Applied Industrial Technologies Inc (AIT) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Applied Industrial Technologies second quarter 2010 financial earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Rick Shaw. Mr. Shaw, you may begin.

Thank you, John, and good afternoon, everyone. We appreciate your joining us today for our fiscal 2010 second quarter investor conference call. Our earnings release was issued this morning before the market opened and if you have 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 to analysts and investors. Because the webcast is open to all constituents and prior notification has been widely and 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. You'll 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 David Pugh.

Thanks, Rick, and good to be with you folks again. Let me just state up front that if you have joined this teleconference in hopes of gaining absolute clarity on what's going to transpire economically in 2010, you probably have a vastly misplaced trust in our clairvoyance. As we see it, there's still a dichotomy, if not a trichotomy of speculation across the spectrum of our operating universe with regard to macroeconomics. The ability at this point to separate political spin from real intellectual assessment from physical facts is very difficult, if not impossible. Even sitting right here in this room, Mark sees a stabilization. Ben sees light at the end of the tunnel.

And I'm a little bit more concerned than either one of them as to how and when the economy's going to recover. We would fit in very well with the recent survey of industry leaders in northeast Ohio, which showed that 40% are expecting a sluggish first half of 2010 followed by gradual recovery. Another 25% are expecting no change from last year. Another 25% are expecting a slow improvement followed by a relapse, in essence a double dip. And 10% are expecting a snapback by year end. Quite diverse out there.

Speculation aside, let's discuss what we do know. We did see some sales growth in the fourth quarter -- I'm sorry, in the second quarter. Whether that is sustainable is yet to be seen. The impact of transient stimulus investments makes forecasting on the basis of legacy metrics a little bit of a guessing game.

Margins are still taking a hit. Distressed end use customers, especially in construction-related industries, are making some pretty tough demands. Maintaining our share in such a climate at times requires concessions we would rather not make. But the price/volume balance in this business is very delicate.

As far as cost control goes, I feel good that the controllable piece of SD&A has the attention it deserves and is being managed well. Asset management continues to be an area where our team is exhibiting excellent operating skills. All in all, I'm confident that our fundamentals are in balance with what this market is currently offering, and that we are maintaining the dexterity to move quickly whichever way it goes. Now, here's Ben who will give you some insight on how things shaped up with operations during the quarter.

Thank you, Dave, and good afternoon, everyone. The economic indices that we follow support Dave's comment that the economy is difficult right now. However, we are seeing some improvement.

Industrial production continued to improve during the quarter and finished at 100.3 in December, boosted by a rise in utility output. Manufacturing capacity utilization also improved slightly in December and hit 68.6, its highest level since December of 2008. While improving, it is a long way from expansionary levels.

Finally, the other major economic indicator that we follow, the ISM purchasing manager's index, increased to 55.9 in December, its highest level since April of 2006, and the fifth consecutive month that it has been in expansionary territory. Looking at our top 30 industries, seven industries actually showed some growth, while 23 industries were down compared to last year. 22 of the top 30 industries improved over our first quarter results. We were pleased with our progress in government sales during the quarter and while it still hasn't returned to a growth mode, it is much improved compared to the double-digit decline we saw in our first quarter.

SD&A as a percent of sales was 22.1% improved from 22.3% in our first quarter. Improved sales volume, when it comes, will definitely help us, as we have the capacity to handle more sales right now without adding head count. While our SD&A isn't where we want it to be, we believe it is competitive and we'll continue our efforts to bring it more into line with our expectations and our sales volumes.

We continue to adjust our staffing to better match demand, and our employee count is down 85 for the quarter and down over 700 from September of 2008. It is now at 4550 employees. Shortened work weeks reduced our full-time equivalents by another 70. 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 also continuing to actively manage our assets and have decreased our consolidated inventory by $52.8 million, or 20.8% since June 30, 2009. We're pleased with this effort and should realize a reduction in excess of 25% by fiscal year end. These inventory reductions have not affected our on-time delivery performance, which remains at high levels. We continue to make investments in training that will help us grow our business, particularly sales training and technology.

We are also making investments to improve our information technology that will help us to improve the operational side of our business. We expect these to be a strong benefit when the economy returns to a growth mode. 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 second quarter financial performance.

