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Article by DailyStocks_admin    (07-24-08 10:07 AM)

The Daily Magic Formula Stock for 07/24/2008 is Applied Industrial Technologies Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

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

• Our Director Independence Standards

• Charters for the Audit, Corporate Governance, and Executive Organization & Compensation Committees of our Board of Directors
The information 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, Cleveland, Ohio 44115.
(a) General Development of Business.
Information regarding developments in our business can be found in our 2007 annual report to shareholders under the caption “Management’s Discussion and Analysis” on pages 10 — 15. This information is incorporated here by reference.

(b) Financial Information about Segments.
We have identified two reportable segments, service center-based distribution and fluid power businesses.
The service center-based distribution segment provides customers with a wide range of industrial products through a network of service centers stretching across North America. The fluid power businesses segment consists of specialized regional companies which distribute fluid power components and operate shops to assemble fluid power systems and perform equipment repair. The fluid power businesses primarily sell products and services directly to customers rather than through the service centers. Both segments offer technical support and provide creative solutions to help customers minimize their production downtime, improve machine performance, and reduce overall procurement and maintenance costs.
Segment financial information can be found in the 2007 annual report to shareholders in note 11 to the consolidated financial statements on pages 31 — 32. That information is incorporated here by reference.
(c) Narrative Description of Business.
Overview . Our field operating structure is built on two platforms – service center-based distribution and fluid power businesses:
• Service Center-Based Distribution . We distribute a wide range of industrial products through 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 service center-based distribution business accounts for a substantial majority of our field operations and sales dollars. The business operates in the U.S. using the Applied Industrial Technologies trade name. We also are known as Bearing & Transmission, B&T Rubber, and Groupe GLM in Canada, Applied México in Mexico, and Rafael Benitez Carrillo in Puerto Rico.

• Fluid Power . Our specialized fluid power businesses primarily market products and services directly to customers within the businesses’ geographic regions; in the U.S., the businesses also market products and services through our service center network. In addition to distributing fluid power components, the businesses assemble fluid power systems, perform equipment repair, and offer technical advice to customers. Customers include firms purchasing for maintenance, repair, and operations needs, as well as for original equipment manufacturing applications.

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 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, particularly for our fluid power businesses. 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 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. There is no assurance that this practice will continue and its discontinuance could adversely affect our business.
Net sales by product category for the most recent three fiscal years is detailed in the 2007 annual report to shareholders in note 11 to the consolidated financial statements on page 32. That information is incorporated here by reference.
Services . Our associates advise and assist customers in selecting and applying products, and in managing inventory. 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. These solutions help customers minimize production downtime, improve machine performance, and reduce overall procurement and maintenance costs. 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.
Our service center 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 information, and assist account managers in serving customers. Account managers make on-site calls to current and potential customers to provide product information, identify customer requirements, make recommendations, and assist in implementing equipment maintenance and storeroom management programs, including our automated storeroom replenishment system, AppliedSTORE ® . Account managers also measure and document the value of the cost savings and increased productivity we help generate. Product and industry specialists assist with applications in their areas of 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. Having product in stock helps us satisfy customers’ just-in-time needs.
Timely delivery of products is an integral part of our service, particularly when customers require products for emergency repairs. Service centers and distribution centers use the most effective method of transportation available to meet customer needs. These methods include our own delivery vehicles, dedicated third-party transportation providers, as well as 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 catalog, 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.
In addition to our electronic capabilities, we serve customers with our paper catalogs. In July 2007, we issued our newest catalog, a comprehensive resource for widely used maintenance and repair items from more than 100 manufacturers, including 20,000 bearing and power transmission parts and almost 9,000 fluid power products. Products from the catalog are also available for purchase at www.applied.com .
We supplement the service center product offering with our MaintenancePro ® 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.

