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 Applied Industrial Technologies Reports Fiscal 2016 Fourth Quarter and Year-End Results
   Friday, August 12, 2016 6:30:17 AM ET

Applied Industrial Technologies (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."

Conference Call Information

Applied will host its quarterly conference call for investors and analysts at 10 a.m. ET on August 12, 2016. Neil A. Schrimsher - President & CEO, and Mark O. Eisele - CFO will discuss the Company’s performance. To join the call, 1-888-343-1302 or 1-303-223-4368 (for International callers). A live audio webcast can be accessed online through the investor relations portion of the Company’s website at www.applied.com. A replay of the call will be available for two weeks by dialing 1-800-633-8284 or 1-402-977-9140 (International) using passcode 21814774.

About Applied Industrial Technologies

Founded in 1923, Applied Industrial Technologies is a leading industrial distributor serving MRO and OEM customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial and fluid power applications, as well as customized mechanical, fabricated rubber and fluid power shop services. Applied also offers maintenance training and inventory management solutions that provide added value to its customers. For more information, visit www.applied.com.

This press release contains statements that are forward-looking, as that term is defined by the Securities and Exchange Commission in its rules, regulations and releases. Applied intends that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are often identified by qualifiers such as "will," "expect," "forecast" and derivative or similar expressions. All forward-looking statements are based on current expectations regarding important risk factors including trends in the industrial sector of the economy, the performance of acquired businesses, currency exchange movements, and other risk factors identified in Applied’s most recent periodic report and other filings made with the Securities and Exchange Commission. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by Applied or any other person that the results expressed therein will be achieved. Applied assumes no obligation to update publicly or revise any forward-looking statements, whether due to new information, or events, or otherwise.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(In thousands, except per share data)
                                                                             Three Months Ended                                                                                   Year Ended
                                                                             June 30,                                                                                             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,             June 30,
                                                            2016                 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
CONTACT INFORMATION

INVESTOR RELATIONS
Mark O. Eisele
Vice President - Chief Financial Officer & Treasurer
216-426-4417

CORPORATE & MEDIA RELATIONS
Julie A. Kho
Manager, Public Relations
216-426-4483

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