During the quarter ended December 31, 2009, net sales decreased $56.2 million, or 11.2% compared to the prior year quarter, reflecting decreased net sales in same-store business. We have, however, seen additional improvements during the quarter and our daily sales rates starting in November and continuing through December. In fact, our month of December, sales per day rate is greater than the monthly rate from December 2008. This is the first time we have seen an improvement in sales compared to the prior year in quite a while. The number of selling days for the quarters ended December 31, 2009 and 2008 were 62 days in each quarter. Our product mix during the quarter was 28% fluid power products and 72% industrial products.

Net sales for our service center-based distribution segment decreased $40.4 million, or 9.9% during the quarter from the same period in the prior year. This is attributed to declines in our same-store business. Net sales from our fluid power business segment decreased $15.8 million, or 16.5% during the quarter from the same period in the prior year. Our Fluid Power resource acquisition is now fully included in both the current and prior years' quarters, as they were acquired in August 2008.

From a geographic perspective, sales from our US operations were down $50.4 million, or 11.6%. Sales from our Canadian operations decreased a total of $4.1 million, which was net of a $3.4 million favorable foreign currency translation. Our Mexican operations decreased $1.7 million, of which approximately $1.3 million is attributable to foreign currency translation. During the quarter, our North American operating facilities increased by one to 463, as we now have a location in New York City.

Our gross profit percentage for the quarter was 26.2% as compared to 27% in the prior year's quarter. This decrease is all related to the continued downward pressure on our point of sale pricing to customers throughout all of our operations. Our selling, distribution and administrative expenses for the quarter decreased from the prior year in absolute dollars by $8.7 million. This is primarily due to lower wage and related employee benefit expenses due to our lower head count.

During the quarter, we also recorded Board of Director stock option and stock awards expense, which are normally incurred in January and normally in our third quarter. These amounts were $470,000, or $0.01 a share for this current quarter. Our overall selling, distribution and administrative expenses were flat compared to the first quarter.

As a percentage of sales, our SD&A expenses improved slightly compared to the first quarter. We expect our go-forward SD&A expenses per day -- daily rate, to be relatively flat for the remainder of the year as well. Our operating margin was 4.2%, an improvement over the 4.0% rate in our first quarter. The continued deleveraging impact of decreased sales was the primary reason for our operating margin declines in comparison to the prior year.

Our effective tax rate for the quarter was unusually high at 40.1%. This rate was impacted by recording $600,000 of discrete item expenses related to our Mexican subsidiaries. These items pertained to the determination that specific deferred tax assets for Mexico would not be realized and therefore they were expensed in the quarter. This reduced our earnings per share by $0.01 also. On a go-forward basis, we expect the remaining quarters of fiscal 2010 to have a tax rate of around 36.0%.

Our balance sheet remains strong, with shareholders equity at $522.2 million, and a current ratio of 2.3 to 1. Our pretax return on assets increased slightly to 8.6% from 8.3% in the prior quarter. Our inventories decreased $24.2 million in the quarter and now total $52.8 million year-to-date.

This is consistent with the goals of our fiscal 2010 inventory management program. We plan to continue burning through our excess inventories and limiting additional purchasing to levels supported by our current sales activity. We now believe that for the full year, inventories will be reduced by over $75 million. Previously, we had been targeting a reduction in the $60 million range.

Cash generated from our operations of $45.4 million for the quarter and $95.7 million year-to-date was significantly above prior year's amounts. The significant cash flow is attributable to our inventory reductions in fiscal 2010 compared to net inventory additions in the prior year. We expect our cash generated from operations for the last half of the year to be approximately one half of the cash generated in the first half of the year. While we are working hard to increase our overall gross profit levels, looking forward to the remainder of the year, we expect to maintain a gross profit margin close to our quarterly run rate currently of 26.2%.

As discussed in previous conference calls, 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 and the last two quarters of the year as compared to the first two quarters. Our inventory reduction has been effective in offsetting the impact of these lower supplier rebate benefits on our current quarter income statement. This strategy resulted in recording LIFO income of $1.8 million during the quarter and reduced our LIFO reserve by the same amount.

