distribution center and service center in Atlanta, Georgia
- the distribution center in Florence, Kentucky
- the service center in Monroe, Louisiana
- the service center and rubber shop in Omaha, Nebraska
- the distribution center in Carlisle, Pennsylvania
- the distribution center and rubber shop in Fort Worth, Texas
Our principal leased real properties (each of which has more than 25,000
square feet of floor space) at June 30, 2006 were:
- the corporate headquarters facility in Cleveland, Ohio
- the distribution center, rubber shop, fluid power shop, and service
center in Fontana, California
- the rubber shop and fluid power shop in Tracy, California
- the rubber shop and service center in Denver, Colorado
- the service center, fluid power shop, and offices in Minneapolis,
Minnesota
- the fluid power shop in Billings, Montana
- the distribution center in Portland, Oregon
- the offices and fluid power shop in Kent, Washington
- the service center in Longview, Washington
- the rubber shop and the fluid power shop in Longview, Washington
- the offices, service center, and rubber shop in Appleton, Wisconsin
Except for those in Billings and Kent, all of the properties listed above
are used in our service center-based distribution segment. The Fontana, Tracy,
Minneapolis, and Longview (shops) properties are used in operations both inside
and outside the service center-based distribution segment.
We consider our properties generally sufficient to meet our requirements
for office space and inventory stocking. A service center's size is primarily
influenced by the amount of inventory the service center requires to meet
customers' needs. We use all of our owned and leased properties except for
certain properties which in the aggregate are not material and are either for
sale, lease, or sublease to third parties due to a relocation or closing. We
also may lease or sublease to others unused portions of buildings.
In recent years, when opening new operations, we have tended to lease
rather than purchase real property. We do not consider any of our service
center, distribution center, or shop properties to be material, because we
believe that, if it becomes necessary or desirable to relocate an operation,
other suitable property could be found.
Additional information regarding our properties is included in the 2006
Annual Report to shareholders in note 11 to the consolidated financial
statements on page 32, and that information is incorporated here by reference.
14
ITEM 3. LEGAL PROCEEDINGS.
Applied and/or one of its subsidiaries is a party to various judicial and
administrative proceedings. Based on circumstances currently known, we do not
believe that any liabilities that may result from these proceedings are
reasonably likely to have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Applied's security holders during
the last quarter of fiscal 2006.
EXECUTIVE OFFICERS OF THE REGISTRANT.
Applied's executive officers are elected by the Board of Directors for a
term of one year, or until their successors are chosen and qualified, at the
Board's organizational meeting held following the annual meeting of
shareholders. The following is a list of the executive officers and a
description of their business experience during the past five years. Except as
otherwise stated, the positions and offices indicated are with Applied, and the
persons were elected to their current positions on October 12, 2005:
David L. Pugh. Mr. Pugh is Chairman & Chief Executive Officer, and a
member of our Board of Directors. He is 57 years of age.
Bill L. Purser. Mr. Purser is President & Chief Operating Officer. He
is 63 years of age.
Todd A. Barlett. Mr. Barlett is Vice President-Acquisitions and Global
Business Development (since July 2004). He had served as Vice
President-Global Business Development (from 2000 to July 2004). He is 51
years of age.
Fred D. Bauer. Mr. Bauer is Vice President-General Counsel (since
April 2002) and Secretary (since October 2001). He had served as Vice
President-Legal Services (from 2000 to April 2002) and Assistant Secretary
(from 1994 to October 2001). He is 40 years of age.
Michael L. Coticchia. Mr. Coticchia is Vice President-Chief
Administrative Officer and Government Business (since July 2006). Prior to
that, he served as Vice President-Human Resources and Administration (from
April 2002 to July 2006), Vice President-Human Resources and Risk
Management (from 1998 to April 2002) and Assistant Secretary (from 1990 to
January 2002). He is 43 years of age.
15
Mark O. Eisele. Mr. Eisele is Vice President-Chief Financial Officer &
Treasurer (since January 2004). Prior to that, he had been Vice President &
Controller (from 1997 to December 2003). He is 49 years of age.
James T. Hopper. Mr. Hopper is Vice President-Chief Information
Officer. He is 62 years of age.
