Applied Industrial Technologies Inc (AIT) 2006 Q4 法說會逐字稿

Hello and welcome to the Applied Industrial Technologies fourth quarter 2006 financial earnings conference call. [OPERATOR INSTRUCTIONS] At the request of Applied Industrial Technologies, today's conference call is being recorded. If you should have any objection, you may disconnect at this time.

I would like to introduce Mr. Richard Shaw, Applied Vice President of Communications. Mr. Shaw, you may begin.

Thank you Operator, and good afternoon, everyone. On behalf of Applied Industrial Technologies, thank you for joining our fourth quarter year end call today. You should have already received our earnings news release that was issued this morning, if you've not received it, you may retrieve it by visiting our website at applied.com. A replay of today's broadcast will be available for the next two weeks and the archive information that's contained in that news release.

Before we begin, I would like to remind everyone that we will discuss Applied's business outlook during this conference call and make statements that are forward looking. Applied intends that all forward looking statements be subject to the Safe Harbor of the Private Securities Litigation Act of 1995. All forward looking statements are based on current expectations regarding important risk factors, including trends in the industrial sector of the economy, the success of our various marketing strategies, 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 representation by Applied or any other person that the results expressed therein will be achieved. Applied assumes no obligation to publicly update or revise any forward looking statements whether due to new information or events or otherwise, except as required by law. This conference call is copy righted property of Applied Industrial Technologies. Any copying, rebroadcast, publication, posting, transcription, or distribution of any portion of this call without Applied's expressed prior written consent is prohibited.

Our speakers today include David Pugh, Chairman and CEO of Applied, who will discuss our overall performance during the quarter and year. We will also here from Mark Eisele, Vice President and Chief Financial Officer, who will discuss our financial performance, and Bill Purser, President and Chief Operating Officer, who will discuss operational activities. Dave Pugh will start us off.

Thanks, Rick, and thanks for joining us today. In the fourth quarter, we continued the strong earnings performance that we've been showing. Allowed us to put a capstone on a good year. If I were to recap 2006, there are some items of note that would be good to take [inaudible] of. First of all, we once again had double-digit sales growth. And that was aided in part from two nice acquisitions, and we had a pretty good economy all year. We continued to show excellent earnings leverage on this growth as a result of both margin enhancement and cost control efforts.

We did take some corrected action to ensure that our future inventory position is going to be properly aligned with sales, opportunities, and service commitment. We made some strategic investments in future significant growth areas such as our government sales. If while still managing our cost structure to a rate well below that of our sales growth. The results of managing all of the processes to a proper balance allowed us to provide almost a 15% return to our shareholders in the form of increased dividends and share appreciation.

Now, specifically to the fourth quarter, we increased our earnings per share by nearly 30% on sales growth of a little over 11%. That puts us at 15 consecutive quarters of at least 20% earnings per share increases over the prior year. There were no single items of significance. We enjoyed a [inaudible] economy and we managed the fundamentals very well. And by sticking with the steady balanced approach, we think there's still more improvements to come. We're going to continue to invest wisely and we're continue to stress quality in all of our efforts.

I'm really pleased with the margin, the continued margin improvement. This is more as a result of a willingness to avoid bad decisions than it is of their ability to redirect the market. Asset management is always in the forefront of our Company, as we continue to make our investments more productive. We did elect in the fourth quarter to trade off some short term gross margin in the form of purchasing incentives in order to allow us to start corrective action on an adverse inventory position that we had created during the last recession. The margin hits for this quarter only in the inventory correction is going to take place over the next 24 months.

Our Managers are doing an excellent job of taking care of the business at hand while still keeping an eye on and investing in the future. I'm going to let Mark and Bill to take over to add a few details to the results and then I'm going to return later to discuss what we see for the future before we take your questions. Mark.

Thanks, Dave. Good afternoon, everyone. Let me provide some additional insight for our fourth quarter and year end financial performance. We are very pleased to achieve fourth quarter earnings of $0.44 per share. This enabled us to close out fiscal 2006 with record earnings of $1.57 per share. Sales for the fourth quarter ended at $504.2 million, this represents an 11.2% improvement over last year's fourth quarter. We had 63.5 selling days this quarter, which was one-half day less than the same period last year due to the way the Good Friday holiday fell.