Year-to-date, there has been no negative impact on our gross profit percentage from lower volume rebate benefits due to our taking advantage of the LIFO liquidation benefits. We expect this to continue for the remainder of the year as well. If our inventory levels had remained constant with the June 30, 2009 levels, we would have recorded LIFO expense in the quarter of $3.9 million. Our fiscal 2010 inventory reductions generated a $5.7 million LIFO layer liquidation benefit in the quarter. This is what resulted in the actual LIFO benefit of $1.8 million being recorded for the quarter as well. Now, for some closing comments by Dave Pugh.

Thanks, Mark, and thanks, Ben. That's about as much insight as we can give you on a substantive basis. As I indicated in my opening remarks, there is just not a lot of transparency out there with regard to what the future holds. I have a lot of faith in our folks to get the most out of what the market does offer. We're going to move with the facts. We're going to follow where they lead us. Hype and hope have never been elements of our plan. John, with that, we'll open the line up to questions.

(Operator Instructions). Our first question comes from Jeff Hammond with KeyBanc Capital. Please go ahead.

Good afternoon, guys. I'm going to focus my questions on Ben. He seems to be the most optimistic. Ben, if you could just walk us through some of the end markets where you're maybe seeing more notable in flexion point and maybe some of the notable laggers.

The laggers stick out more than the positives right now. If you look at anything, obviously construction related, lumber and wood products, cement, the aggregate industry, they are all -- continue to suffer and year-over-year are down significantly, double digits. If you look at high tech is one of the bright areas. Some of our high tech customers have seen an uptick and we're seeing that in a number of areas of our business.

There are a few other of the industries -- I mentioned seven industries that are up. Only a few of them where we can say the industry is up overall. Rubber products, as an example, which we would relate to the stimulus effect of maybe Cash for Clunkers and the automotive industry.

The other industries that are showing only a slight improvement, digging into the numbers, looking at some lower comparables from prior year, some customer-specific, possibly our improved position with some specific customers in those industries. But we show growth in a few industries where I don't believe the overall industry is growing.

Okay. And then just on the daily sales trend, I think Mark mentioned improvement November or December. As you go out and talk to customers, is there anything to suggest that that's not sustainable or what are they specifically pointing to that's driving that?

Jeff, my optimism comes from looking at the daily sales rate, looking at the overall numbers, looking at the graphs of PMI and the MCU and somewhat of the momentum that we're seeing. Not a whole lot of good anecdotal customer stories of plants starting back up. We're probably hearing more stories of shutdowns in those industries I had mentioned earlier. Not a whole lot of good, positive stories coming from our customer base. Talking with our suppliers, I think they are cautiously optimistic as we are, but really can't relate that back to any news worthy events in our customer base.

Okay. Thanks, guys. I'll get back in queue.

Thanks.

Thank you.

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

Good afternoon, guys.

Hi, Joe.

First, I just wanted to touch on pricing. Just wanted to get some more color on how this environment works. What kind of player you are in this type of an environment. Are you leading the pricing competition? Are you lowering prices? How does that work in this type of an environment? And how do we look at that going forward with improved sales here?

We look at -- we are -- we're seeing the degradation in our margins across our business units and across geographies. We're looking at it as we are not leading. We are responding to market conditions and the competitive nature of the business, led by the downturn in the economy.

Who are the players that are leading that?

Tough -- it's tough to say. I think it's really just the competitive nature of our business right now and the challenges that our customers are seeing. It really begins with the customer and the pressures they are under and we're responding as well as our competitors.

Okay. And then how is that looking, say, going forward? Is that relieving at all? Or is that letting up or how is that looking going forward?

We continue to see extreme pressures in the marketplace across our business segments. We have a number of initiatives in place to mitigate the drop and we are very hopeful that some of those efforts will start to take hold, as well as the market firming up.

Okay. And then in terms of the LIFO inventory benefit, I was wondering if you could just touch on that a little further. What are we going to see when you guys actually do begin to have to increase inventories with increasing sales and such? How is that going to affect you when that benefit drops off?

Well, I think our expectation, Joe, right now is that in this current year, we are getting fewer supplier purchase incentive rebates. The LIFO layer liquidation is available to us to offset that. During fiscal 2011 and forward, if we're -- if inventories are stable, we're purchasing from our suppliers based upon the rate of cost of goods sold, then our expectation is our rebate benefits will rebound to a more normal level. And that those benefits when that inventory is sold, will flow into the income statement and our gross profit percentage should be relatively stable on a go-forward basis. We have the impact this year of the rebate benefits going down, but because we're on LIFO, we have the opportunity to take advantage of the layer liquidation benefits. But then next year and in future years, we should see us back achieving the normal gross profit percentages.

