Applied Industrial Technologies Inc (AIT) 2010 Q1 法說會逐字稿

Hello, and welcome to the Applied Industrial Technologies first quarter 2010 financial earning conference call. All lines will be in a listen-only mode until the formal question-and-answer session. At that time, instructions will be given.

At the request of Applied Industrial Technologies, today's conference call is being recorded. If you should have any objection, you may disconnect at any time. I would like to introduce your host, Mr. Richard Shaw, Applied's Vice President, Communications and Learning. Mr. Shaw, you may begin.

Thank you, Christine, and good afternoon, everyone. We appreciate the fact that you've joined us today for our fiscal 2010 first quarter investor conference call. Our earnings release was issued this morning before the market opened and if you've not received it, you can retrieve it by visiting our website at Applied.com.

A replay of today's broadcast will be available for the next two weeks as noted in the archive information that's contained in the 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.

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 also with other filings made with the SEC. Accordingly, actual results may differ materially from those expressed in the forward-looking statements.

In compliance with SEC Regulation FD this webcast is being made available to the media and the general public, as well as analysts and investors. Because the webcast is open to all constituents and prior notification has been widely and selectively -- unselectively disseminated, all content of the call will be considered fully disclosed.

Our speakers today include David Pugh, Chairman and CEO of Applied, who will discuss our overall performance during the quarter and the year -- whoops, not the year, just the quarter. You will also hear from Ben Mondics, our President and Chief Operating Officer, who will discuss operational activities and Mark Eisele, Vice President and Chief Financial Officer, who will discuss our financial performance in detail. Getting us started today is Dave Pugh.

Thanks, Rick. Good to be with you guys again. You know, as I sit here I'm reminded of kind of flashback to last year's teleconference about this same time. We had just come off of a fairly good quarter, but we were seeing signs of economic havoc as the financial news drove American businesses to tighten their belts and pull back on spending.

You know, for us at that time we were already two quarters into making adjustments that are continuing to this day. We look back and you say how have we done? What kind of progress are we making against this economic headwind? It's still tough going.

The macroeconomics still overwhelm the microeconomics and nearly all of the markets we serve are still down and while we see some economists pointing to signs of an improving economy, there are an equal number saying there's no sustainable basis for it. Actually, we're seeing very little evidence of a base recovery at this point.

Our business would tend to lag any general recovery by three to six months, so we still have a ways to go yet with regard to top line impact. I've been traveling coast to coast and internationally over the past two months meeting with customers and suppliers alike and unfortunately I've met no one in our field that is currently in the optimist camp.

For the quarter just completed all but four of our top 30 markets were down compared to the first quarter of last year and for the four that are up they aren't up by very much. This sales climate is virtually unprecedented and while we're seeing a few signs of life beginning to emerge, it only serves to signal that we may have hit bottom and are seeing some stabilization to what had been a steady decline in sales over the last year.

Mark is going to provide yo some more detail on our quarterly numbers in his financial report, so I'm not going to get into that part. But suffice it to say that in spite of the economic turmoil we've managed to carve out fairly good results for the shareholders. Our direction is to balance all elements of our fundamentals lowering the cost of the assets in line with the opportunities we see, but maintaining the agility to respond to any stimulus generated recovery.

We are running a very tight ship. Our employee base is about 12% lower than it was in the first quarter of last year and another 12% are on reduced work weeks. We've closed several service centers that were in marginal performance and we've pushed hard to get productivity up. Simply put, we're doing more with less.

During the quarter, we did struggle with margins as customers shopped everything hard. We saw prices go to abnormal levels as the industry attempted to dump inventories. Margin management is going to be our toughest challenge in the foreseeable future, but we do feel we're up to the task.

During the quarter, we reduced our inventories by about 11%. This is part of an ongoing program for fiscal 2010 in which we plan to lower them about 25% in total. That dictates that we're going to be foregoing supplier incentives in some product categories. Given our current levels of inventory we feel like we can accomplish this reduction without negatively impacting our customer service.

We managed -- we continue to manage our receivables well and our customers are impressively current considering the depth of the economic recession. Our associates have done an excellent job of watching this area.