Jeffrey A. Ramras. Mr. Ramras is Vice President-Marketing and Supply
Chain Management (since September 2002). He had served as Vice
President-Supply Chain Management (from 2000 to September 2002). He is 51
years of age.
Richard C. Shaw. Mr. Shaw is Vice President-Communications and
Learning. He is 57 years of age.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Applied's common stock, without par value, is listed for trading on the New
York Stock Exchange under the ticker symbol AIT. Information concerning the
principal market for Applied's common stock, the quarterly stock prices and
dividends for the fiscal years ended June 30, 2006, 2005, and 2004 and the
number of shareholders of record as of August 15, 2006 is set forth in the 2006
Annual Report to shareholders on page 37, under the caption "Quarterly Operating
Results and Market Data," and that information is incorporated here by
reference.
Information concerning securities authorized for issuance under Applied's
equity compensation plans is incorporated by reference to Applied's proxy
statement relating to the annual meeting of shareholders to be held October 24,
2006, under the caption "Equity Compensation Plan Information."
The following table summarizes Applied's repurchases of its common stock in
the quarter ended June 30, 2006. All of the share amounts and prices in the
table and footnotes have been adjusted for the 3-for-2 stock split paid on June
15, 2006.
16
(c) Total Number of (d) Maximum Number of
(a) Total (b) Average Shares Purchased as Part Shares that May Yet Be
Number Price Paid of Publicly Announced Purchased Under the Plans
Period of Shares per Share ($) Plans or Programs or Programs *
- ------ --------- ------------- ------------------------ -------------------------
April 1, 2006 to
April 30, 2006 0 -- 0 1,500,000
May 1, 2006 to
May 31, 2006 226,800 25.28 226,800 1,273,200
June 1, 2006 to
June 30, 2006 869,300 23.49 869,300 403,900
--------- ----- --------- ---------
Total 1,096,100 23.86 1,096,100 403,900
========= ===== ========= =========
* On January 18, 2006, the Board of Directors authorized the purchase of up
to 1,500,000 shares of Applied common stock. The authorization was publicly
announced that day. After 1,096,100 shares were repurchased, the Board of
Directors replaced the existing authorization on July 18, 2006, again
granting the company authorization to purchase up to 1,500,000 shares. The
new authorization was publicly announced that day. The purchases may be
made in the open market or in privately negotiated transactions. The new
authorization is in effect until all shares are purchased or the
authorization is revoked or amended by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA.
The summary of selected financial data for the last five years is set forth
in the 2006 Annual Report to shareholders in the table on pages 38 and 39 under
the caption "10 Year Summary" and is incorporated here by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis" is set forth in the 2006 Annual
Report to shareholders on pages 10 through 16 and is incorporated here by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
The disclosures about market risk required by this item are set forth in
Applied's 2006 Annual Report to shareholders on page 17, which information is
incorporated here by reference. For further information relating to borrowing
and interest rates, see the Liquidity and Capital
17
Resources section of "Management's Discussion and Analysis" and Notes 6 and 7 to
the consolidated financial statements in Applied's 2006 Annual Report to
shareholders on pages 10-16, 26 and 27, respectively, which information is
incorporated here by reference. In addition, please see "Risk Factors" at pages
10-13, above, for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and supplementary data of
Applied and its subsidiaries and the reports of the independent registered
public accounting firm listed below, which are included in the 2006 Annual
Report to shareholders at the pages indicated, are incorporated here by
reference and filed with this Report:
Caption Page No.
- ------- --------
Financial Statements:
Statements of Consolidated Income
for the Years Ended June 30, 2006, 2005, and 2004 18
Consolidated Balance Sheets June 30, 2006 and 2005 19
Statements of Consolidated Cash Flows for the Years Ended
June 30, 2006, 2005, and 2004 20
Statements of Consolidated Shareholders' Equity for the
Years Ended June 30, 2006, 2005, and 2004 21
Notes to Consolidated Financial Statements
for the Years Ended June 30, 2006, 2005, and 2004 22 - 33
Reports of Independent Registered Public Accounting Firm 34, 36
Supplementary Data:
Quarterly Operating Results and Market Data 37
18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Management, under the supervision and with the participation of the chief
executive officer and the chief financial officer, has evaluated Applied's
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the chief executive officer and chief
financial officer have concluded that the disclosure controls and procedures are
effective in timely alerting them to material information about Applied required
to be included in our Exchange Act reports.