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. Field crews 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 or 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 service centers, but as product distributors, share the same focus on customer service. Product and application recommendations, inventory availability, and delivery speed are all critical to the businesses’ success.
The fluid power businesses distinguish themselves from most component distributors by offering engineering, design, system fabrication, installation, and repair services. These services can represent a significant portion of the overall value provided to customers. Each business has account managers with extensive technical knowledge, who handle sophisticated projects, including original equipment manufacturing applications. The businesses also provide technical support to our service centers and their customers.
Markets . We purchase from over 2,000 product manufacturers and resell the products to 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. In the fluid power businesses, product manufacturer authorizations are often more selective and can be a more significant competitive factor.
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.
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 material at any given time to our business as a whole, although they are a more important factor for our fluid power businesses. 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®, Applied®, and AIT Ò , 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. We 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.
Number of Employees . On July 31, 2007, we had 4,635 employees.
Working Capital . Our working capital position is discussed in “Management’s Discussion and Analysis” in the 2007 annual report to shareholders on pages 11 — 13.
We require substantial working capital related to accounts receivable and inventories. Significant amounts of inventory are carried to meet customers’ rapid delivery requirements. 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, 2007, and prior fiscal years, were less than 2% of net sales. Export sales 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 2007 annual report to shareholders in note 11 to the consolidated financial statements on page 32 and in “Quantitative and Qualitative Disclosures About Market Risk” on page 15. That information is incorporated here by reference.

CEO BACKGROUND

William G. Bares

Director since 1986, member of Executive and Executive Organization & Compensation Committees

Business Experience. Mr. Bares, age 66, was Chairman of The Lubrizol Corporation until his retirement from that post in December 2004. He was also Lubrizol’s Chief Executive Officer until April 2004 and President until January 2003. Lubrizol is a premier specialty chemical company focused on providing innovative technology to global transportation, industrial, and consumer markets.

Other Directorship. KeyCorp

Edith Kelly-Green

Director since 2002, member of Audit Committee

Business Experience. Until her retirement in October 2003, Ms. Kelly-Green, age 54, was Vice President and Chief Sourcing Officer of FedEx Express, the world’s largest express transportation company and a subsidiary of FedEx Corporation.

Stephen E. Yates

Director since 2001, member of Executive Organization & Compensation Committee

Business Experience. Mr. Yates, age 59, joined KeyCorp, one of the nation’s largest bank-based financial services companies, as Executive Vice President and Chief Information Officer in September 2004. He had been President of USAA Information Technology Company until May 2004.

L. Thomas Hiltz

Director since 1981, member of Corporate Governance Committee

Business Experience. Mr. Hiltz, age 61, is an attorney in Covington, Kentucky and is one of five trustees of the H.C.S. Foundation, a charitable trust which has sole voting and dispositive power with respect to 600,000 shares (as of June 30, 2007) of Applied common stock.

Other Directorship. Great American Financial Resources, Inc.

John F. Meier

Director since 2005, member of Executive Organization & Compensation Committee

Business Experience. Mr. Meier, age 59, is Chairman and Chief Executive Officer of Libbey Inc., a leading supplier of tableware products in the U.S. and Canada, in addition to supplying to other key international markets.

Other Directorships. Cooper Tire & Rubber Company, Libbey Inc.

David L. Pugh

Director since 2000, member of Executive Committee

Business Experience. Mr. Pugh, age 58, is Applied’s Chairman & Chief Executive Officer.

Other Directorships. Hexcel Corporation, OM Group, Inc.

Peter C. Wallace

Director since 2005, member of Corporate Governance Committee

Business Experience. Mr. Wallace, age 53, has been President and Chief Executive Officer, and a director, of Robbins & Myers, Inc. since July 2004. Robbins & Myers is a leading designer, manufacturer, and marketer of highly engineered, application-critical equipment and systems for the pharmaceutical, energy, and industrial markets worldwide. Prior to July 2004, Mr. Wallace was President and Chief Executive Officer of IMI Norgren Group, a manufacturer of sophisticated motion and fluid control systems for original equipment manufacturers.

Other Directorship. Robbins & Myers, Inc.