Okay. Great. And then last question, I just wanted to ask you, in terms of your financial position, your cash has gone up. What is your use of cash with the environment showing slight improvement? How do you go about that? Are you looking at acquisitions, et cetera?

Yes. First off, on the balance sheet we have $75 million of debt that is now all shown as current because that will come due -- $50 million in September of 2010 and then the remaining $25 million in November of 2010. A good chunk of the cash will be used to pay off that debt and then the plan is we would be debt-free. With that said, we're still very actively looking at acquisition candidates and talking to organizations about potential acquisitions. It's a key part of our strategy on a go-forward basis.

Okay. Great. Thank you very much.

Our next question comes from Jason Rodgers from Great Lakes Review. Please go ahead.

Hi. My last question was just answered. But I was wanting to inquire about supplier price increases to see if there's been any change there at all.

We have seen very few supplier price increases. They have been a little scattered. We've had a couple in the most recent quarter announced from a few of our major suppliers, but it doesn't seem like the industry has followed their lead. They are few and far between right now.

Okay. Thank you.

You're welcome.

John?

Our next question comes from Brent Rakers from Morgan Keegan. Please go ahead.

Good afternoon. I think first, Mark, I just want to make sure -- I want to revisit something you said in the opening comments. Just to clarify. Did you say in terms of second half of the fiscal year that the SG&A as a percentage of sales would be at similar rates as in the second quarter?

I think our SG&A expense per day should be relatively similar, but I think the expectation is as a percent of sales, it may go down a bit.

Okay. I'm sorry. You meant similar on a dollar basis, is that correct?

Yes.

Now, a further point of clarity on that. As presumably as revenues increase per your guidance the second half of the year, what -- would there be offsetting components to the increase in -- whether it be shipping and handling or variable employee compensation that should be increasing? What would be the offset to some of those factors? Because I would suspect that by the fourth quarter you could see pretty good levels of year-over-year revenue increases.

Our sales guidance of $1.75 billion to $1.85 billion for the whole year -- if you just want to take the midpoint of those guidances, that is a little bit better than what we had last year on a sales rate perspective. But we think that for the first amounts of sales dollars that we'll be adding -- that we'll add to our numbers, that we'll be able to leverage that in a pretty good way down to the bottom line. Our expectation is that the SG&A expense will not go up because we till have a pretty tight reign on those costs.

And then, Mark, I'm sorry to harp on this, but I also thought there has historically been some -- a fair amount of seasonality with regard to operating costs, some things that kick in as a result of the normal calendar year in the first -- in the third and fourth quarter. Am I confused on that point? Or maybe you can walk me through that a little bit.

Obviously in the fiscal third quarter, you do have some additional employee tax issues for FICA tax, unemployment taxes, things like that so we have some seasonality with that as things are happening. One of the things that did happen that I mentioned in the conference call about the -- traditionally in the month of January is when the Board awards their stock option, stock awards. And the Board met in December instead of January this year. And so that moved from the third quarter to the second quarter and that was about $470,000 of expense.

Okay, and, Mark, that brings about a good point. I wanted to follow up on that point as well. Are those the types of numbers -- would that $470,000 -- is that the number that shows up on the cash flow statement for stock based comp? Is that included in that number?

Yes, it is.

Okay. That means outside of the $470,000, the year-over-year comparison in that category was down -- was up in Q1 year-over-year and then down fairly sharply in Q2. Can you give me a sense of what I should expect from that -- from that line in the second half of the year? Because there's been --

I don't have -- yes, yes, I can. I don't have the exact numbers in front of me, but my expectation is that for the second half of the year, the change in that line will be about $1.5 million increase. We're now at about $2.9 million. My thought is that we should be around $4.4 million at June of 2010.