Total U.S. Service Center and Fluid Power Operations sales for the quarter were up 10.5%. We estimate that approximately 1 to 2 percentage points of this increase relates to the impact of supplier price increases on our sales. We also saw our Canadian operations, sales improved by 18% in the quarter. Of which about half related to currency translation from the strengthening of the Canadian dollar compared to the prior year, and the remainder from additional volume, mix, and pricing.

Our Mexican and Puerto Rico operations had somewhat lower sales increases as a result of the adverse market impact of customer work stoppages within each area. All in all, though, we saw continued growth across the board. During the quarter, our number of operating facilities increased to 452 locations as we completed our consolidation of several Minnesota Bearing locations acquired at the beginning of April with existing Applied locations. Our product mix during the quarter was 20% Fluid Power Products and 80% Industrial products. Our gross profit percentage for the quarter was 26.5%, about 50 basis points lower than last year's fourth quarter and 100 basis points lower than the third quarter. The major reason for our lower gross profit relates to the one time adjustment and purchasing incentives with our vendors that Dave previously mentioned.

Looking at our selling distribution and administrative expenses for the quarter, we achieved an SG&A rate of 20.4%, 100 basis points lower than last year's fourth quarter. This rate is one half of a percentage point lower than our SG&A for the full 2006 year. The absolute dollar increase in SG&A dollars for the quarter was only 6.1% compared to a sales increase of 11.2%. The SG&A increase primarily relates to the acquisitions of Spencer Fluid Power and Minnesota Bearing Company. As well as additional compensation, incentives, and benefits resulting from our improved financial performance. We are continuing to succeed at growing SG&A at a rate substantially less than our sales growth rate.

Our fourth quarter operating margin increased to 6.0% compared to 5.6% in the prior year's fourth quarter. This achievement continues our upward trend in operating margins. This trend is driven the increase in sales and by limiting the growth of SG&A expenses. Our annual effective tax rate for the year of 36.1% was lower than we originally expected primarily due to the recording of state and local tax benefits from [true ups] of our prior year's provision upon filing of the returns in the fourth quarter. Our go forward expectations for our effective tax rate in fiscal 2007 is 36.5%.

Our balance sheet continues to strengthen with shareholders equity exceeding $414.8 million up 5.5% from the prior year. Our current ratio is 3.0 to 1. Our pretax return on assets rose to 16.1% for all of fiscal 2006 compared to 13.7% for 2005. Inventory levels decreased $17.5 million in the fourth quarter. Overall inventory balances for the year only increased $15 million, which related entirely to the Spencer Fluid Power and Minnesota Bearing acquisitions. Once you take into account supplier price increases and the additional inventories added for new product lines acquired, we have done an exceptional job as inventory management, and as Dave mentioned this will always have our focussed attention.

Accounts receivable and days sales outstanding at 39.7 days remain competitive, but with room for improvement. Cash provided from operations during the quarter was a solid $49.4 million which resulted in our full year amount reaching $69.9 million. The full years cash provided from operating activities was impacted by an accounting classification change required under Statement of Financial Accounting Standards 123R, related to excess tax benefits received from the exercise of stock options and appreciation rights.

For fiscal 2006, these tax benefits are shown as a financing activity in the cash flow statement. Whereas, in prior years it continues to be shown as an operating activity. If this reclassification had not been required, cash provided from operations for 2006 would have been greater than the prior year. We provided annual financial guidance for fiscal 2007 in this morning's press release for sales increasing 7 to 10% to between approximately 2.03 to $2.09 billion, with earnings per share in the range of $1.76 to $1.80 per share. Therefore, our guidance is for an EPS increase of up to 14.6% on a sales increase of up to 10%. We are not forecasting any gains on sales of property or other nonoperating events.

We expect fiscal 2007 gross profit levels to be relatively consistent throughout the year with our annual rate of 27.0% in fiscal 2006. The rate of supplier price increases is somewhat uncertain at this point. And any escalation over what we experience last year could cause this to deteriorate temporarily. We expect to realize purchasing incentives from suppliers at a rate similar to those achieved in 2006. However, they are subject to adjustment throughout the fiscal year.