Management's annual report on Applied's internal control over financial
reporting and the attestation report of the independent registered public
accounting firm are set forth in the 2006 Annual Report to shareholders on pages
35-36, and are incorporated here by reference.
Management has not identified any change in internal control over financial
reporting occurring during the fourth quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item as to Applied's directors is
incorporated by reference to Applied's proxy statement relating to the annual
meeting of shareholders to be held October 24, 2006, under the caption "Election
of Directors." The information required by this Item as to Applied's executive
officers has been furnished in this Report on pages 15 and 16 in Part I, after
Item 4, under the caption "Executive Officers of the Registrant."
The information required by this Item as to compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by reference to Applied's
proxy statement relating to the annual meeting of shareholders to be held
October 24, 2006, under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance."
19
Applied has a code of ethics, entitled the Code of Business Ethics, that
applies to our employees, including our chief executive officer, chief operating
officer, chief financial officer, and corporate controller. The Code of Business
Ethics is posted at the investor relations area of our www.applied.com website.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
Applied's proxy statement relating to the annual meeting of shareholders to be
held October 24, 2006, under the captions "Compensation of Directors," "Deferred
Compensation Plan for Non-Employee Directors," "Summary Compensation,"
"Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises and
Fiscal Year-End Option/SAR Values," "Long-Term Incentive Plans - Awards in Last
Fiscal Year," "Estimated Retirement Benefits Under Supplemental Executive
Retirement Benefits Plan," "Deferred Compensation Plan," and "Change in Control
Agreements and Other Related Arrangements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information concerning the security ownership of certain beneficial owners
and management and related stockholder matters is incorporated by reference to
Applied's proxy statement relating to the annual meeting of shareholders to be
held October 24, 2006, under the captions "Beneficial Ownership of Certain
Applied Shareholders and Management" and "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to
Applied's proxy statement relating to the annual meeting of shareholders to be
held October 24, 2006, under the caption "Item 2 - Ratification of Auditors."
20
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)1. Financial Statements.
The following consolidated financial statements, notes thereto, the reports
of independent registered public accounting firm, and supplemental data are
included in the 2006 Annual Report to shareholders on pages 18 - 34 and 36 - 37,
and are incorporated by reference in Item 8 of this Report.
Caption
Statements of Consolidated Income for the Years Ended June 30, 2006,
2005, and 2004
Consolidated Balance Sheets at June 30, 2006 and 2005
Statements of Consolidated Cash Flows for the Years Ended June 30,
2006, 2005, and 2004
Statements of Consolidated Shareholders' Equity for the Years Ended
June 30, 2006, 2005, and 2004
Notes to Consolidated Financial Statements for the Years Ended June
30, 2006, 2005, and 2004
Reports of Independent Registered Public Accounting Firm
Supplementary Data:
Quarterly Operating Results and Market Data
(a)2. Financial Statement Schedule.
The following report and schedule are included in this Part IV, and are
found in this Report at the pages indicated:
Caption Page No.
- ------- --------
Report of Independent Registered Public Accounting Firm 27
Schedule II - Valuation and Qualifying Accounts 28
21
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions, are not
applicable, or the required information is included in the consolidated
financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
Exhibit
No. Description
- ------- -----------
3(a) Amended and Restated Articles of Incorporation of Applied Industrial
Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit
3(a) to the Company's Form 10-Q for the quarter ended December 31,
2005, SEC File No. 1-2299, and incorporated here by reference).
3(b) Code of Regulations of Applied Industrial Technologies, Inc., as
amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form
10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299,
and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio Secretary of State on October 18, 1988,
including an Agreement and Plan of Reorganization dated September 6,
1988 (filed as Exhibit 4(a) to Applied's Registration Statement on
Form S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) Private Shelf Agreement dated as of November 27, 1996, as amended on
January 30, 1998, between Applied and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance Company of
America) (filed as Exhibit 4(f) to Applied's Form 10-Q for the quarter
ended March 31, 1998, SEC File No. 1-2299, and incorporated here by
reference).
4(c) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf
Agreement between Applied and Prudential Investment Management, Inc.