Overall we continue to create shareholder value and we're pleased that our operational processes are giving us above average results. But in spite of the process that we've made we'll have to say this recession is far from over and we're going to be living with a tough operating environment for some time to come. While we're committed to making the tough short-term calls necessary to cope with the economy, we're not losing sight of our key long-term strategies for the Company.

Overall I'm pleased with the majority of the results driven by very strong and decisive management team and the dedicated associates across the operations despite a very difficult economy. We have the resources and a very sound financial foundation to be able to continue to invest in the business and to make the most of our opportunities. I'll throw the ball to Ben, who will give you some insight as to what those opportunities are.

Thanks, Dave, and good afternoon, everyone. The economic indices that we follow support Dave's comment that we may have hit bottom. Industrial production hit 98.5 in September, the third month in a row that we've seen an increase. Manufacturing capacity utilization also increased for the third consecutive month to 67.5.

The ISM purchasing managers index fell a little bit in September to 52.6 but remained above the expansionary threshold of 50. While there is some encouragement in those numbers in that they are moving in the right direction, we need to be mindful that our results lag the indices by three to six months. So we need a few more months before we know if this uptick is sustainable.

Looking at our top 30 industries, 12 of them were down by 25% or more. Even government sales, which has grown very well for us over the past few years, saw a double-digit decline impacted by slower spending as tax revenues decreased. SG&A was down 10% from last year, but was 22.3% of sales due to our lower sales volume. While an SG&A of 22.3% of sales is not where we'd like it to be, it is competitive and we continue our efforts to bring it more into line with our expectations and our sales volume.

We continue to consolidate locations and adjust staffing to better match demand. Our employee count is down 619 from September 30, 2008, and is now at 4,635. Shortened work weeks reduced our full-time equivalents by another 66. We have made and will continue to make adjustments to bring our operating costs in line with the amount of business we have to support it.

We are taking a measured approach to these adjustments and are closely looking at the long-term ramifications to assure that we can continue to deliver a high level of service to our customers. We are still actively seeking and taking advantage of opportunities to grow our business. In spite of the recession we continue to invest in information technology improvements that will help us to improve the operational side of our business and we have also made sensible investments in training and technology for our salesforce.

We expect these to be a strong benefit as the economy returns to a growth mode. And finally, we continue to look at acquisitions. In this economic environment we see opportunities to expand our business via acquisitions. However, we continue to look for businesses that have a strategic and a cultural fit as well as reasonable valuations.

I will now turn the call over to Mark Eisele for a discussion of the quarter's financial results.

Thanks, Ben. Good afternoon, everyone. Let me provide some additional insight for our first quarter financial performance. Looking at our day-to-day operations sales for the quarter ended at $437.7 million, a 19.5% decrease over last year's first quarter.

We had 64 selling days in both the current quarter and prior year's first quarter. Sales at our U.S. service centers were down 24% from the prior year quarter reflecting the economic slowdown and its impact on our various customer sectors as discussed by Ben. Our monthly sales rate in our U.S. service centers began to improve slightly in the month of September after being stable since the month of March.

Sales at our U.S. fluid power businesses from the same-store perspective were down 27% for the quarter. Sales in local currency at our Canadian operations decreased 10% over the prior year quarter. Overall, including the impact of the decline in the Canadian currency, we are showing a 17% net decline in Canadian sales. Our overall Mexican operations also reflected a sales decrease of 28%.

During the quarter, our North American operating facilities declined by two to 462 and our associate count declined by 94 to 4,635 associates. Our product mix during the quarter was 27% fluid power products and 73% industrial products. Our gross profit percentage for the quarter was 26.4% or 50 basis points below last year's first quarter. This decrease is virtually all related to the continued downward pressure we are experiencing on our point-of-sale pricing to customers. We are experiencing this in the U.S., Canadian and Mexican markets.

Our selling, distribution and administrative expenses for the quarter decreased from the prior year quarter in absolute dollars by $10.9 million. Even though a $6.8 million of our quarterly SD&A expense relates to added expenses from acquisitions not included in the prior year quarter which includes $1.3 million of additional intangible amortization expense.