Thomas A. Commes

Director since 1999, member of Audit and Executive Committees

Business Experience. Until his retirement in 1999, Mr. Commes, age 65, was President and Chief Operating Officer, and a director, of The Sherwin-Williams Company, a manufacturer, distributor, and retailer of paints and painting supplies. His career included service as that company’s Chief Financial Officer.

Other Directorships. Agilysys, Inc., U-Store-It Trust

Peter A. Dorsman

Director since 2002, member of Corporate Governance Committee

Business Experience. Mr. Dorsman, age 52, joined NCR Corporation in April 2006 as Vice President and General Manager of its Systemedia business, which provides business products and services, such as receipt paper and printer supplies, for the retail, financial, and manufacturing industries. He had been Executive Vice President & Chief Operating Officer (from 2000 to June 2004) of The Standard Register Company, a leading provider of information solutions for financial services, healthcare, manufacturing, and other markets worldwide.

J. Michael Moore

Director since 1997, member of Audit Committee

Business Experience. Mr. Moore, age 64, is President of Oak Grove Consulting Group, Inc. He was Chairman and Chief Executive Officer of Invetech Company, a distributor of bearings, mechanical and electrical drive system products, industrial rubber products, and specialty maintenance and repair products, prior to its acquisition by Applied in 1997.

Dr. Jerry Sue Thornton

Director since 1994, member of Corporate Governance Committee

Business Experience. Dr. Thornton, age 60, is President of Cuyahoga Community College, the largest multi-campus community college in Ohio.