That's helpful. And then just one last question. I'm trying to get some perspective around the gross margin pressures, and again, maybe adjusting out the contribution from the LIFO layers liquidation. But look at -- peek to where we are now and I'm revisiting what occurred for Applied back in the last recession, where it looked -- it gives the appearance to me that inventories came down a fairly significant amount during that timeframe. Obviously revenues came down, not as much as we've seen this time. But I want to say that gross margins consistently increased every year I think from 2000 to 2004. Just maybe if -- if Ben or Dave, you can talk me through a little bit about the nuances of last recession versus what you're experiencing now.

To start with, we had a much lower base to start from.

Okay.

We corrected -- we were in a little bit of a deficit position compared to our competition at that point and we took some stringent initiatives to make sure that we got back in line. In fact, felt like we moved ahead of a few folks. We had an easier start -- an easier comparison back then. With regard to the rates that we're seeing right now, I see no let up in the pressure that we are seeing right now with regard to margins. And it's going to be a tough haul for awhile.

Okay. Great. Thank you, Dave.

Sure.

Our next question comes from Matt Duncan from Stephens, Incorporated. Please go ahead.

Good afternoon, guys.

Good afternoon.

The first question I've got really goes back to the sales performance you guys had this quarter. Were you in any way surprised that it was up sequentially in what is typically a seasonally down quarter? Was that a bit of a positive surprise for you guys?

I would say so. As we modeled our year, we did not have high expectations for the growth we saw and pleasantly surprised. We're glad to see the increase. We're glad to see that we bottomed out and we've begun the climb. Although we have a stepped approach to it and may still have some set backs. But overall, the trend is good.

Okay. That's helpful. And then I know you guys typically have not commented on monthly sales, but since you did it for the fourth quarter, is the trend of improvement from October to November to December, has that continued into January?

I think we've seen some flatness and we haven't necessarily seen the trend continue.

Okay. January's flattened out with December then. Is probably the right way to think about it?

Yes. You're seeing about the same sort of a trend. Now, it's an easier -- last January was pretty tough. On a comparison basis, it's a little easier comparison on a year-over-year. But sequentially, you're seeing about flat.

Okay. That's helpful. And then going back to the gross margin for a second, sounds like you guys think it's going to hold at 26.2%, give or take for the rest of the year. And Mark, did I understand you correctly that you think the rebate levels being lower are going to get cancelled out essentially by the higher LIFO liquidations? That those two were pretty much a one to one trade-off?

Yes. That's our expectation. Also what we're doing with the accounting is we're required, based upon GAAP, to estimate what our June 30, 2010 inventory balances are, use those estimates to then record the LIFO layer liquidation benefits throughout the interim quarters. Whatever that number ends up at June of 2010, there's going to be some type of a true-up. While our expectation is that it's going to work to what we're predicting, obviously we can't predict that perfectly.

Sure. And the same is true for rebate levels as well, right? You approve of those throughout the year based on your expectations for purchases?

Yes, but obviously we have control of those purchases much easier.

But then you would also expect -- what I'm getting at is, it sounds like this gross margin pressure should largely be confined to fiscal 2010, given your current expectation that we would see a return to more normalized 27% gross margin in fiscal 2011. Is that fair?

I think the perspective is that the impact of the rebate benefit and the LIFO benefit, which we're basically saying is a push so far this year. We expect it to continue to be a push and not be a drag for next year. The whole issue on point of sale pricing that we're saying is we're experiencing those point of sale pricing issues now, which is the reason we went from 27.0% to 26.2%. Those really don't have anything to do with the rebates or the LIFO situation. When we're getting back to let's say, the more normal rebate benefits, that would just be a continuation of the GP percent where we're at potentially, as opposed to resuming back to the 27%.

Okay, okay. That's helpful. And then the last thing I've got is, typically you guys have said in the past that your business is going to lag economic data three to six months. We're now five to six months into the sequential increases in MCU. PMI's been above 50% for roughly the same period of time. Theoretically we are at the point in time where your business ought to begin to see an inflexion point. Do you feel like that ought to be the case this time? Or is your visibility just not there to predict that?

We have been seeing improvement in our daily sales since September. We are seeing the improvement. If you look at the PMI, it's got a very strong rebound. If you look at the MCU, it's a much shallower and just starting the rebound. And if you look at the lag between that and our business, I would look at the MCU more so than the PMI right now.

Okay. That's helpful. Thanks, guys.

