OREANDA-NEWS. Applied Industrial Technologies (NYSE:AIT) today reported results for its fourth quarter and fiscal 2016 year ended June 30, 2016.

Net sales for the quarter were $634.0 million, a decrease of 6.4% compared with $677.5 million in the same quarter a year ago. The overall sales decrease for the quarter reflects a 2.4% increase from acquisition-related volume, offset by a 7.6% decrease in our underlying operations and a negative 1.2% foreign currency translation impact. Of the 7.6% decrease in underlying operations, 3.9% is attributable to sales in traditional core operations with the remainder associated with sales in our operations serving the upstream oil and gas markets. Net income for the quarter was $26.1 million, or $0.66 per share, compared with $28.0 million, or $0.70 per share, in the fourth quarter of fiscal 2015.

For the 12 months ended June 30, 2016, net sales were $2.52 billion, a decrease of 8.4% compared with $2.75 billion last year. Net income was $29.6 million, or $0.75 per share, compared with $115.5 million, or $2.80 per share, in the prior year. The current year results include a third quarter non-cash charge of $1.62 per share for goodwill impairment and a third quarter charge of $0.13 per share for restructuring activities.

Commenting on the results, Applied's President & Chief Executive Officer Neil A. Schrimsher said, “Our fourth quarter and full-year results reflect an economic environment that continues to be challenging. Sequentially, fourth quarter demand was generally flat compared to the third quarter, including reduced demand in oil and gas, mining and other industrial end markets.”

“Throughout fiscal 2016, we were disciplined in our operations, implementing appropriate cost controls and restructuring measures that lower our cost base and strengthen our competitive position. We remain on track to realize the targeted $7.8 million in SD&A savings that we introduced in April with our third quarter results.”

“Across Applied, we have opportunities to advance our business in the current industrial economy and position ourselves for improvement in long-term performance. We are continuing to build on our strengths via investments in technology, talent initiatives and strategic acquisitions, as evidenced by our recent acquisition of Seals Unlimited. This is an excellent addition that enhances our bearings and power transmission platform in Eastern Canada. We are also excited about the new Applied.com e-commerce site that will launch later this month, and we look forward to providing our stakeholders with updates on these and other initiatives as the new year progresses.”

Balance Sheet and Liquidity

During fiscal 2016, the Company returned more than $80 million to shareholders via dividends and share repurchases. The Company did not purchase any shares of its common stock in open market transactions during the fourth quarter. For full fiscal year, the Company purchased 951,100 shares for $37.5 million. At June 30, 2016, the Company had remaining authorization to purchase 296,200 additional shares. 

Outlook

Today the Company also provided its initial outlook for fiscal year 2017. For the full year, the Company is forecasting a sales change in the range of negative 3.0% to up 1.0%, and expects earnings per share in the range of $2.40 to $2.60 per share.

Mr. Schrimsher concluded, “In this current industrial economic environment, we remain focused on serving our customers, enhancing our value-add capabilities and delivering benefits for all Applied stakeholders. With our solid foundation, strong balance sheet and significant position as a well-diversified industrial distributor, we have much to offer and even greater potential, and we are committed to performing in any environment.”  

 

         
  APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(In thousands, except per share data)
       
  Three Months Ended 
June 30,		 Year Ended
June 30,
  2016 2015 2016 2015
Net Sales $ 634,006   $ 677,540   $ 2,519,428   $ 2,751,561  
Cost of sales   455,556     485,734     1,812,006     1,981,747  
Gross Profit   178,450     191,806     707,422     769,814  
Selling, distribution and administrative,        
including depreciation   136,005     143,931     553,827     585,195  
Goodwill impairment   -     -     64,794     -  
Operating Income    42,445     47,875     88,801     184,619  
Interest expense, net   2,059     2,131     8,763     7,869  
Other expense (income), net   (64 )   1,142     1,060     879  
Income Before Income Taxes   40,450     44,602     78,978     175,871  
Income Tax Expense   14,383     16,557     49,401     60,387  
Net Income  $ 26,067   $ 28,045   $ 29,577   $ 115,484  
Net Income Per Share - Basic $ 0.67   $ 0.70   $ 0.75   $ 2.82  
Net Income Per Share - Diluted $ 0.66   $ 0.70   $ 0.75   $ 2.80  
Average Shares Outstanding - Basic   39,030     40,062     39,254     40,892  
Average Shares Outstanding - Diluted   39,286     40,335     39,466     41,187  
       
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(1)  Applied uses the last-in, first-out (LIFO) method of valuing U.S. inventory.  An actual valuation of inventory under the LIFO method can only be made 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.
 