(assignee of The Prudential Insurance Company of America) (filed as
Exhibit 4(e) to Applied's Form 10-Q for the quarter ended September
30, 2000, SEC File No. 1-2299, and incorporated here by reference).
22
4(d) Amendment dated November 14, 2003 to 1996 Private Shelf Agreement
between Applied and Prudential Investment Management, Inc. (assignee
of The Prudential Insurance Company of America) (filed as Exhibit 4(d)
to Applied's Form 10-Q for the quarter ended December 31, 2003, SEC
File No. 1-2299, and incorporated here by reference).
4(e) Amendment dated February 25, 2004 to 1996 Private Shelf Agreement
between Applied and Prudential Investment Management, Inc. (assignee
of The Prudential Insurance Company of America) (filed as Exhibit 4(e)
to Applied's Form 10-Q for the quarter ended March 31, 2004, SEC File
No. 1-2299, and incorporated here by reference).
4(f) $100,000,000 Credit Agreement dated as of June 3, 2005, among Applied,
KeyBank National Association as Agent, and various financial
institutions (filed as Exhibit 4 to Applied's Form 8-K dated June 9,
2005, SEC File No. 1-2299, and incorporated here by reference).
4(g) Rights Agreement, dated as of February 2, 1998, between Applied and
Computershare Investor Services LLP (successor to Harris Trust and
Savings Bank), as Rights Agent, which includes as Exhibit B thereto
the Form of Rights Certificate (filed as Exhibit No. 1 to Applied's
Registration Statement on Form 8-A filed July 20, 1998, SEC File No.
1-2299, and incorporated here by reference).
*10(a) Form of Change in Control Agreement (amended and restated as of August
8, 2001) between Applied and each of its executive officers (filed as
Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31,
2001, SEC File No. 1-2299, and incorporated here by reference).
*10(b) A written description of Applied's director compensation program is
incorporated by reference to Applied's proxy statement relating to the
annual meeting of shareholders to be held October 24, 2006 under the
caption, "Compensation of Directors."
23
*10(c) Applied Deferred Compensation Plan for Non-Employee Directors
(September 1, 2003 Restatement) (filed as Exhibit 10(c) to Applied's
Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(d) A written description of Applied's Life and Accidental Death and
Dismemberment Insurance for executive officers (filed as Exhibit 10(b)
to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC
File No. 1-2299, and incorporated here by reference).
*10(e) A written description of Applied's Long-Term Disability Insurance for
executive officers (filed as Exhibit 10(c) to Applied's Form 10-Q for
the quarter ended December 31, 1997, SEC File No. 1-2299, and
incorporated here by reference).
*10(f) Form of Director and Officer Indemnification Agreement entered into
between Applied and each of its directors and executive officers
(filed as Exhibit 10(g) to Applied's Registration Statement on Form
S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated
here by reference).
*10(g) Applied Supplemental Executive Retirement Benefits Plan (January 1,
2002 Restatement) in which current and certain former executive
officers participate (filed as Exhibit 10 to Applied's Form 10-Q for
the quarter ended March 31, 2002, SEC File No. 1-2299, and
incorporated here by reference).
*10(h) Applied Deferred Compensation Plan (September 1, 2003 Restatement)
(filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June
30, 2003, SEC File No. 1-2299, and incorporated here by reference).
*10(i) First Amendment to the Company's Deferred Compensation Plan (September
1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form 10-Q for
the quarter ended December 31, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(j) 1997 Long-Term Performance Plan re-adopted by Shareholders on October
22, 2002 (filed as Exhibit 10(a) to Applied's Form 10-Q for the
quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated
here by reference).
*10(k) Amendment No. 1 to 1997 Long-Term Performance Plan, effective as of
August 8, 2003 (filed as Exhibit 10(j) to Applied's Form 10-K
24
for the year ended June 30, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(l) Applied Supplemental Defined Contribution Plan (January 1, 1997
Restatement) (filed as Exhibit 10(m) to Applied's Registration
Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801,
and incorporated here by reference).
*10(m) First Amendment to Applied Supplemental Defined Contribution Plan
effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied's
Form 10-Q for the quarter ended September 30, 2000, SEC File No.
1-2299, and incorporated here by reference).
*10(n) Second Amendment to Applied Supplemental Defined Contribution Plan
effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's
Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299,
and incorporated here by reference).
