OREANDA-NEWS. Applied Industrial Technologies (NYSE:AIT) today reported sales and earnings for the third quarter and nine months ended March 31, 2016.

Net sales for the quarter were $633.2 million, a decrease of 6.9% compared with $680.0 million in the same quarter a year ago. Net loss for the quarter was $44.7 million, or $1.14 per share, compared to net income of $28.6 million, or $0.70 per share, in the third quarter of fiscal 2015. For the nine months ended March 31, 2016, sales decreased 9.1% to $1.88 billion from $2.07 billion in the same period last year. Net income was $3.5 million, or $0.09 per share, compared with $87.4 million, or $2.11 per share, last year. The current year results for both the quarter and year to date include negative earnings per share impacts of $1.62 per share for a goodwill impairment charge and $0.13 per share for restructuring expenses.

The overall sales decrease for the quarter reflects a 2.3% increase from acquisition-related volume offset by a negative 1.8% foreign currency translation impact and a 7.4% decrease in core underlying operations. This 7.4% decrease consists of a 2.7% decline attributable to sales in traditional core operations with the remainder associated with sales in our operations serving the upstream oil and gas markets.  

Commenting on the results, Applied’s President & Chief Executive Officer Neil A. Schrimsher said, “Results for the third quarter and year to date were impacted by a $64.8 million ($63.8 million after tax) non-cash goodwill impairment charge. This total consists of two components, the first being an $8.8 million charge for our Australian operations, primarily due to the continued decline in the Australian industrial economy, namely mining. The remaining amount pertains to a goodwill impairment of $56.0 million for our Canadian operations and is predominantly the result of the sustained decline in oil and gas drilling activity.  

“We continue to respond to the energy market challenges by decreasing ongoing operating expenses and positioning Applied for future value creation. We have implemented restructuring activities within our upstream oil and gas focused operations to reduce our operating expenses and de-risk our balance sheet.  

“As a result of these actions, we recorded restructuring expenses in the March quarter totaling $7.0 million, or $0.13 per share. Approximately $3.6 million of these charges are included in cost of sales and pertain to inventory reserves for potential excess and obsolete inventory; the remaining $3.4 million of charges are included within SD&A and are severance and facility consolidation related. The restructuring is expected to yield annual SD&A savings of $7.8 million and will further strengthen our competitive position going forward.

“As we head into the final quarter of our fiscal year, we are providing fourth quarter guidance of earnings per share of $0.62 to $0.70 per share on sales of $640.0 million to $650.0 million. Throughout Applied, we are focused on serving our customers, delivering a strong close to the fiscal year and generating shareholder value.”

During the quarter, the Company purchased 250,000 shares of its common stock in open market transactions for $9.7 million. Fiscal year to date, the Company has purchased 951,100 shares for a total of $37.5 million. At March 31, 2016, the Company had remaining authorization to purchase 296,200 additional shares.

In addition, Mr. Schrimsher announced that the Company’s Board of Directors declared a quarterly cash dividend of $0.28 per common share. The dividend is payable on May 31, 2016, to shareholders of record on May 16, 2016.  

         
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(In thousands, except per share data)
       
  Three Months Ended 
March 31,		 Nine Months Ended 
March 31,
    2016     2015     2016     2015  
Net Sales $ 633,172   $ 679,994   $ 1,885,422   $ 2,074,021  
Cost of sales   458,379     492,631     1,356,450     1,496,013  
Gross Profit   174,793     187,363     528,972     578,008  
Selling, distribution and administrative,        
including depreciation   143,031     143,591     417,822     441,264  
Goodwill impairment   64,794     -     64,794     -  
Operating Income (Loss)   (33,032 )   43,772     46,356     136,744  
Interest expense, net   2,359     2,121     6,704     5,738  
Other expense (income), net   65     (887 )   1,124     (263 )
Income (Loss) Before Income Taxes   (35,456 )   42,538     38,528     131,269  
Income Tax Expense   9,272     13,928     35,018     43,830  
Net Income (Loss) $ (44,728 ) $ 28,610   $ 3,510   $ 87,439  
Net Income (Loss) Per Share - Basic $ (1.14 ) $ 0.70   $ 0.09   $ 2.12  
Net Income (Loss) Per Share - Diluted $ (1.14 ) $ 0.70   $ 0.09   $ 2.11  
Average Shares Outstanding - Basic   39,107     40,800     39,328     41,168  
Average Shares Outstanding - Diluted   39,107     41,067     39,548     41,477  
 
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.
 