We will continue to work our initiatives to improve pricing and freight recovery throughout 2007. Our aim is to keep tight control of our selling distribution and administrative expense growth in fiscal 2007. Our overall growth in SG&A, most likely will exceed our goal of one half the rate of sales growth due to continued investments in initiatives that will help us build future profitable growth.

For fiscal 2007, interest expense, net of interest income should be lower due to higher rates being earned on our invested cash. Depreciation should be slightly down for the year and amortization should be comparable to fiscal 2006 amounts. From a cash planning perspective, we expect property additions to be primarily in the computers and information technology area and will be in the 10 to $12 million range. We also expect to continue to purchase stock for treasury periodically throughout the year depending on market conditions. That gives you some perspective on our outlook for 2007. Now, Bill Purser will comment on sales and operations.

Thanks, Mark. And happy new year, everyone. It's a pleasure to be with you this afternoon, especially since we have such good results to report. I was extremely pleased with our quarter, not to mention the entire business year. Our associates worked hard to deliver the numbers and deliver they did. As we move forward into our new business year, we carry momentum from several programs that I feel are sustainable for the next business year. I will discuss them in a few minutes.

First let's look at the industries that were strong for this business year, then I will make a few comments regarding their viability for the future. Not surprisingly, those SICs having to do with energy have been robust this year and will likely continue to be strong next year, as well. We've seen high procurement activity in petroleum and coal products, coal mining, and power generation. Additionally mining aggregate fabricated metal products, lumber and wood products and our largest SIC, which is industrial machinery and equipment were all strong performance. And generally look good for next year. The one exception could be lumber and wood products where we expect some stabilization related to slower construction demand.

Food and kindred products were up slightly, as were paper and allied products and primary metals. The transportation equipment segment has been sluggish and quite honestly we don't see that improving much over the next 12 months. Likewise, we've seen sales decline in electric and electronic equipment, printing, and industries related to textiles.

During this past year, several marketing programs contributed to our growth. A new power generation program, the continued focus of our HDAC program and our marketing programs to support government sales. We also introduced new product expansion, new lines in the tools, linear bearings, and fuel power products. Looking into 2007, we're expanding our relationships with Rustoleum, 3M, and [Sumotomo] and are excited about the long-term potential of these lines.

In our last teleconference, I reported that I was beginning to see moderation in some key industries. Nothing dramatic, just the slowing discretionary spending. We see this continuing, still nothing drastic, but enough to make me feel the growth this business year will not be as robust as the last. Our prediction for a 7 to 10% sales increase, while it's a little lower than we saw in 2005 and 2006, still represents solid growth.

As I mentioned earlier, we have several programs that gained traction this year and we feel will carry momentum in our business year. Our government sales effort, although still a small part of our total sales effort continues to exceed expectations. Our new catalog focus is also beginning to show results. More on that effort in future teleconferences. Our new acquisition, Spencer and Minnesota Bearings have exceeded our expectations and certainly have contributed to our profitable growth. Our operations in Canada, Mexico, and Puerto Rico as well as our Fluid Power subsidiaries have all contributed to this year's past success. And I thank all of our associates that work in these businesses for their efforts.

This next business year, as Dave said, we will maintain balance by continuing to focus on enhancing our margins, managing our assets, controlling our costs, and increasing our profitable sales through initiatives that are already in place. To sum up my comments, I see a good year ahead, maybe not as robust as last, however, a good performance year, nonetheless. I will now turn the call over to Dave for closing comments.

Thanks Bill. We, we do feel confident about FY 2007 as we head into the year. The remainder of calendar 2006 should hold up well, and beyond that, we still see growth, but the rate of growth looks like it may slow just a little bit. Given that double-digit earnings growth is still obtainable. Managing expectations becomes a challenge coming off of four years of performing well above the market. And we don't intend to rest on our lull but I think it would be proper to remind you that we have had pretty good earnings per share growth in the last four years of 36% followed by 55%, followed by 68%, and then 31% this year. So we, we enjoy building strength upon strength, but the hill does tend to get a little steeper as you go along.

Full year contributions from Spencer and Minnesota Bearing will give us a boost in 2007. We're going to continue to purge relationships that fail to provide adequate returns as we grow to be a stronger Company. We should start to see our government sales make an impact this next year. At the same time, we're going to invest more heavily in this opportunity as relational doors open to us.