*10(o) Form of Non-Statutory Stock Option Award Terms and Conditions
(Directors) (filed as Exhibit 10 to Applied's Form 8-K dated November
30, 2005, SEC File No. 1-2299, and incorporated here by reference).
*10(p) Stock Appreciation Rights Award Terms and Conditions (Officers) (filed
as Exhibit 10(c) to Applied's Form 8-K dated August 9, 2005, SEC File
No. 1-2299, and incorporated here by reference).
*10(q) Performance Grant Terms and Conditions (filed as Exhibit 10(b) to
Applied's Form 8-K dated August 8, 2006, SEC File No. 1-2299, and
incorporated here by reference).
*10(r) 2006 Management Incentive Plan General Terms (filed as Exhibit 10(a)
to Applied's Form 8-K dated August 9, 2005, SEC File No. 1-2299, and
incorporated here by reference).
*10(s) 2007 Management Incentive Plan General Terms (re-filed to correct the
version filed as Exhibit 10(a) to the Applied's Form 8-K dated August
8, 2006, SEC File No. 1-2299).
*10(t) Non-qualified Deferred Compensation Agreement between Applied and J.
Michael Moore effective as of December 31, 1997 (filed as Exhibit
10(a) to Applied's Form 10-Q for the quarter ended March 31, 1998, SEC
File No. 1-2299, and incorporated here by reference).
25
10(u) Lease dated as of March 1, 1996 between Applied and the
Cleveland-Cuyahoga County Port Authority (filed as Exhibit 10(n) to
Applied's Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by reference).
13 Applied 2006 Annual Report to shareholders (not deemed "filed" as part
of this Form 10-K except for those portions that are expressly
incorporated by reference).
21 Applied's subsidiaries at June 30, 2006.
23 Consent of Independent Registered Public Accounting Firm.
24 Powers of attorney.
31 Rule 13a-14(a)/15d-14(a) certifications.
32 Section 1350 certifications.
Applied will furnish a copy of any exhibit described above and not
contained herein upon payment of a specified reasonable fee which shall be
limited to Applied's reasonable expenses in furnishing the exhibit.
Certain instruments with respect to long-term debt have not been filed as
exhibits because the total amount of securities authorized under any one of the
instruments does not exceed 10 percent of the total assets of Applied and its
subsidiaries on a consolidated basis. Applied agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of each such
instrument.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Applied Industrial Technologies,
Inc.
We have audited the consolidated financial statements of Applied Industrial
Technologies, Inc. and subsidiaries (the "Company") as of June 30, 2006 and
2005, and for each of the three years in the period ended June 30, 2006,
management's assessment of the effectiveness of the Company's internal control
over financial reporting as of June 30, 2006, and the effectiveness of the
Company's internal control over financial reporting as of June 30, 2006, and
have issued our reports thereon dated August 18, 2006; such consolidated
financial statements and reports are included in your 2006 Annual Report to
Shareholders and are incorporated herein by reference. Our report relating to
the consolidated financial statements of the Company includes an explanatory
paragraph concerning the adoption of a new accounting standard effective July 1,
2005. Our audits also included the consolidated financial statement schedule of
the Company listed in Item 15. This consolidated financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 18, 2006
27
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
(in thousands)
COLUMN C
-------------------------
ADDITIONS
COLUMN B ADDITIONS (DEDUCTIONS) COLUMN D COLUMN E
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
COLUMN A BEGINNING COSTS AND OTHER FROM AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ---------- ---------- ------------ ----------- ---------
YEAR ENDED JUNE 30 2006:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $6,500 $1,953 ($510)(B) $1,943(A) $6,000
YEAR ENDED JUNE 30 2005:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $6,400 $1,958 $300(B) $2,158(A) $6,500
YEAR ENDED JUNE 30 2004:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $6,100 $2,525 $60(B) $2,285(A) $6,400
(A) Amounts represent uncollectible accounts charged off.
(B) Amounts represent reserves for the return of merchandise by customers.