We experienced decreases in wages due to our lower headcount as well as decreases in incentives and employee benefits. We also had favorable experience with our bad debt expense during the quarter. Overall bad debts declined by $500,000 and are reflecting a more normal run rate for these items from prior to the economic downturn.

I'd like to talk about our sequential selling, distribution and administrative expense run rate from the June quarter to the September quarter. SD&A expenses for the current quarter were $3.5 million higher than our June quarter, so slightly higher sales in the current quarter contributed to this. However, other increases related to the accounting for stock option grants in the current quarter that were immediately expensed and reversals of incentive compensation accruals in the June quarter that did not repeat or reoccur in the current quarter.

Our operating margin was 4%. The decline in our gross profit margin at the point-of-sale from competitive pressures was the primary reason for our operating margin decline along with the deleveraging impact of decreased sales. In addition, the incremental intangible asset amortization from fiscal 2009's acquisitions decreased our quarterly operating margin by approximately 25 basis points on a comparable basis with the prior year's first quarter.

Our effective tax rate for the quarter was unusually low at 33.1%. This rate was impacted by resolution of various state, local and Canadian issues that lowered income taxes by approximately $500,000 during the quarter and are not expected to reoccur for the rest of fiscal 2010. On a go-forward basis, we expect the remaining quarters of fiscal 2010 to have a tax rate of around 36%.

Our balance sheet remains strong with shareholders equity at $512.9 million and a current ratio of 2.6 to 1. Our pre-tax return on assets was 8.3% for the quarter compared to 16.9% in the prior year quarter. This decrease is due to the reductions in earnings from slowing sales and the large amount of intangible assets added to our asset base from acquisitions in fiscal 2009.

Our inventories decreased $28.7 million in the quarter. This is consistent with the annual reduction goals of our inventory management program for fiscal 2010. We plan to continue burning through our excess inventories and limiting additional purchasing to levels supported by our current sales activity. We believe that for the full year inventories will be reduced by over $60 million.

Cash generated from operations of $50.2 million was comparable to the $48.9 million from the same period in the prior year. The negative cash flow impact of lower operating income was offset by our inventory reductions during the quarter.

During the last earnings conference call, we expressed concerns about maintaining a gross profit margin close to the 27.0% realized during fiscal 2009 due to continued downward pressures on point-of-sale margins. The point-of-sale margin decline in our first quarter explains virtually all of our gross profit margin decrease from the prior year period.

Looking forward for the remainder of the year, our goal is to maintain a gross profit margin at our slightly better than the 26.4% we accomplished this quarter. As discussed in our previous conference call, we are experiencing a decrease in supplier purchase incentive rebates for our current year purchases.

These flow into the income statement as the inventory is sold to customers. Therefore, the current year rebate reductions will negatively impact gross margins to a greater extent in future quarters. Our inventory reduction strategy has been effective in offsetting the impact of lower supplier rebate benefits on our current quarter income statement. This strategy enabled us to record LIFO income of $700,000 during the quarter and reduce our LIFO reserve by the same amount.

Our aim continues to be to keep a continued tight control on our selling, distribution and administrative expenses. Our expectation is that overall headcount will continue to shrink throughout the year. By effectively managing our headcount we effectively manage overall expenses.

We expected operating margins to come down during the first two quarters of fiscal 2010. However, the 4.0% level in the first quarter is lower than our original forecast. We still expect to see an increase in our operating margins in the later half of the year as sales begin to increase as the industrial economy improves.

We continue to have no immediate plans to purchase stock for treasury and while we'll continue to monitor the quarterly dividend rate, our expectations are that it will continue to remain stable during fiscal 2010. And now for some closing remarks by Dave Pugh.

Thanks, Mark. That's pretty much it. The numbers are down, but we're certainly not desperate. It was a tough operating environment in the first quarter. We made the most of it.

There's some signs that the economy might be starting to bubble, but we sit here and believe that right now it's going to be a long, slow recovery for manufacturing in our business. With that, Christine will open the line up for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). The first question comes from Matt Duncan from Stephens, Incorporated. Please go ahead.