As I mentioned earlier, we're going to have a balanced attack with regards to sales margins, cost, and assets. We aren't going for broke in any one area. That's simply not wise nor sustainable. We do intend to maximize where possible and prudent. So I want to thank you again for your interest in Applied, and we're going to do our best to answer your questions. Operator, let's open the lines and get started.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from [Andrew DeAnglos] with KeyBanc Capital Markets..

Good afternoon, gentlemen.

Hi, Andrew.

I'd just like some color around the inventory adjustment in the quarter. Specifically what prompted it, why now, and should we expect any level of LIFO liquidations going forward, similar to what kind of happened within the quarter?

Yes, Andrew, this is Mark, I'll respond to that. We don't have any LIFO layer liquidations in our forecast for the next fiscal year at this point in time. We do expect that we will continue to manage our inventories in a wise manner. As we talked in the -- on the call, we had an opportunity now to basically have a short-term negative impact on our income statement that will help us long term in the future. And so we decided to pull the trigger.

Okay. And then, on the investment side continuing to invest in the business, obviously, in '07, I guess could you talk to the seasonality of those investments throughout the next year? And I guess the magnitude relative to what we saw this past fiscal year?

Andrew this is Bill, from a seasonality standpoint, it's really steady state investment in those programs that we feel like are going to carry us forward in '07. I don't see that there would be any more investments in a particular area, say first half verses second half. These are programs that we feel that, such as government sales, that will be carried forth for the 12 month period.

Got you. And then in terms of the guidance that you guys provided. Any growth seasonality assumed within that? In terms of first half being notably greater or weaker than the back half of the year in terms of top line growth?

Well, Andrew, obviously, the number of selling days in any given quarter is a key driver for what's going to happen for the sales. And for the first two -- and for the first two fiscal quarters of our year, we also have planned shut downs and also significant amount of holidays compared to the last two quarters. So I mean I think if you look back historically you'll see that our sales in our first two quarters are somewhat lighter than the overall sales in the second two quarters. I would expect that to continue. When we look at the rates of sales growth compared to last year, we need to factor in when the acquisitions of Spencer Fluid Power as well as Minnesota Bearing, when those acquisitions were made so that we can get to a true apples-to -apples comparison also that which will be impacting the growth percentages, as well.

Okay. But in terms of, I guess, the core growth of the business in the first half verses the back half, any discrepancy in the assumptions that we should be looking at there?

Andrew, just go back to the comments I made earlier. We think the remainder of this calendar year is going to kind of move along as we've been seeing it. There's some indications we might see some slowing. And I mean all of this is subject to any [inaudible] events that may transpire.

Got you. And then my last question, just the acquisition pipeline, an update there. Thanks, guys.

I'll try to handle it, Andrew, as best I can. Obviously I'm not going to divulge any names. Let me just say that we are active in the acquisition market. We continue to look for those acquisitions that fit our Company, fit our culture. And we'll continue to do so.

Okay.

Can't say much more than that. But other than that that's part of our strategy.

And we'll take our next question from Matt Duncan with Stephens.

Good afternoon, guys.

Hey, Matt.

Hi, Matt.

Just first question here on the government business you gave us a little bit of color there just beating your expectations to this point. Last quarter I think you said your month-to-month run rate was about 1 million a month. Is that improved this quarter?

Yes, and you are correct. That is the number I gave you and we are ahead of that number.

Okay. Can you characterize how much or do you not want to do that at this point?

Prefer not to, Matt. But let me just say that we feel there's a lot of up side opportunity to there.

Okay. Great, thanks. And then on operating margin I know you had previously said that you were hoping to hit your 6% goal, by I guess it was fiscal '07, you've done that a year early, so congratulations on that. Do you have any feel for how high you think you might be able to get that operating margin from here?

Thanks, Matt. We appreciate that comment on what we accomplished in '06. I think what we'll say is that we believe we'll be able to make steps forward during fiscal '07 in our operating margin percentage. So we expect to continue that step forward.

Matt, this is Dave. I hesitate to put a number out there because the guys may hit it and stop. So sky's the limit as far as I'm concerned.

Okay, great thanks. And then last question and then I'll jump back in the queue here. Is there any way, just back on this inventory deal, is there any way to quantify the impact that that had on the gross margin this quarter? For instance if you've been purchasing inventories, you normally would in the quarter, what might gross margin have been?