Sure.

Our next question comes from Jeff Hammond from KeyBanc Capital Market. Please go ahead.

Hi, guys. Just a follow-up question on the pricing environment. Do you get -- your inventory's exiting -- calendar '08 were pretty high and you've been working those down aggressively. And assuming your competitors are doing the same thing, do you get the sense that pricing starts to get better as inventories within the distributor channel normalize? Or do you think it's more than that?

Intuitively, that should happen, yes.

Okay. And then just to the price increase environment, you said it's been sporadic. Is there more discussion as we see copper and steel prices move up? And how does that work in, in terms of the price discipline?

I'm sure that the our suppliers would love to be able to pass along pricing increases right now, but I think they know the market will not accept it right now. As the market firms up -- I think they are in a tough position with regard to raw materials right now, if those do continue to climb like copper. But the market would really struggle with the price increase at this time.

Okay. And then final question for Mark or Dave, if you look at last cycle -- through last cycle, you were generating a lot of cash and I think your share count was down around 7%, peak to trough. And I'm just wondering how -- your balance sheet's in very good shape. Just how you're thinking about share repurchase as we exit this down cycle?

Yes, Jeff. We've been talking about that a lot and we actually had some conversations about that in the Board meetings that we've had in the last two days as well. It's been 12 months to 15 months since we've done share buybacks. I don't really exactly how many months, but it's been between 12 and 15. I think we're going to consider getting back into the market in a small way on share buybacks sometime potentially this quarter.

Okay. And then, certainly the acquisition pipeline seems fairly mixed and you guys continue to look. But all-in, how do you think about the appropriate leverage for Applied in a normal environment?

Sure. Obviously we want to remain investment grade on our balance sheet and our performance, but that provides us a very large amount of leverage that we can get. We could put several hundred millions of dollars of debt on our books and still be solidly in investment grade. We would only want to do that for acquisitions -- for building the business. We're not into reengineering the financial structure for the organization.

And I would say that from an acquisition perspective, we're talking to more organizations today than we were several months ago about things. We're hopeful that some of these will come to fruition over the next year or so.

Okay. Great. Thanks, guys.

Thanks, Jeff.

Our next question comes from Holden Lewis from BB&T. Please go ahead.

Good afternoon. Thank you.

Hey, Holden.

The first quickie, guys. What do you expect your fees to be in Q3 and Q4? Have you tallied those up?

I'm sorry. I couldn't understand the question, what was --

Do you know what the days are expected to be?

Oh, sure. Yes. The selling days for Q3 is 63 business days. For Q4, it's 63 1/2. And then for the whole year -- so for the whole year, we'll have the same as we did in the prior year. And those days are the exact same as the prior year as well.

Got it. Okay. Thank you. And then, another quickie. You did -- you narrowed your guidance for revenues to the upper half of your prior range, but you really only narrowed the earnings so that your midpoint was the same. Why did you get a little bit more enthusiastic in guidance about revenue, but less -- but that did not carry forward into the EPS guidance?

Because we've seen the sales go up and the margins go down.

Okay.

It's -- and the question is, is that a direct correlation? We are watching that ourselves, but there is a high sensitivity to price/volume in this business.

Relative to when you put that guidance out originally, you really have said that the revenue certainly was a nice surprise, but you would say that --

That the margins are a negative surprise.

Yes.

Holden, are you still there?

Looks like he dropped off.

Okay.

Our next question comes from Jason Rodgers from Great Lakes Review. Please go ahead.

Thanks for taking the follow-up. If you have a -- do you have the percentage changes for Canada and Mexico, both on absolute and constant currency basis for the quarter?

Yes, I do. For Canada, the absolute dollars was a decrease of $4.1 million in sales. And that's a combination of a positive $3.4 million of currency fluctuation and a negative $7.5 million of pricing volume, local currency type issues. For Mexico, the currency fluctuation was a negative $1.3 million and the pricing volume activity was a negative $400,000. The total Mexican sales decrease was $1.7 million. Did that answer your question or was that --

No, that's helpful. I was just looking for the percentage change.

Oh, I'm sorry. The percentages for Canada was -- their decrease was 7.8%. And the pricing volume was a decrease of 14.2% and then currency was a positive 6.4%. Mexico, the currency was a negative 9.4%. And the pricing volume was a negative 2.6% for a total of negative 12%.

