)--Industrial activity in North American is improving slightly, but still isn't strong enough to be called a recovery, resulting in only limited sales gains for Applied Industrial Technologies Inc. (AIT), said David L. Pugh, chairman and chief executive officer.

"We haven't seen a whole lot of benefit from the government's stimulus package," Pugh told Dow Jones Newswires. The industrial environment "is as tough as I've seen it in my 38 years" of business experience.

"Industrial production probably has hit bottom," he said, "but I want to see results for the next three or four months before I decide whether we're in a real recovery," he said.

U.S. housing, metals and some other industries may never return to prerecession levels, he said.

Applied Industrial distributes repair and maintenance products ranging from bearings to hydraulic hose to about 156,000 factories and other industrial users across the U.S., Canada and Mexico. Since bearings and other parts wear out only when machinery is running, Applied Industrial's order rate provides a good overview of industrial activity.

Sales per day fell for more than six months before leveling off last March, said Mark O. Eisele, vice president and chief financial officer. Average daily sales remained at the March level through August, he said, but "had a tick up in September."

October sales were weaker than September, reflecting the end of the "cash for clunkers" program, he said, but were higher than August.

Management said a month ago that profit for the fiscal year ending June 30, 2010 probably would be in the range of 90 cents to $1.30 a share. That would compare with $1.53 in 2009 before a write-off of goodwill, and net income of 99 cents after the write-off.

Officials said sales probably would fall to a range of $1.65 billion to $1.85 billion, from $1.92 billion in fiscal 2009.

Management hasn't revised those estimates, Eisele said.

As previously reported, sales in the fiscal first quarter fell nearly 20% and net income fell 50% to 26 cents a share, from 52 cents.

Despite the earnings drop, the company "expects to maintain the dividend rate," currently 15 cents quarterly, Eisele said, "because we have great cash flow."

Many of Applied Industrial's customers are still reducing inventories, as are many major suppliers, Pugh said. Operating rates are low, he said, and some customers are still closing plants.

Applied Industrial expects to whack its own inventories by 20% during fiscal 2010, Eisele said, and achieved nearly half that cut in the September quarter.

Reducing inventories increases corporate cash. Most customers have cash and are paying on time, Eisele said.

"Past due receivables are at an all-time low as a percentage of sales," he said.

Applied Industrial is broadening its product line to include items ranging from safety glasses to janitorial products, said Benjamin J. Mondics, president and chief operating officer.

Management also is continuing efforts to increase sales to governmental units, Mondics said. Even governments have reduced orders, he said, but less than most companies.

The order picture varies by industry. Food and beverage companies continue to order normally, Pugh said, as do pharmaceutical companies.

Forest products, cement and aggregates companies were hit hard by the construction slowdown. And primary metals manufacturers also reduced orders as sales to builders and transportation equipment producers declined.

Auto manufacturers and primary auto parts suppliers have little direct impact on Applied Industrial. General Motors, Ford (F) and Chrysler combined account for only about 2% of sales.

Applied Industrial's management is operating very conservatively until they are sure industrial recovery has begun, Pugh said.

A wage and salary freeze will extend through the end of fiscal 2010, Eisele said, "and we're keeping a tight rein on capital expenditures."

Head count is down 12% from prerecession levels, Pugh said. However, management won't sacrifice customer service to cut costs, he said, and hasn't reduced investment in training and technology.

"Maintaining profit margins is the toughest battle," Pugh said. "It's a very competitive market," he said, with customers pushing hard for price discounts and some suppliers starting to announce price increases.

"We will see whether those price increases stick," Pugh said.

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