Good afternoon, guys.

Hi, Matt.

The first question I've got is really kind of taking a look at what you're seeing out there in the economy. It sounds like maybe you're seeing some very early signs that things could start to get better in the second half of your fiscal year and I guess I'm just kind of curious what you're seeing, what are your customers telling you and when do you feel like maybe you can start to see your monthly sales rate pick up? It sounds like it did a little bit in September. Do you think maybe that continues?

Matt, we're optimistic looking at the indices that we follow that they seem to have -- the major ones, the ISM and the MCU have ticked up. In conversations with customers and suppliers we have not seen that translated into our business as of yet and we haven't seen that many green shoots out there, plants starting back up, lines starting back up.

There have been a few, but not enough to really call the increase in sales. Our outlook is in the near term for the next quarter or so I think to continue about where we are and hopefully later in the year with that three to six-month lag we'll see it pick up in the second half of our fiscal.

Okay. And then I guess kind of the follow-up to that, typically you do have that three to six-month lag. When would the commentary from your customers normally begin to change? Would it normally be happening by now if things were going to get better three to six months from now or is it typical that you don't really hear your customers' tone change until your order rates actually start to get better?

Well, we should start hearing some comments now and in the next few months and there have been some signs of life. We don't know how much of it is due to the "Cash For Clunkers" program.

There was, believed that from a destocking standpoint the automotive industry is probably destocked more than anybody else, but I think the Commerce Department came out with a report last week that showed that inventories were still dropping significantly and so I'm not sure if the inventory destocking is finished yet.

Matt, let me just tag onto that because I mean typically our customers' order rates are going to have to improve ahead of our order rate. Their wheels are going to have to start -- their shaft is going to have to start turning before they're wearing out the parts that we supply and we haven't seen them talking about their order rates improving at this point. So I don't see anything that's going to be driving a pick-up in our business for a while.

And then I guess sort of that uncertainty level is probably why your guidance range is still fairly wide. Would that be safe to assume?

It is and we don't -- we just don't know when -- if and when stimulus generated recovery might occur. There's rumors out there about road projects and stuff that are about to be released and we would be in good position from that standpoint with our position in that industry, but it just hasn't started happening yet.

Okay. A couple more things and I'll hop back in queue. I guess on the price pressure that you guys saw this quarter, were you surprised by how much of that you were seeing?

Is it getting any worse right now? I guess, did it worsen throughout the quarter is kind of what I'm getting at and did it surprise you that it got as bad as it did?

I would say, Matt, that obviously we were surprised at the level of the competitive pressures. I don't think that it got any worse throughout the quarter, but I don't have the numbers in front of me, but my feeling is that, yes, a little bit of a surprise on the downside, but I'm not sure if it's gotten any worse recently.

And then, Ben, is that price pressure, are you seeing more of that at the point-of-sale? Are you seeing more of it in renegotiation of national account-type agreements? Where are you seeing it most commonly? Where is it coming from? Is it the small mom and pop or are you seeing it from some of your bigger competitors?

It's fairly widespread and it's at the point-of-sale.

Okay. That's helpful and then last thing here and I'll get back in queue, Mark, on the rebate levels, I know you guys are experiencing or expecting those to be down quite a bit this year. Are rebates for you guys tied more to a calendar year or your fiscal year? And I guess I'm trying to figure out at what point in the year is it going to weigh on your margins the most?

The rebate programs are generally either based upon our fiscal year-end or our supplier's fiscal year-end. So I'd say many of them are June programs. Many of them are December programs and we even have a September and a March program as well from relatively large suppliers to us. But it all relates to the purchase volumes and we're just buying less from our suppliers. So if we buy less, we get less benefits.

Is there any way you can quantify for us in dollar terms how much the impact of that is going to be on your gross profit level?

No. We really don't want to do that, but we will say like we said in the conference call that the negative impact on gross profit for this quarter really all related to point-of-sale pricing.

Okay. That's helpful. Thanks, guys.

Yes.

The next question comes from Adam Uhlman from Cleveland Research. Please go ahead.