SCHEDULE II
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
/s/ David L. Pugh /s/ Bill L. Purser
- ------------------------------------- ----------------------------------------
David L. Pugh, Chairman & Bill L. Purser, President &
Chief Executive Officer Chief Operating Officer
/s/ Mark O. Eisele /s/ Daniel T. Brezovec
- ------------------------------------- ----------------------------------------
Mark O. Eisele Daniel T. Brezovec
Vice President-Chief Financial Corporate Controller
Officer & Treasurer (Principal Accounting Officer)
Date: August 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
* *
- ------------------------------------- ----------------------------------------
William G. Bares, Director Thomas A. Commes, Director
* *
- ------------------------------------- ----------------------------------------
Peter A. Dorsman, Director L. Thomas Hiltz, Director
* *
- ------------------------------------- ----------------------------------------
Edith Kelly-Green, Director John F. Meier, Director
* /s/ David L. Pugh
- ------------------------------------- ----------------------------------------
J. Michael Moore, Director David L. Pugh, Chairman & Chief
Executive Officer and Director
* *
- ------------------------------------- ----------------------------------------
Dr. Jerry Sue Thornton, Director Peter C. Wallace, Director
*
- -------------------------------------
Stephen E. Yates, Director
/s/ Fred D. Bauer
- -------------------------------------
Fred D. Bauer, as attorney in fact
for persons indicated by "*"
Date: August 28, 2006
29
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 2006
Exhibit
No. Description
- ------- -----------
3(a) Amended and Restated Articles of Incorporation of Applied Industrial
Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit
3(a) to the Company's Form 10-Q for the quarter ended December 31,
2005, SEC File No. 1-2299, and incorporated here by reference).
3(b) Code of Regulations of Applied Industrial Technologies, Inc., as
amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form
10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299,
and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio Secretary of State on October 18, 1988,
including an Agreement and Plan of Reorganization dated September 6,
1988 (filed as Exhibit 4(a) to Applied's Registration Statement on
Form S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) Private Shelf Agreement dated as of November 27, 1996, as amended on
January 30, 1998, between Applied and The Prudential Insurance Company
of America (filed as Exhibit 4(f) to Applied's Form 10-Q for the
quarter ended March 31, 1998, SEC File No. 1-2299, and incorporated
here by reference).
4(c) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf
Agreement between Applied and The Prudential Insurance Company of
America (filed as Exhibit 4(e) to Applied's Form 10-Q for the quarter
ended September 30, 2000, SEC File No. 1-2299, and incorporated here
by reference).
4(d) Amendment dated November 14, 2003 to 1996 Private Shelf Agreement
between Applied and The Prudential Insurance Company of America (filed
as Exhibit 4(d) to Applied's Form 10-Q for the quarter ended December
31, 2003, SEC File No. 1-2299, and incorporated here by reference).
4(e) Amendment dated February 25, 2004 to 1996 Private Shelf Agreement
between Applied and the Prudential Insurance Company of America (filed
as Exhibit 4(e) to Applied's Form 10-Q for the quarter ended March 31,
2004, SEC File No. 1-2299, and incorporated here by reference).
4(f) $100,000,000 Credit Agreement dated as of June 3, 2005, among Applied,
KeyBank National Association as Agent, and various financial
institutions (filed as Exhibit 4 to Applied's Form 8-K dated June 9,
2005, SEC File No. 1-2299, and incorporated here by reference).
4(g) Rights Agreement, dated as of February 2, 1998, between Applied and
Computershare Investor Services LLP (successor to Harris Trust and
Savings Bank), as Rights Agent, which includes as Exhibit B thereto
the Form of Rights Certificate (filed as Exhibit No. 1 to Applied's
Registration Statement on Form 8-A filed July 20, 1998, SEC File No.
1-2299, and incorporated here by reference).
*10(a) Form of Change in Control Agreement (amended and restated as of August
8, 2001) between Applied and each of its executive officers (filed as
Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31,
2001, SEC File No. 1-2299, and incorporated here by reference).
*10(b) A written description of Applied's director compensation program is
incorporated by reference to Applied's proxy statement relating to the
annual meeting of shareholders to be held October 24, 2006, under the
caption, "Compensation of Directors."
*10(c) Applied Deferred Compensation Plan for Non-Employee Directors
(September 1, 2003 Restatement) (filed as Exhibit 10(c) to Applied's
Form 10-K for the year ended June 30, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(d) A written description of Applied's Life and Accidental Death and
Dismemberment Insurance for executive officers (filed as Exhibit 10(b)
to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC
File No. 1-2299, and incorporated here by reference).