Other Directorships. American Greetings Corporation, National City Corporation, RPM, Inc.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
Our sales, operating income and earnings per share for the quarter ended March 31, 2008 increased 1.7%, 10.5% and 12.2%, respectively, compared to the prior year quarter. Higher gross margin percentage, lower selling, distribution and administrative expenses (“SD&A”) as a percent of sales and the impact of our share buyback program were the primary factors driving the improvement in operating income and earnings per share.
The balance sheet continues to strengthen; the current ratio climbed to 3.3 from 2.6 at June 30, 2007. The significant improvement reflects repayment of the $50.0 million senior unsecured term notes in December 2007.
Applied monitors the Purchasing Managers Index (PMI) published by the Institute for Supply Management and the Manufacturers Capacity Utilization (MCU) index published by the Federal Reserve Board and considers these indices key indicators of potential Company business environment changes. During the quarter the PMI and MCU declined slightly, a signal the economy may be weakening. Our performance traditionally lags these key indicators by up to 6 months.
The number of Company associates was 4,649 at both March 31, 2008 and June 30, 2007. We had 4,574 associates at March 31, 2007. Our operating facilities totaled 451 at March 31, 2008 and March 31, 2007. Both the associate and facility counts include the impact of our acquisition of Vycmex S.A. de C.V. (“Vycmex”) in Mexico in December 2007.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (“FIN 48”). FIN 48, which is an interpretation of SFAS No. 109, “Accounting for Income Taxes,” provides guidance on the manner in which tax positions taken or to be taken on tax returns should be reflected in an entity’s financial statements prior to their resolution with taxing authorities. In accordance with FIN 48, the Company recognized an immaterial cumulative effect adjustment decreasing its liability for unrecognized tax benefits, interest, and penalties and increasing the July 1, 2007 balance of retained earnings. See Note 6 for more information on income taxes.
Results of Operations
Three Months Ended March 31, 2008 and 2007
During the quarter ended March 31, 2008 sales increased $9.0 million or 1.7% compared to the prior year, reflecting increased sales in both our service center based distribution segment and fluid power businesses. Sales attributed to acquisitions contributed 0.3% of the increase. The number of selling days for the three months ended March 31, 2008 and March 31, 2007 was 63.5 and 64 days, respectively.
Sales from our service center based distribution segment increased $3.4 million or 0.7% during the quarter ended March 31, 2008 from the same period in the prior year. The increase in sales was primarily driven by the addition of national contract business. The impact of favorable currency fluctuations between Canadian and U.S. dollars was largely offset by declines in our service center based Canadian business which is seeing declines in sales to customers in the natural gas, oil, lumber and wood products industries.
Sales from our fluid power businesses increased $5.7 million or 10.9% during the quarter from the same period in the prior year. Favorable foreign currency translation in the Canadian portion of these businesses accounted for $2.2 million of the increase between periods. Our recent acquisition of Vycmex accounted for approximately $1.5 million of the increase. The remainder of the increase is primarily attributed to higher volume in existing locations.
During the quarter ended March 31, 2008, industrial products and fluid power products accounted for 79.8% and 20.2%, respectively, of sales. In comparison, industrial products and fluid power products accounted for 80.6% and 19.4%, respectively, of sales for the same period in the prior year.
From a geographical perspective, sales from our Canadian operations increased $2.7 million or 5.6% during the quarter ended March 31, 2008 from the same period in the prior year. The net sales increase was due to foreign currency translation as sales in the local currency declined by 8.9% due to a slowdown in the Canadian economy. The slowdown was most notable in sales to customers in the lumber and wood products industry due to the current downturn in the housing market and sales to customers participating in natural gas and oil exploration activity.
Gross profit as a percentage of sales increased slightly to 27.3% compared to the prior year’s 27.0%. We continue to experience gross profit margin pressures primarily due to increased sales to national contract customers which are generally at lower margins, as well as contractual limitations on immediately passing certain supplier price increases to our customers. Positive influences were improved margins in Canada, lower scrap costs and higher levels of supplier purchasing incentives during the quarter.
SD&A decreased as a percent of sales to 20.1% in the quarter ended March 31, 2008 from 20.4% in the prior year quarter. We continue to focus on overall cost control which has resulted in this percentage decline. In dollars, SD&A increased $0.3 million compared to the prior year quarter. Higher expenses due to foreign currency fluctuations, new service center locations, additional bad debt reserves and the acquisition were offset by lower depreciation expense and nonrecurrence of certain information technology and sales tax expenses.
Interest expense, net for the current quarter decreased $0.5 million or 67.8% from the same period in the prior year. This was due to lower interest expense as a result of the retirement of $50.0 million in debt last quarter.
Other expense (income), net for the quarter ended March 31, 2008 changed $0.5 million largely due to declines in market values in investments held by deferred compensation trusts offset partially by favorable changes in the fair value of the cross-currency swap.
The income tax rate was 36.7% for the quarter ended March 31, 2008 compared to 35.5% for the quarter ended March 31, 2007. The higher tax rate relates primarily to higher effective state tax rates in the current year quarter and U.S. federal tax law changes which have eliminated certain deductions related to foreign sourced income.
As a result of the above factors, net income increased $1.9 million or 8.7% compared to the prior year quarter. Earnings per share rose to $0.55 per share for the current quarter compared to $0.49 in the prior year quarter.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations
Three Months Ended March 31, 2008 and 2007
During the quarter ended March 31, 2008 sales increased $9.0 million or 1.7% compared to the prior year, reflecting increased sales in both our service center based distribution segment and fluid power businesses. Sales attributed to acquisitions contributed 0.3% of the increase. The number of selling days for the three months ended March 31, 2008 and March 31, 2007 was 63.5 and 64 days, respectively.
Sales from our service center based distribution segment increased $3.4 million or 0.7% during the quarter ended March 31, 2008 from the same period in the prior year. The increase in sales was primarily driven by the addition of national contract business. The impact of favorable currency fluctuations between Canadian and U.S. dollars was largely offset by declines in our service center based Canadian business which is seeing declines in sales to customers in the natural gas, oil, lumber and wood products industries.
Sales from our fluid power businesses increased $5.7 million or 10.9% during the quarter from the same period in the prior year. Favorable foreign currency translation in the Canadian portion of these businesses accounted for $2.2 million of the increase between periods. Our recent acquisition of Vycmex accounted for approximately $1.5 million of the increase. The remainder of the increase is primarily attributed to higher volume in existing locations.
During the quarter ended March 31, 2008, industrial products and fluid power products accounted for 79.8% and 20.2%, respectively, of sales. In comparison, industrial products and fluid power products accounted for 80.6% and 19.4%, respectively, of sales for the same period in the prior year.
From a geographical perspective, sales from our Canadian operations increased $2.7 million or 5.6% during the quarter ended March 31, 2008 from the same period in the prior year. The net sales increase was due to foreign currency translation as sales in the local currency declined by 8.9% due to a slowdown in the Canadian economy. The slowdown was most notable in sales to customers in the lumber and wood products industry due to the current downturn in the housing market and sales to customers participating in natural gas and oil exploration activity.
Gross profit as a percentage of sales increased slightly to 27.3% compared to the prior year’s 27.0%. We continue to experience gross profit margin pressures primarily due to increased sales to national contract customers which are generally at lower margins, as well as contractual limitations on immediately passing certain supplier price increases to our customers. Positive influences were improved margins in Canada, lower scrap costs and higher levels of supplier purchasing incentives during the quarter.
SD&A decreased as a percent of sales to 20.1% in the quarter ended March 31, 2008 from 20.4% in the prior year quarter. We continue to focus on overall cost control which has resulted in this percentage decline. In dollars, SD&A increased $0.3 million compared to the prior year quarter. Higher expenses due to foreign currency fluctuations, new service center locations, additional bad debt reserves and the acquisition were offset by lower depreciation expense and nonrecurrence of certain information technology and sales tax expenses.
Interest expense, net for the current quarter decreased $0.5 million or 67.8% from the same period in the prior year. This was due to lower interest expense as a result of the retirement of $50.0 million in debt last quarter.
Other expense (income), net for the quarter ended March 31, 2008 changed $0.5 million largely due to declines in market values in investments held by deferred compensation trusts offset partially by favorable changes in the fair value of the cross-currency swap.
The income tax rate was 36.7% for the quarter ended March 31, 2008 compared to 35.5% for the quarter ended March 31, 2007. The higher tax rate relates primarily to higher effective state tax rates in the current year quarter and U.S. federal tax law changes which have eliminated certain deductions related to foreign sourced income.
As a result of the above factors, net income increased $1.9 million or 8.7% compared to the prior year quarter. Earnings per share rose to $0.55 per share for the current quarter compared to $0.49 in the prior year quarter.