Hi. Good afternoon.

Hey, Adam.

Mark, just a follow-up to the last question on the LIFO layer liquidations. I think the press release noted that you had captured a little over a $4 million benefit this quarter. You've already had taken out about $30 million of inventories or about halfway through your goal for the year. Should we expect those benefits from LIFO layer liquidations to moderate throughout the year or is that kind of an even income stream throughout the year?

That's a good question, Adam. One of the accounting requirements for what we're doing on interim accounting for LIFO when you have layer liquidations is that you ratably book those benefits throughout the year. So a good estimate right now is to take what we recorded in our September quarter and multiply times four and that's the annual estimate.

Of course, as we go through the year, we'll be refining those estimates because as of right now we need to make an estimate of what the June 30, 2010 inventory balances are and, of course, we'll continue to refine that as we get closer to June of 2010.

Okay. And then has there been any impact to fill rates as you've taken out so much inventory over the last quarter? Is that a concern at all?

No. Not at all. We're looking at this for reducing inventories of excess quantities of individual items that we have in stock and we are seeing no degradation of our fill rates to customers. We expect no degradation of our fill rates to customers.

Let me reiterate that one because this is not an inventory reduction program. It's an inventory management program that basically says, given the reduced volume we can maintain the same level of service at a lower asset base. So we don't -- nowhere in our Company do we call this an inventory reduction program.

Okay, got it. And then there were some commentary earlier that September sales trends seemed to improve. They sounded like the best of the quarter. Could you talk about, maybe quantify that a little bit and talk about what you're seeing so far in October?

Well, I think what we saw is for the months of March through August our daily sales rate was basically flat for each of those months and that was similar to what we talked about on our previous conference call, that we saw that. And we did see a small tick-up in the month of September and on so that was obviously something we were glad to see. I think one month does not a trend make for that tick-up and we need to see a couple more months to see what's going on. We're not seeing big improvements yet in our sales.

Okay. And then the last question and I'll get back in the queue, the government sales seem to have taken a step down. Can you talk about where in the government they're spending less money and kind of what the outlook there is for the remainder of the year?

Yes. A couple of areas. I think on the -- everything you read about the state spending with some of the budget constraints there, that has been slower. And then also on some of the contractor business we have, the military contractors, some of that business has slowed down and shifted around somewhat.

So those are the two main areas and the other areas we continue to see growth and overall in the government our reduction is much, much lower than the reduction in the remainder of the business. So it's still growing faster than the remainder of the business.

Great. Thanks, Ben.

The next question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead.

Hi. Good afternoon, guys.

Hi, Jeff.

You mentioned in your prepared remarks that I guess your op margins were lower than you had anticipated coming in. Can you just talk more generally versus your internal forecasts how sales fell out, earnings relative to expectations?

Yes. I think that the decrease was really due to the point-of-sale gross profit margins being lower than what we were expecting in the quarter. And I think a little bit of that was we saw a little bit of higher sales run rate in the quarter and I think some of that might be tied together for us being aggressive in sales with customers and getting some more sales at potentially lower margins.

Jeff, if I read your question properly, sales were a little bit above expectation. The margins were a little bit below expectations offsetting the benefit we got from the sales and costs were pretty much where we thought they would be.

Okay. And I mean do you seem to be taking a more aggressive stance on price than your peers or competitors because, broadly, as we hear third quarter earnings, it seems like price resiliency has been pretty good across the board just given that steel and copper prices are back on an upswing. So I'm just a little surprised to hear that pricing pressure is so severe.

It's tough to say, Jeff. We operate in a lot of different markets and a lot of different industries and overall we're seeing competitive pressures.

The comment about commodities, prices and such, we have not had price increases for the last two quarters. I don't believe we've had, the increases we've seen from our suppliers have been negligible.

Okay. Thanks, guys.

The next question comes from Joe Mondillo from Sidoti & Company. Please go ahead.

Good afternoon, guys.

Hi, Joe.

In your commentary you mentioned four end markets that you saw actually grow in the quarter. Could you tell us what those were?