I think Matt had a look at that in a different perspective is what we talk about in the conference call. Whereas we expect our-- our looking at our gross margin percentage in fiscal 2007, throughout the year to be at around 27.0% rate, which is the rate we ended up for the whole year fiscal '06. So that gives an indication of what we think our run rates going to be.

Okay. Thanks.

And we'll take our next question from Adam Uhlman with Cleveland Research.

Yeah, hi, good afternoon.

How you're doing Adam?

Good. Bill I had a question for you. If you could talk about the split of growth between your large customers and your smaller and mid-sized customers. Is there any shifts that you're seeing there?

Okay, Adam. As a matter of fact, I just looked at that a couple of days ago. More along the lines of trying to determine if we've captured any market share that's what I was really looking for. It would appear that with some of the larger accounts, we are slightly up as far as market share. Medium accounts are pretty static since we have made some gains with some small accounts. That's pretty much where the growth has come.

Okay. And then could you talk about the growth that you're seeing in your Fluid Power businesses overall compared to the Industrial businesses? I know that you guys don't want to throw out some specific numbers on it. But if you could just try to quantify the magnitude of the differences between those two businesses, that'd be helpful.

Well, we've certainly helped the Fluid Power growth with our acquisitions. And also by the introduction of Fluid Power lines throughout the corporation. Both of those have really driven pretty dynamic growth as far as Fluid Power products are concerned. To your point, I really don't want to get into any numbers, but I'm just saying that those are the two key elements that have really driven Fluid Power growth.

Is it fair to assume that they're pretty close to each other on an organic basis excluding acquisitions? Or are they both running more in a single-digit type of range?

I don't know if we know that answer, Adam. But I mean I do know like from the acquisitions, obviously, Spencer Fluid Power, virtually 100% of their sales are Fluid Power sales. And as we talked about when we purchased Minnesota Bearings at that time, we stated that about one third of their sales were Fluid Power sales. So both of those acquisitions are in the numbers in this current quarter that were not in the prior year, so that's helping to really drive the Fluid Power percentage upwards from that perspective. But from-- we have still seen organic growth too like Bill mentioned for let's say the Parker pneumatic line that we got in the [inaudible] in the [inaudible] line.

Okay great. Thanks, Mark. That's helpful. And the last question I had for you. was, are there any working capital targets for the year? Would you like to, do you have any extra plans for inventory reductions as we go into the first and second quarters? Or pretty comfortable with where we're at right now?

Well we continue to focus on inventory management, and our inventory levels will fluctuate depending upon what we decide to do in that arena. We do have opportunities that are presented to us periodically from suppliers, and we will determine whether or not those are advantageous to the corporation or not advantageous to the corporation. We look at inventory purchasing as one of our core competencies. So we will continue to actively manage inventories. And whether it's up or down in this quarter next quarter remains to be seen.

Okay. So there's no specific target for -- ?

Not really for that, no.

Okay, great, thanks.

Sure.

Our next question comes from [Jason Rogers] with Great Lakes Review.

Hi. I have just a quick question and then Elliot from our office has a few, as well. Did price increases have any impact on sales in the quarter?

Yes we'd mentioned about 1 to 2 percentage points of our total sales increase of 11% really was related to passing along supplier price increases to customers.

And what's the expectation for fiscal '07?

The impact has been coming down over the last several quarters when we've actually been calculating it. And we expect the impact in fiscal '07 to probably be somewhat equal to or maybe a little bit less than what we've been experiencing in all of fiscal '06. But that's unknown right now as to what is going to happen with future supplier price increases.

Okay. Go ahead Elliott.

Hi, and congratulations on the good quarter and good year.

Thank you.

Let me ask you if I remember correctly, last, the preceding year, you had one customer that was close to 4%. Is there any customer that's of that type of significance or up to 5% in the year ended?

None Elliott.

Our largest customer is still less than 4% total sales.

And you commented on market share, but I didn't hear any specifics. I think in the past you've commented that you've had about 7% of the broadly defined market. Any comment as to where you ended for the year verses the industry? Or what the growth in the industry was?