Okay. That's helpful. Thank you.

Okay. Sure.

Our next question comes from [Derek Josie] from Longbow Research. Please go ahead.

Hi, guys.

Hi, Derek.

I just wanted to ask you about -- and I know these are longer-term questions. Your private label products are still under 1%. I was wondering if you had gotten any further thoughts on perhaps expanding that line, because you do have a fair amount of commodity products where it seems like if you had your own version of them, there could be significant margin to add to that.

And we continue to take a measured approach to our growth and some of our private label products. We are looking for the right opportunities to grow and continue to be committed to our primary supplier. We want to make sure that we are not cannibalizing any of our existing business. We're growing in a measured way and right now we're going to continue down that path.

Okay. I was also wondering, the fluid power business, you guys have a wide variety of names and products offered there. Longer-term, the idea is that it's going to be a more nationalized business and you guys have a pretty good position there. But I'm just wondering what the -- considering there are a lot of acquisition opportunities out there in that space, are you guys thinking of consolidating some of those names? I think there's around 15 different ones now. Is there a thought to maybe consolidating that business a little more?

Not at this time. We continue to run our fluid power business under the subsidiary structure. There's significant value in those subsidiary brand -- they have significant brand equity in their local markets. And again, the relationship with the suppliers is key and the authorizations for those products in those local markets is key. We are going to continue with that strategy.

Okay. Just a follow-up to that, doesn't that longer term also cause an issue because if you have such a variety of fronts and you are providing basically different products to different places, are you going to see excessive inventory where a consolidation among certain suppliers might be more beneficial?

There are some things we can do internally back office wise, systems wise to share that inventory better across the organization. We'll approach it more from a back office standpoint.

Okay. Sounds good. Thanks, guys.

Thank you.

John, we've got time for one more follow-up.

Our last question comes from Brent Rakers from Morgan Keegan. Please go ahead.

Great. Thanks again. Just wanted to, again, clarify the gross margins. As we move from this -- the fourth quarter, this June fiscal year end quarter to the first quarter of fiscal 2011, is it your impression as of right now that if point of sale margins stay the same, that both LIFO layers would essentially fall off as a benefit, but simultaneously rebates would move up essentially 1 to 1.5 percentage points to offset that in Q1 of 2011?

I don't know about those percentage points there, Brent, but I think our expectation is that -- and of course most of those rebate agreements have not yet been negotiated. But our expectation is that when we resume purchasing products at the rate of our cost of goods sold, that our rebate levels will resume to be relatively close to the levels we had in prior fiscal years.

Okay. Okay. And just one housekeeping question, if I could. Just, Mark, do you have the bad debt expense number -- income statement number for the quarter and what that moved year-over-year?

I do. We did better this year compared to last year on that. I believe the bad debt expense was around $700,000 for the quarter this year. The prior year's quarter was about $800,000. And that's the net-net for -- including all the write-offs, changes in the reserves, preference claims issues, all that stuff.

Okay. And maybe one actually final question, I think maybe for Ben. It was addressed sequentially earlier, but when you look at the MCU on a year-over-year basis, it's -- December is getting close to flattish year-over-year. Now, if you take the business though from a -- your vantage point that typically AIT's business works at a three to six-month lag -- if you go back three to six months, obviously the year-over-year comparisons on the MCU are very unfavorable. But I believe you commented earlier that the December sales per day actually turned positive. I was hoping maybe you could reconcile the normal lag factor with the fact that you're actually now comping positive in the December month.

Brent, a number of people have tried to look at fourth quarter. And when you put some of the stimulus package in, when you put some of the housing credit in, when you put some of the out of work stimulus in, the fourth quarter -- trying to look at the fourth quarter on the basis of legacy metrics has been very, very difficult. A lot of people call this the transient stimulus impact. It's like throwing that quarter out and let's look at this next quarter and see if you see anything that stabilizes.

Great. Thanks. Thank you, Dave.

Sure. Okay. John, we'll finish at this point then. I want to thank everyone who participated. Some great questions today. We're trying to make the most of what we have here, and got a lot of guys working hard on trying to make this good for our shareholders. Thanks for being with us. Talk to you next quarter.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.