CONF CALL

David Pugh

Thanks, Amanda. And thanks everyone for joining us today. I'm going to keep my comments brief this afternoon, and let Ben, discuss the fundamentals of what we are encountering in this challenging economic climate. While our market data and our business plan projected this quarter to be our weakest. We were still a bit disappointed with the extent of the slowdown that we experienced during the quarter.

Coming off with a strong second quarter where we posted the 8.2% year-over-year sales increase, this 1.7% third quarter sales increase was a little bit weaker than we expected. I guess the only good news that we see in it is that, the operational controls showed up well as we continue to turn out double-digit increases in operating income.

So we feel pretty solid about how we're managing in this process. At this time we don't see relief in sight for some of the key markets that have dragged us down. And there are indications that the decline is moving into more segments and signaling a general broad based slowdown. As you've heard and has been documented the housing segment is the most critically affected, and the input that we're getting from key customers in this industry, indicate that they expect the current rate of housing starts to linger through 2009.

So there's a fair amount of uncertainty and anxiety among our customers. The combination of high energy prices and tight credit in the housing market are pulling in one direction. We've got the federal monetary policy and the stimulus package they are pulling another, whether they will offset each other is still to be seen. Now while we originally felt the fourth quarter would provide mild recovery, current indicators point towards additional slowing.

So there's been a definite change since we last talked. And I'm going to let Ben and Mark, fill in the details and we're going to change the order just a little bit today because, I think you probably want to hear more about the what's and the why's of the marketplace than just the pure numbers. So I'm going to let Ben go first today.