Really don't have those numbers, Elliott. Mainly because of our business year being mid-year. Those numbers don't really come out till the end of the year. We really aren't exactly sure. What I was doing was trying to go back and look at the segments of business small, medium, and large accounts. To try to determine the wins and losses as best I could and what our position was. And I really don't know how much that would have changed that 7% number. If it was so small, that it depends on how the market grew or shrunk in this particular case. I really don't have the numbers on that.

Okay. And also, you had indicated you purchased 2.4 million shares, what was your average cost or -- and/or the high price that you paid on the shares?

I don't have that specific number at my fingertips, Elliott. But I believe the average cost was around 22 to $23 per share throughout the year. And I do not have the high end price that we paid.

And last, if I may, the -- among the choices that you have on that cash reserve of making acquisitions or increasing the dividend more generously or repurchasing shares, where are you current priorities among the three?

I think our priorities are high on all three of those areas, Elliott. I don't think we are having to make a choice between one or the other. I think we're fortunate enough that we have the resources available to us where we can take advantage of acquisitions when we want to, that we can continue to review our dividend policy when needed, and continue to take share buy backs when it's opportunistic.

Elliott, this is Dave, any time we can get a nice acquisition that fits strategically, and we can get it the right price and we feel we can come in and do something with, certainly that's going to be our priority. Unfortunately, today the M&A market is a little tough. A lot of financial buyers out there that are making life difficult for strategic buyers. So we are going to --we're not letting the money burn a hole in our pocket, we're going to make wise investments. And if it -- if we can't find the right acquisition opportunity for increasing the long term scale of this Company, we will be continue to buy back our stock when it's running at the rate it's running.

Without being specific, are there any of those acquisition candidates that have gotten away from you that you would have liked to have had in the last few months, but where price was the major problem? And somebody else came in around you?

I -- that probably wouldn't be a good discussion to have. I don't-- sitting here looking at one that, there's no one we're losing sleep over right now.

Good, I hope you continue to sleep well.

Great. Thank you.

And we'll take our next question from Brent Rakers with Morgan Keegan.

Good afternoon. Let me start, I guess one quick follow up on the M&A side. You guys probably are, I guess, aware of motions acquisition of [Lewis] Supply. And I wondered if anywhere in the strategy that you guys currently have that would include kind of going outside of some of your traditional product lines?

Brent our stated strategy is to grow profitably in North America within our core product domain. And as you step outside of that the acquisitions get more risky and to the -- I don't think that the market is dead on the opportunity for us to invest within our core domain. And that's kind of where we're staying right now.

Okay. And I guess related as well. I think [Command] said some of the same kind of things on their call with regards to the M&A being tougher to close deals in this kind of environment. Do you think the mind set has changed among your target acquisition audience? Is there anything more you can maybe add there, Dave?

I don't know that mind set has changed. I will tell you if I were on the market, I'd sure be enamored with what the financial guys are paying these days. But from our standpoint, we might just wait and see if it comes back on the market a few years from now.

Great. And then, I didn't hear you quantify a number with regards to maybe how much the Spencer and Minnesota Bearings acquisitions contributed in terms of sales in the quarter.

Yes, yes Brent we really haven't --

And Brent we haven't because some of those we blend. We take operations and consolidate them. So we have stated a practice not to talk about same-store sales because it's meaningless when you consolidate operations.

Okay,and then just maybe a couple of housekeeping questions. If I recall from the last call and with regards to what Mark talked about in terms of price increases for fiscal '07, there was talk about one of the big bearing manufacturers putting through a price increase set for July. My understanding is that that wasn't necessarily -- I mean, first of all, I guess, what is your commentary as to how much of that has sticked? And have the other product suppliers and in the event of higher steel costs and whatever looked to pass on increases, as well?

Brent this is Bill. The anticipated price increase to your point did not happen. There was lots of conversation and redirect, but did not come to fruition. And I believe there was some concern as to whether the market would bear it or not. That does not mean that we won't see price increases before this calendar year is over, but we did not see the one in July that we were anticipating in the last call.

And so there are -- there are no other ones that you are currently aware of, is that correct?

We are-- we have been notified and one of the bearing suppliers has gone on record that they will be having an increase in September. There have-- the others have not followed suit at this point in time.

Bill, to a degree, are we talking a couple of percentage points here?

Bigger than that bread basket, yes.

Okay. Great.

Now as far as the impact to us, as Mark said, that's a different situation from announced price increase. But at this point in time, we only have one manufacture that's announced.