*10(e) A written description of Applied's Long-Term Disability Insurance for
executive officers (filed as Exhibit 10(c) to Applied's Form 10-Q for
the quarter ended December 31, 1997, SEC File No. 1-2299, and
incorporated here by reference).
*10(f) Form of Director and Officer Indemnification Agreement entered into
between Applied and each of its directors and executive officers
(filed as Exhibit 10(g) to Applied's Registration Statement on Form
S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated
here by reference).
*10(g) Applied Supplemental Executive Retirement Benefits Plan (January 1,
2002 Restatement) in which current and certain former executive
officers participate (filed as Exhibit 10 to Applied's Form 10-Q for
the quarter ended March 31, 2002, SEC File No. 1-2299, and
incorporated here by reference).
*10(h) Applied Deferred Compensation Plan (September 1, 2003 Restatement)
(filed as Exhibit 10(h) to Applied's Form 10-K for the year ended June
30, 2003, SEC File No. 1-2299, and incorporated here by reference).
*10(i) First Amendment to the Company's Deferred Compensation Plan (September
1, 2003 Restatement) (filed as Exhibit 10 to Applied's Form 10-Q for
the quarter ended December 31, 2003, SEC File No. 1-2299, and
incorporated here by reference).
*10(j) 1997 Long-Term Performance Plan re-adopted by Shareholders on October
22, 2002 (filed as Exhibit 10(a) to Applied's Form 10-Q for the
quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated
here by reference).
*10(k) Amendment No. 1 to 1997 Long-Term Performance Plan, effective as of
August 8, 2003. (filed as Exhibit 10(j) to Applied's Form 10-K for the
year ended June 30, 2003, SEC File No. 1-2299, and incorporated here
by reference).
*10(l) Applied Supplemental Defined Contribution Plan (January 1, 1997
Restatement) (filed as Exhibit 10(m) to Applied's Registration
Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801,
and incorporated here by reference).
*10(m) First Amendment to Applied Supplemental Defined Contribution Plan
effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied's
Form 10-Q for the quarter ended September 30, 2000, SEC File No.
1-2299, and incorporated here by reference).
*10(n) Second Amendment to Applied Supplemental Defined Contribution Plan
effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's
Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299,
and incorporated here by reference).
*10(o) Form of Non-Statutory Stock Option Award Terms and Conditions
(Directors) (filed as Exhibit 10 to Applied's Form 8-K dated November
30, 2006, SEC File No. 1-2299, and incorporated here by reference).
*10(p) Stock Appreciation Rights Award Terms and Conditions (Officers) (filed
as Exhibit 10(c) to Applied's Form 8-K dated August 9, 2005, SEC File
No. 1-2299, and incorporated here by reference).
*10(q) Performance Grant Terms and Conditions (filed as Exhibit 10(b) to
Applied's Form 8-K dated August 8, 2006, SEC File No. 1-2299, and
incorporated here by reference).
*10(r) 2006 Management Incentive Plan General Terms (filed as Exhibit 10(a)
to Applied's Form 8-K dated August 9, 2005, SEC File No. 1-2299, and
incorporated here by reference).
*10(s) 2007 Management Incentive Plan General Terms (re-filed to correct the
version filed as Exhibit 10(a) to the Applied's Form 8-K dated August
8, 2006, SEC File No. 1-2299). Attached
*10(t) Non-qualified Deferred Compensation Agreement between Applied and J.
Michael Moore effective as of December 31, 1997 (filed as Exhibit
10(a) to Applied's Form 10-Q for the quarter ended March 31, 1998, SEC
File No. 1-2299, and incorporated here by reference).
10(u) Lease dated as of March 1, 1996 between Applied and the
Cleveland-Cuyahoga County Port Authority (filed as Exhibit 10(n) to
Applied's Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by reference).
13 Applied 2006 Annual Report to shareholders (not deemed "filed" as part
of this Form 10-K except for those portions that are expressly
incorporated by reference). Attached
21 Applied's subsidiaries at June 30, 2006. Attached
23 Consent of Independent Registered Public Accounting Firm. Attached
24 Powers of attorney. Attached
31 Rule 13a-14(a)/15d-14(a) certifications. Attached
32 Section 1350 certifications. Attached