I don't have them in front of me. We're looking at each other. We don't have the list. They, I'd tell you that the four end markets were smaller markets, but in general I would say that, I might not have the exact ones here, but the food industry has done better than most, power generation, a couple of the ones, energy related fields as well as the food industry have outperformed the other industries.

Okay. So you said in March through August basically you saw somewhat a flat sales and then in September you saw most of the sequential growth from the fourth quarter of 2009 to the first quarter of 2010. So more or less you saw a $12 million increase in sales in September. Is that fair to say?

I don't have the calculation in front of me, Joe, but if -- that might be accurate. I don't know.

I guess I'm just wondering what you contribute or what do you attribute that to? Do you think it was the "Cash For Clunkers" and it could be a near-term thing or what you attribute that decent jump in September?

Yes.

We've asked ourselves that same question. About the only thing we've seen out there you could attribute to is "Cash For Clunkers" and some positive publicity that went with that and I don't -- we'll take a look at this this next quarter and can probably compare the two and see if we can find a space. But there was nothing that jumped out at us, any one field, any one order, any one customer that would have accounted for this.

Okay. And then it looks like you have increased the amount of inventory that you're going to work at down in 2010. I think in the last call you said about $50 million. It looks like it's about $60 million now. Could you just give some comments on that?

Sure, Joe. As we continue to look at our inventory levels, we continue to peel back the onion on more and more suppliers, more and more specific line items of items that we have inventoried. We are finding more and more opportunities.

As we're implementing this inventory management program, we're able to find more areas for improvement and I think that's what we're doing as we move throughout the year. We'll be updating that number.

Exactly.

See where we're going to come out with.

Don't expect the target to stop where it is because we're inviting all of our associates to participate and be engaged in this.

Okay. And then just going back to the rebates, is that -- are you continuing to see -- I think this was touched on before, but are you continuing to see a decline, an adverse effect of reduction of rebates going forward or is that sort of fully been eliminated?

Well, I think we'll see the negative impacts in that for the entire fiscal year. Since we are basically purchasing products from suppliers at a lower level than the cost of goods sold, what we're selling, then we're buying less.

Until we get purchases more in line with COGS, I think we'll be having a challenge on the rebate side of things.

So is the amount, the number of rebates that you're seeing continuing to decline or have they declined to a point where they're just going to be weak and flat going forward?

I think they've declined to a point where they'll be weak and relatively flat for the year, although some of the calendar year programs have not necessarily been finalized for calendar year 2010 and we have estimates in there of what we think they're going to be, but we're not 100% sure on all of those.

From what we know, we have accurately forecasted those in our guidance.

Yes.

Okay. And then just lastly, in term of all the cost cutting that you've done how much do you estimate would come back once you get to an operational level such as in 2007 or 2008? Is that all going to come back or --

It will not all come back even if the sales volume comes back to where it was. We expect to continue with efficiencies and run with less. So it's tough to say percentagewise, but maybe in the short term maybe half of the expenses would come back.

Okay. And just real quick, do you have an estimate of how much savings you've cut out of the -- or how much costs have you cut out of the cost revenue?

I don't have that number right here in front of me, Joe. Obviously, we cut a bunch through the last two quarters of fiscal 2009 and those savings have continued to pay dividends in this quarter. We reduced headcount by around 100 people again this quarter.

So we're getting additional savings from that. We're just continuing to push on all cylinders to control costs and it's top of mind for everybody, but I don't have a specific number and I think just to piggyback on what Ben said about half the costs may be coming back, I think how we try to look at it is that about half the headcount would come back and so, therefore, that might be close to half the costs if we resumed getting back to sales levels from what we were a year and a half ago.

Okay, great. Thanks a lot, guys.

Thank you.

The final question comes from Brent Rakers from Morgan, Keegan. Please go ahead.

Good afternoon. Let me -- I guess I have several questions. Let me start with a couple of the housekeeping questions. Do you have, Mark, maybe what the contribution was year-over-year from the acquisitions, I guess a full quarter of FPR and then Cincinnati as well?

We purchased FPR at the end of August of 2008. So this quarter has all full three months of them. Last year only had one month. I think it was, they were running at around, for those two months it would be around $24 million of sales approximately.