Another housekeeping question. What were the employee numbers for the Company at the end of the year?

Just a second. Mark's reaching for his book, Brent.

I tell you what while Mark's looking for that, let me ask one last question. I was hoping maybe you could walk through the SG&A line a little bit. Because I--you look at the pattern over the last three years. You have seen a kind of a sequential Q3 to Q4 increase. And with the additional revenue and with layering on the Minnesota Bearing transaction, I would have thought that SG&A would have been higher. Was there any one time type items in there that brought that maybe number down or did the lower gross margin number, did that tie to incentive comps somehow and maybe impact the SG&A line, as well?

Brent, this is Mark. Obviously, lots of factors impacted the SG&A line, lots of pluses, lots of minuses that we have there. And there wasn't any one thing that was unusual for us to point out there. Obviously the -- like you said the acquisitions that are layered on, as well are on there.

And Brent, I just, purely attention to detail. Because I mean once we looked at the third quarter and some of the run rate there, we mentioned a concern to our guys to not let this get out of hand. Just an overall attention to detail with regards to managing the cost.

One thing I will point out that you, when you look at the, the press release, you will see that our allowance for docile accounts is down to $6 million and it was $6.5 million last year. And it was close to that even last quarter. So that also was a slight decrease, as well that you can see from the analyzing the press release too.

And that's, obviously, you just feel more comfortable with I guess the collections and going forward, is that kind of--?

Our DSOs with receivables continue to go down. Our collection experience continues to bode well. We feel very good at this point in time with our customer base.

That's just another one paying attention to detail. And our attention to asset management is very, very important in this Company. And that's just one element of it.

Brent I did get that employee number for you. And it's at June 30th, we had 4,684 associates.

And then-- last thing, I guess, on the SG&A, you talked about some--and obviously there were some consolidations with some of the Minnesota Bearing locations, can you give us a number as to how much that was and was there any one time costs associated with severance or facilities closings or anything like that with those locations?

Brent, there were five locations that we consolidated between Minnesota Bearings and our own facilities. I'm trying to think if there were any nonreoccuring. I don't think there were. I think--

If they were they were diminutive.

They were so small, nothing jumps into my mind that that was the case.

So presumably then, there are some more hopefully potential gains on sales of properties coming over the next couple of months or so then, right?

Well we don't have anything in the plan. I mean we do have some portfolios of properties that we have that we look at to try to dispose of appropriately.

Great, thanks a lot.

And we'll take our final question from [Andrew DeAnglos] with KeyBanc Capital Markets.

Guys, I just wanted to follow up on guidance. You talked about some end markets that are perhaps slowing a bit. But with organic growth being pretty similar this quarter to last quarter. I mean, I just want to get a sense of the balance of actual weakness in the growth that you're seeing verses that which you kind of expect.

Could you restate that one Andrew? I'm not sure we quite-- I want to make sure we answer your question properly.

Okay yeah, I guess I'm looking for the balance of actual weakness that you're seeing in your markets now verses that which you kind of anticipating based on conversations with your customers and, just general contacts out in the field.

Well, I'll try to feel that question if-- at best I can. The things that we're seeing. I think the hot markets are going to be the energy markets. I mean that's no mystery. We're certainly involved there. We feel like those will bode us well in this next business year. Some of the concerns I mentioned, construction, that's going to impact lumber and wood. Now commercial construction's up, but home construction is down. So we're a little concerned about what might happen in that marketplace. The good markets that we were strong in, we-- like aggregate, mining in general we think are going to be strong in this coming business year. And we think that's where a lot of the growth is coming from.

Yes, Andrew from a standpoint of, this is our first guidance for the year. So to talk about actual results verses anticipated results, we're coming out with guidance right now. We're comfortable with that guidance. And so from that standpoint, there's nothing surprising at this early stage of the year.

Okay. That's helpful, thanks, guys.

Okay great. Thanks.

And with no further questions, I'd like to turn the call back over to our speakers for any additional remarks or any closing comments.

Well, we appreciate that everyone took time from their busy day-to-day to join us for this year end call. And we look forward to talking with you again in October when we announce our first quarter 2007 results. Thanks.

And ladies and gentlemen, this does conclude the Applied Industrial Technologies fourth quarter 2006 financial earnings conference call.