Ben Mondics - President and Chief Operating Officer

Thanks, Dave and good afternoon, everyone. We experienced a slowing of the economy during our third quarter and it affected many of the key industries that we serve. Not surprisingly, we saw decreased sales to the lumber and wood products segment, which is heavily tied to the housing market. A general slowdown, however, was also felt in the pulp and paper, and transportation equipment segment.

On the upside, we saw strong increases in food products, metal mining, and cement, compared to year ago performance. We also saw good performance from rubber and plastic products, as well as the primary metals industries. Overall, the strength of these industries could not overcome the effect of the weaker markets to maintain the growth rate we had coming into the quarter.

Government sales continued to produce a double-digit sales increase in keeping with our emphasis on developing this opportunity. Our sales force continues to expand their sales calls to include all types of government entities. Catalog sales continue to grow and year-to-date we've seen a 23% increase. We will shortly finish production on our 1,100 page 2008-2009 catalog, which will be distributed to customers starting in early July.

The new catalog will include more than 40,000 products of all types. Putting all of these factors together resulted in a sales increase of 1% for our U.S. based service centers. Our U.S. fluid power companies increased their sales 5% compared to the prior years quarter. The VYCMEX acquisition in Mexico, and the fluid power related products sold through our service center businesses, have all contributed to the approximate 1% increase of fluid power sales as a component of our overall product mix.

Although our Canadian sales increased 5.6% in U.S. dollars due to the impact of the currency translation factor, we continue to have our challenges in the forest products industries. We are, however, seeing some improvement in our fluid power business in Canada. Elsewhere, our Mexican and Puerto Rican operations are performing well, although they currently represent a small part of our business.

Our Mexican operations including the VYCMEX acquisition, which we acquired in December, had double-digit increases over last years period. Our operations in Puerto Rico did as well. Looking at the fourth quarter ending June 30th, we believe the markets we serve will continue to be slow. The economic indices for March, including the ISM purchasing managers index and industrial production, showed a slight improvement over February.

However, manufacturing capacity utilization is still below 80 and the ISM index is below 50 indicating some level of contraction. Some of our customers in the lumber and wood products segment report that they don't expect any significant recovery this calendar year. Putting it in perspective, housing starts peaked in 2005 with 2 million units. Since then it has been steadily falling with 1.4 million units reported in 2007. Going forward, the market is expected to drop below a million units in 2008 with some level of recovery possible in 2009.

We believe that the slowdown will continue in our fourth quarter and we expect sales will be flat to slightly up. In anticipation, we have moved to keep our expenses and assets under control. In the face of a sluggish economy we will continue to balance our operating cost with our sales and position ourselves for a fair return on assets.

Our continuous improvement programs are helping us find new and better ways of doing things. We have a strong team, a strong dedication to quality, and we have more than 600 improvement teams that work in our U.S. facilities, with many more in Canada and Mexico. These teams drive efficiencies in all areas of the Company, as indicated by our operating leverage. And we continue to see opportunities for improvement in sales growth, market share gain, and operating margins as a result.

In summary, we have a good strategic plan at work which will help drive our top and bottom line results. Our employee associates are upbeat and working hard to generate profitable sales and efficient operations. I'll now turn the call over to, Mark Eisele for a discussion of our financial results.

Mark Eisele

Thanks, Ben, good afternoon, everyone. Let me provide some additional insights for our third quarter financial performance. We were very pleased to achieve a 12% third quarter earnings per share increase or $0.55 versus $0.49. Sales for the third quarter were $530 million which represents a 1.7% improvement over last year's third quarter.

We had 63.5 selling days this quarter compared to 64 days in the same period last year. On a sales per day basis, sales increased to 2.5% over last year. For the quarter U.S. service center sales per day were up 1.8%, while sales per day at our U.S. fluid power businesses were up 6.2%. We believe approximately 80% of this increase in sales for the U.S. service centers relates to the impact of passing along supplier price increases.