And Cincinnati is just a couple million more. Is that right?

Yes. Their run rate was much lower from a quarterly perspective. It was under $2 million a quarter. I'm not sure exactly what it is right in front of me.

And then in terms of the -- on the revenue side do you have a number what the inflation, or I guess, maybe possibly deflation contribution was to revenue in the quarter?

We have not been experiencing -- we have not experienced any major supplier price increases over the past nine months. So I don't have that number right in front of me. My estimate would be it would be less than 1%, but we haven't experienced deflation from suppliers either.

Okay. Great. And then maybe a couple little more tricky questions. I just want to understand, I mean there's a combination of factors that seem to have occurred in the quarter.

There's talk about increased price competition, but simultaneously some revenue gain in gross margin pressure specific to Applied that doesn't appear to have taken place at one of your large competitors. Is there a strategy in place with Applied to maybe go more aggressively at market share?

Is that something of an inventory cleansing that maybe is wrapped up now where the gross margins will go up? Could you maybe just talk around those points a little for me?

Yes, Brent. I don't think there's anything we can point to that says it is a strategy or any actions we've taken that are outside of our normal activities to be aggressive in the marketplace and at the same time work on both the sell side and the buy side on our margins. So maybe something that just evidenced itself in the quarter, but nothing really strategic to speak of.

And, Brent, it's tough to get a direct comparison on some of these and you've got to watch for reversals and some accounts and between the two companies and so you can take one of two big orders aggressively in a quarter that could skew this a little bit. So I'm not really concerned that there's been a major change in the competitive playground there.

I think if you look at our sales change for our U.S. service centers and compare that to the major competitor that announced their earnings a day or two ago, it's spot on when you take out their acquisition impact.

And let me just as a follow-up to that, I guess I maybe heard some commentary earlier that there was some revenue or maybe some perception of some market share gain from Applied in the quarter. I wondered if you could maybe talk a little bit more to that. Were there some national account wins that maybe were booked in the quarter or is this just day-to-day business that maybe you think you picked up on a little bit here?

Brent, I don't believe we said that, but I think if anything, we said that we might have been surprised a little bit on the upside on the sales side, but I don't think we really made a statement about any big share gain.

Yes. I certainly that -- if we did, it was a mistake because we didn't intend to.

Okay. Fair enough. And then one final question -- well, actually I guess two final questions. First, attached to the comments about FTE being down I think another 60 to 70 in the quarter, is that something that is incrementally new this quarter or is that something in terms of the hours rates that have been coming down fairly consistently over the last nine months?

I think that it's not new. We've been doing this for the last nine, 10 months. So I'm not sure exactly if in the quarter if our full-time equivalents through reduced work hours was a larger number or smaller number than the prior quarter, but my feeling is that with our headcount being down, our number of reduced work hours is probably -- we probably have fewer people on reduced work hours.

And then just last question, again, trying to understand a little bit about the SG&A trend in the quarter. It's a little, kind of counter what the normal seasonality works for Applied traditionally and I was just wondering if maybe you could speak to kind of the variable compensation portion, specifically some of the bonus compensation, whether it be for execs or managers, branch managers, regional managers, on down the line, wanted to see how that might have done on a sequential basis?

I don't have that in front of me, Brent on, a sequential basis. I do know this year over last year we are still showing major decreases in those categories. My gut feel is on a sequential basis for what I call the field incentives, the folks, the sales reps, the general managers of our locations and the field leadership that their incentives are down a bit.

I mean, but that's my perception. I don't have those numbers in front of me.

Okay, great. Thank you very much.

Thanks, Brent.

Thanks.

That was the last question for today. Please go ahead with any closing comments.

Great, Christine. Thank you very much. Well, ladies and gentlemen, thanks for being with us. Again, tough operating environment. We're going to continue to face it. We're going to continue to deal with it. Thanks a bunch, talk to you next quarter.

Thank you for participating in the Applied Industrial Technologies first quarter 2010 financial earnings conference call. This concludes the conference for today. You may all disconnect at this time.