In fiscal 2016, reductions in U.S. inventories, primarily in the bearings pool, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years.  The overall impact of these LIFO layer liquidations occurred in the fourth quarter of fiscal 2016 and increased gross profit by $2.1 million in the fourth quarter and for the year ended June 30, 2016. There were no LIFO layer liquidation benefits recognized for the period ended June 30, 2015.
 
(2) During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test.  As a result of the test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center Based Distribution reporting unit was impaired as of January 1, 2016.  This impairment is the result of the decline in the mining and extraction industries in Asia and the resulting reduced customer spending due to a decline in demand throughout Asia.  Further, due to sustained declines in oil prices and reduced customer spending in Canada, the Company determined that the goodwill associated with the Canada Service Center Based Distribution reporting unit was also impaired as of January 1, 2016.  Accordingly, the Company recognized a gross combined impairment charge of $64.8 million for goodwill in the third quarter of fiscal 2016, which after taxes had a negative impact on earnings of $63.8 million and reduced earnings per share by $1.62 per share.
 
(3) On June 14, 2016, the Company acquired the stock of Seals Unlimited, a distributor of sealing, fastener and hose products for a purchase price of $6.4 million.  The financial results of the operations acquired have been included in the Service Center Based Distribution Segment as of the acquisition date.
 
(4)  In November 2015, the FASB issued its final standard for the balance sheet classification of deferred taxes.  The amendments in this standard require that deferred tax assets and liabilities be classified as noncurrent in the balance sheet.  This update is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted.  The Company has early adopted this standard in the second quarter of fiscal 2016 and has applied the new standard retrospectively to the prior period presented in the Condensed Consolidated Balance Sheets.  The impact of this change in accounting principle on balances previously reported as of June 30, 2015 was to decrease other current assets $13.3 million, increase other assets $10.9 million and decrease other liabilities $2.4 million.
 
       
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
       
       
  June 30,
2016		   June 30,
2015
   
                 
Assets                
Cash and cash equivalents   $ 59,861     $ 69,470  
Accounts receivable, less allowances of $11,034 and $10,621     347,857       376,305  
Inventories     338,221       362,419  
Other current assets     35,687       37,816  
Total current assets     781,626       846,010  
Property, net     107,765       104,447  
Goodwill     202,700       254,406  
Intangibles, net     191,240       198,828  
Other assets     29,198       28,865  
Total Assets   $ 1,312,529     $ 1,432,556  
       
Liabilities      
Accounts payable   $ 148,543     $ 179,825  
Current portion of long-term debt     3,352       3,349  
Other accrued liabilities     122,493       126,898  
Total current liabilities     274,388       310,072  
Long-term debt     324,982       317,646  
Other liabilities     55,243       63,510  
Total Liabilities     654,613       691,228  
Shareholders' Equity     657,916       741,328  
Total Liabilities and Shareholders' Equity   $ 1,312,529     $ 1,432,556  
     
       
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
 
  Year Ended
June 30,
  2016   2015
 
Cash Flows from Operating Activities  
Net income $ 29,577     $ 115,484  
Adjustments to reconcile net income to net cash provided  
by operating activities:  
Goodwill impairment   64,794       -  
Depreciation and amortization of property   15,966       16,578  
Amortization of intangibles   25,580       25,797  
Amortization of stock appreciation rights and options   1,543       1,610  
Loss (gain) on sale of property   337       (1,291 )
Other share-based compensation expense   2,524       2,896  
Changes in assets and liabilities, net of acquisitions   22,888       (3,445 )
Other, net   (2,217 )     (3,091 )
Net Cash provided by Operating Activities   160,992       154,538  
Cash Flows from Investing Activities  
Property purchases   (13,130 )     (14,933 )
Proceeds from property sales   603       1,932  
Acquisition of businesses, net of cash acquired   (62,504 )     (160,620 )
Net Cash used in Investing Activities   (75,031 )     (173,621 )
Cash Flows from Financing Activities  
Net repayments under revolving credit facility   (19,000 )     (17,000 )
Long-term debt borrowings   125,000       170,000  
Long-term debt repayments   (98,662 )     (2,717 )
Deferred financing costs   (719 )     -  
Purchases of treasury shares   (37,465 )     (76,515 )
Dividends paid   (43,330 )     (42,663 )
Acquisition holdback payments   (18,913 )     (7,693 )
Other, net   1,104       1,277  
Net Cash (used in) provided by Financing Activities   (91,985 )     24,689  
Effect of Exchange Rate Changes on Cash   (3,585 )     (7,325 )
Decrease in cash and cash equivalents   (9,609 )     (1,719 )
Cash and cash equivalents at beginning of period   69,470       71,189  
Cash and Cash Equivalents at End of Period $ 59,861     $ 69,470