Sales for our Canadian operations increased by 5.6% in the quarter, primarily as a result of favorable currency translation, in local currency, our Canadian service center sales were down 12.3%. While the Canadian fluid power businesses were flat. Our operations in Mexico, including VYCMEX acquired in December had a sales increase of 38.1%. VYCMEX represented approximately 28 percentage points of the increase. Our Puerto Rico operations also improved approximately 12% over the prior year quarter.

During the quarter, our number of operating facilities decreased by 1 to 451 as a result of combining two Canadian locations. Our product mix during the quarter was 20.2% fluid power products and 79.8% industrial products. This represents an 80 basis point increase in the fluid power product percentage from last quarter. The gross profit percentage for the quarter was 27.3%, consistent with the guidance we've provided for fiscal 2008. This margin was 30 basis points higher than last year's third quarter.

Our selling, distribution, and administrative expenses as a percent of sales improved to 20.1% for the quarter. This rate is 30 basis points lower than the third quarter of the prior fiscal year. We continue to see benefits from our overall focus on productivity improvements and cost control. Lower employee benefit and depreciation expenses were the main contributors to the improved percentages.

We will, however, continue to invest in additional resources for our government and other growth programs in support of our ongoing corporate strategies. The absolute dollar increase in selling, distribution, and administration expenses for the quarter was less than 1% compared to a sales increase of 1.7%. Our expectation for SG&A in the fourth quarter is to be comparable with our third quarter run-rate with only a small potential increase.

Our third quarter operating margin of 7.1% was 60 basis points above the 6.5% operating margin in the prior year third quarter. The higher gross profit percentage, along with improved rate of operating expenses to sales, were the significant factors contributing to the improved margin results. Our net interest expense was lower due to the retirement of $50 million of our debt near the end of our second quarter.

The effective tax rate for the quarter was 36.7%, compared to 35.5% in the third quarter of last year. The higher rate is primarily due to a higher effective rate for state taxes in this period, and U.S. tax law changes which have eliminated certain deductions related to foreign income. Year-to-date, our tax rate is 37.2%, and we anticipate this to be our tax rate for the entire year.

Our balance sheet remains solid, with shareholders equity at over $480 million and a current ratio of 3.3 to one. This ratio is consistent with the prior quarter and above the prior year level due to the debt retirement mentioned previously. Our return on assets rose to 19.8% for the quarter compared to 18.3% for the prior year quarter.

As anticipated, inventory levels decreased to $10.4 million in the quarter, primarily due to the burn off of special inventory buys made towards the end of the calendar year. We expect inventory to decrease another $10 million by year-end. Projected inventory levels at June year-end should be approximately $10 million above our June 2007 levels, included in this increase of course, is the additional inventory related to the VYCMEX acquisition. Accounts receivable and day sales outstanding of approximately 40 days remain competitive.

Cash provided from operations for the quarter was $11.3 million compared to $28.9 million for the prior year third quarter. This change in the third quarter reflects variability regarding the timing of certain income tax, and accounts payable payments. Year-to-date cash provided from operations is virtually double that of the prior year. Cash used for financing activities in the quarter included $12.2 million related to our ongoing stock repurchase program and $6.4 million of cash dividend payments.

During the quarter we repurchased 435,000 shares of our common stock in open market transactions, and have remaining authorization to purchase 1.65 million additional shares. We believe that our fourth quarter sales will put us towards the lower end of our annual sales guidance of $2.1 to $2.18 billion. As we enter the final quarter of our year, we are tightening our annual EPS guidance to $2.15 to $2.25 per share.

Now here is Dave for final comments.

David Pugh

Thanks Mark. Now I guess there we have it, it's a mild disappointment in sales, and we brought solid earnings out of it. As we move forward, we're going to have to expect to get more sales from non-traditional sources. Many of the unexpected disappointments are simply opportunities in disguise. And to view this from a positive aspect, I would expect that this market climate would increase our M&A opportunities.

We are going to adjust our sales to make sure, we get through this temporary storm, and stay on course for the long haul. Amanda, we'd open it for questions now.

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