Applying What You Learn

Applied Industrial Technologies once again sits firmly in the  top 15 industrial distributors , fresh off a comfortable Q4 improvement ... but it hasn't always been an easy ride, and its most certainly not over.

Applied Industrial Technologies once again sits firmly in the top 15 industrial distributors, fresh off a comfortable Q4 improvement ... but it hasn't always been an easy ride, and its most certainly not over.

by Anna Wells, Executive Editor, Industrial Distribution

If you ever met David Pugh, Chairman and CEO of Cleveland-based Applied Industrial Technologies, he’d offer you a seat, a cup of coffee, and a few strong opinions on certain controversial NFL football players. He’s relaxed and confident—friendly; the kind of guy you could have a beer with.

And despite the cheery reports coming out of the Applied in recent weeks (2 new acquisitions, as well as a Q4 net income increase of nearly 60 percent over last year), Pugh admits the past few years have been a rough road—more specifically, an “absolute roller coaster,” says Pugh. And for a company the size of Applied, that can sometimes feel like the weight of the world.

“I wake up every day knowing I have 4,500 employees, and it’s a greater obligation than any sourcing or customer issues we have,” says Pugh.But the time-weathered expression, it’s always darkest before the dawn, indicates more confidence than Pugh, or any of his industry-seasoned competitors are really ready to portray.  

“This last six months has been a nice recovery from the prior 18 months. But you can talk to the majority of businesspeople and they’ll tell you it will be the upcoming months that show whether we can sustain it,” he says. “There is still a lot to be decided out there before folks are comfortable re-opening the investment piece of the business.”

So is it sustainable? According to Pugh, “survival mode” still has a tight grip on the subconscious of American manufacturers. “The economy is going to be a challenge. While the industrial economy in North America has been improving, there is some unusual uncertainty about where it’s headed over the next 12 months,” he says. “The housing market doesn’t look to be improving and that impacts other industries. Unemployment is still high; consumer confidence is low.”

Assessing the fundamentals

So what does a supplier like Applied do when times get turbulent? According to Pugh, the emphasis is still on staying nimble. “There are severe swings,” he says. “Our first half saw business down 20 percent on a year-over-year basis. That’s a big time drop. In the second half, we saw business up over 20 percent.”In order to navigate, the Applied method was to “keep a balanced approach with regard to sales, cost control, asset management, and margin enhancement,” Pugh says. “I liken it to a wheel with four spokes in it; if you overemphasize one, you get the wheel out of balance.”

Ben Mondics, President and COO of Applied, echoes this sentiment, citing “long term stability” as one of the company’s major competitive advantages. In addition, says Mondics, dealing the straight talk to employees has been critical throughout the recession—whether the news is good or bad. “Being visible is key,” says Mondics.

Visibility for Applied has meant consistent video messages, produced with the high-tech capabilities of an in-house video production facility. In an effort to be as transparent as possible, Pugh and Mondics made it a priority to put themselves in front, quite literally, of employees with relevant company news. In the worst of it, says Pugh, “We had to make some tough calls. This recession was so severe that we couldn’t get out of it without having to make some forced reductions, but we explained everything.”

Selling yourself

But even in the grip of uncertainty, the company can take comfort in the fact that the latest numbers are up.“Manufacturing, which led the recovery, is relatively strong,” says Pugh. “While there is unusual uncertainty about where the industrial economy is headed over the next 12 months, we are still expecting growth in fiscal 2011.”

In August, Applied reported results for its fourth quarter and fiscal 2010 year ending June 30, 2010, including an increase in net income of 55.9 percent.According to recent documents, net sales for the fourth quarter were $523,071,000, up 23 percent from prior year sales of $425,183,000 for the comparable period. Net income for the quarter was $27,704,000 or $0.64 per share, an improvement of 85 percent compared to last year’s fourth quarter.

But as economic pressures ease, it’s the customer who will keep suppliers like Applied up at night, specifically those who are, as Pugh puts it, “continuing to demand more and wanting to pay less.”In an effort to address these customer needs, Applied has expanded its product line in recent years “because our customers want to buy more products from fewer suppliers,” says Mondics. According to Mondics, this has come in the form of strengthened offerings in bearing, power transmission, rubber product lines, mill supplies, fluid power, and janitorial/sanitation.

From a big picture perspective, “Our job has continued to expand—both as manufacturers have cut back on the sales folks and the end users cut back on the facilities engineers and the maintenance staff. So we have taken on tasks that they used to have,” Pugh explains, “but we have the scale, the capability, and the resources to do that.”

And what about those who don’t? “We’re quite capable of funding any uptick in the economy with working capital, which could be a problem for some of the smaller folks, and may drive some more consolidation,” he says. “Our job is to continue to ferret out what makes sense for us, and make sure we sell the value that we’re bringing.”