(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) In the quarter ending March 31, 2016, the Company incurred certain restructuring charges.  A reserve of $3.6 million was recorded within cost of sales for the quarter ending March 31, 2016, for potential non-salable, non-returnable and excess inventory due to declining demand, primarily for Canada oil and gas operations.  SD&A included expenses of $3.4 million during the quarter related to severance and facility consolidations, primarily for oil and gas operations.  Total restructuring charges reduced gross profit for the quarter by $3.6 million, operating income by $7.0 million, net income by $4.9 million and earnings per share by $0.13.
 
(4) On January 4, 2016, the Company acquired substantially all of the net assets of HUB Industrial Supply, a distributor of consumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN and Las Vegas, NV for a purchase price of $32,900.  The financial results of the operations acquired have been included in the Service Center Based Distribution Segment as of the acquisition date.
 
(5) 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)  
               
               
               
        March 31, 
2016		   June 30, 
2015		  
           
               
Assets    
Cash and cash equivalents   $ 62,932     $ 69,470    
Accounts receivable, less allowances of $11,479 and $10,621   354,553       376,305    
Inventories     346,979       362,419    
Other current assets       39,377       37,816    
Total current assets     803,841       846,010    
Property, net     108,132       104,447    
Goodwill     199,236       254,406    
Intangibles, net     195,726       198,828    
Other assets       27,404       28,865    
Total Assets     $ 1,334,339     $ 1,432,556    
         
Liabilities          
Accounts payable   $ 134,871     $ 179,825    
Current portion of long-term debt     3,351       3,349    
Other accrued liabilities     114,253       126,898    
Total current liabilities       252,475       310,072    
Long-term debt       367,820       317,646    
Other liabilities       57,202       63,510    
Total Liabilities       677,497       691,228    
Shareholders' Equity     656,842       741,328    
Total Liabilities and Shareholders' Equity $ 1,334,339     $ 1,432,556    
     
           
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES  
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS  
(In thousands)  
           
 
  Nine Months Ended
March 31,		  
   
      2016       2015    
 
Cash Flows from Operating Activities  
Net income   $ 3,510     $ 87,439    
Adjustments to reconcile net income to net cash provided  
by operating activities:  
Goodwill impairment     64,794       -    
Depreciation and amortization of property     12,041       12,792    
Amortization of intangibles     19,065       19,412    
Amortization of stock appreciation rights and options     1,241       1,381    
Loss on sale of property     275       45    
Other share-based compensation expense     2,073       1,123    
Changes in assets and liabilities, net of acquisitions     (16,231 )     (83,601 )  
Other, net     3,591       721    
Net Cash provided by Operating Activities     90,359       39,312    
Cash Flows from Investing Activities  
Property purchases     (9,441 )     (11,009 )  
Proceeds from property sales     372       451    
Acquisition of businesses, net of cash acquired     (56,142 )     (166,479 )  
Net Cash used in Investing Activities     (65,211 )     (177,037 )  
Cash Flows from Financing Activities  
Net borrowings under revolving credit facility     23,000       51,000    
Long-term debt borrowings     125,000       170,238    
Long-term debt repayments     (97,826 )     (2,274 )  
Purchases of treasury shares     (37,464 )     (59,235 )  
Dividends paid     (32,342 )     (31,807 )  
Acquisition holdback payments     (10,658 )     (995 )  
Other, net     1,191       770    
Net Cash (used in) provided by Financing Activities     (29,099 )     127,697    
Effect of Exchange Rate Changes on Cash     (2,587 )     (5,996 )  
Decrease in cash and cash equivalents     (6,538 )     (16,024 )  
Cash and cash equivalents at beginning of period     69,470       71,189    
Cash and Cash Equivalents at End of Period   $ 62,932     $ 55,165