SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Shares of common stock outstanding on January 15, 2005 29,822,710
-----------------------------------
(No par value)
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Statements of Consolidated Income - 2
Three Months and Six Months Ended
December 31, 2004 and 2003
Condensed Consolidated Balance Sheets - 3
December 31, 2004 and June 30, 2004
Condensed Statements of Consolidated Cash Flows - 4
Six Months Ended December 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 5 - 8
Review By Independent Public Accountants 9
Item 2: Management's Discussion and Analysis of 10 - 15
Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk 16
Item 4: Controls and Procedures 17
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 2: Unregistered Sales of Equity Securities & Use of Proceeds 18
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 6: Exhibits 19
Signatures 22
Exhibit Index
Exhibits
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands,except per share amounts)
Three Months Ended Six Months Ended
December 31 December 31
2004 2003 2004 2003
-------- --------- --------- --------
Net Sales $404,139 $ 359,711 $ 817,265 $720,857
Cost of sales 300,191 264,545 603,795 532,214
-------- --------- --------- --------
Gross Profit 103,948 95,166 213,470 188,643
Selling, distribution and
administrative expenses 86,725 85,916 174,744 170,397
-------- --------- --------- --------
Operating Income 17,223 9,250 38,726 18,246
Interest expense, net 1,331 1,405 2,634 2,723
Other (income) expense, net 112 (108) (158) 58
-------- --------- --------- --------
Income Before Income Taxes 15,780 7,953 36,250 15,465
Income Taxes 5,800 2,820 13,230 5,500
-------- --------- --------- --------
Net Income $ 9,980 $ 5,133 $ 23,020 $ 9,965
======== ========= ========= ========
Earnings Per Share - Basic $ 0.34 $ 0.18 $ 0.78 $ 0.35
======== ========= ========= ========
Earnings Per Share - Diluted $ 0.33 $ 0.17 $ 0.76 $ 0.34
======== ========= ========= ========
Cash dividends per common
share $ 0.09 $ 0.08 $ 0.19 $ 0.16
======== ========= ========= ========
Weighted average common shares
outstanding for basic computation 29,580 28,840 29,409 28,675
Dilutive effect of stock options
and awards 1,091 615 1,061 636
-------- --------- --------- --------
Adjusted average common shares
outstanding for diluted computation 30,671 29,455 30,470 29,310
======== ========= ========= ========
See notes to condensed consolidated financial statements.
2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
December 31 June 30
2004 2004
----------- ---------
ASSETS
Current assets
Cash and temporary investments $ 57,305 $ 69,667
Accounts receivable, less allowances
of $6,450 and $6,400 190,904 190,815
Inventories (at LIFO) 192,121 159,594
Other current assets 22,684 22,957
--------- ---------
Total current assets 463,014 443,033
Property, less accumulated depreciation
of $102,704 and $98,121 73,561 77,025
Goodwill 50,846 49,852
Other assets 24,978 26,931
--------- ---------
TOTAL ASSETS $ 612,399 $ 596,841
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 74,551 $ 78,767
Other accrued liabilities 62,717 72,562
--------- ---------
Total current liabilities 137,268 151,329
Long-term debt 77,372 77,767
Other liabilities 31,020 28,210
--------- ---------
TOTAL LIABILITIES 245,660 257,306
--------- ---------
Shareholders' Equity
Preferred stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 36,143 shares issued 10,000 10,000
Additional paid-in capital 94,234 90,520
Income retained for use in the business 329,403 311,922
Treasury shares - at cost, 6,328 and 6,886 shares (70,161) (72,870)
Unearned restricted common stock compensation (985) (1,158)
Accumulated other comprehensive income 4,248 1,121
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 366,739 339,535
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 612,399 $ 596,841
========= =========
See notes to condensed consolidated financial statements.
3
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended
December 31
2004 2003
-------- --------
Cash Flows from Operating Activities
Net income $ 23,020 $ 9,965
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 8,044 8,410
Gain on sale of property (531) (89)
Changes in operating assets and liabilities, net of
effects from acquisition of business (38,331) (28,283)
Treasury shares contributed to employee benefit and deferred
compensation plans 5,492 3,775
Other - net (395) (395)
-------- --------
Net Cash used in Operating Activities (2,701) (6,617)
-------- --------
Cash Flows from Investing Activities
Property purchases (3,973) (10,311)
Proceeds from property sales 1,661 594
Net cash paid for acquisition of businesses (1,285)
Deposits and other (1,095) (693)
-------- --------
Net Cash used in Investing Activities (3,407) (11,695)
-------- --------
Cash Flows from Financing Activities
Borrowings (repayments) - net (2,850)
Change in cash overdrafts (1,563) (6,333)
Dividends paid (5,539) (4,610)
Purchases of treasury shares (7,234) (2,091)
Exercise of stock options 7,556 3,557
-------- --------
Net Cash used in Financing Activities (6,780) (12,327)
-------- --------
Effect of exchange rate changes on cash 526 (39)
-------- --------
Decrease in cash and temporary
investments (12,362) (30,678)
Cash and temporary investments
at beginning of period 69,667 55,079
-------- --------
Cash and Temporary Investments
at End of Period $ 57,305 $ 24,401
======== ========
See notes to condensed consolidated financial statements.
4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of only
normal recurring adjustments) necessary to a fair statement of operations
of the interim periods have been made. This Quarterly Report on Form 10-Q
should be read in conjunction with the Applied Industrial Technologies,
Inc. (the Company) Annual Report on Form 10-K for the year ended June 30,
2004.
The results of operations for the three and six month periods ended
December 31, 2004 are not necessarily indicative of the results to be
expected for the fiscal year.
Cost of sales for interim financial statements are computed using
estimated gross profit percentages, which are adjusted throughout the year
based upon available information. Adjustments to actual cost are made
based on periodic physical inventories and the effect of year-end
inventory quantities on LIFO costs.
All share and per share data have been restated to reflect a three-for-two
stock split effective December 17, 2004.
Certain reclassifications have been made to prior year amounts to be
consistent with the presentation in the current year.
2. STOCK OPTIONS
Effective July 1, 2003, the Company adopted the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation" as
amended by SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," using the modified prospective method for the transition.
Under the modified prospective method, stock-based compensation cost
recognized during the fiscal year is the same as that which would have
been recognized had the fair value recognition provisions been applied to
all awards granted after July 1, 1995. The compensation expense recorded
during the three months ended December 31, 2004 and 2003 was $294, $185
net of tax, or $0.01 per share and $327, $211 net of tax, or $0.01 per
share, respectively. Compensation expense recorded during the six months
ended December 31, 2004 and 2003 was $579, $367 net of tax or $0.01 per
share and $686, $442 net of tax or $0.02 per share, respectively.
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
3. SEGMENT INFORMATION
The accounting policies of the Company's reportable segment and its other
businesses are the same as those used to prepare the condensed
consolidated financial statements. Sales between the service center based
distribution segment and the other businesses are not significant.
SEGMENT FINANCIAL INFORMATION:
SERVICE CENTER
BASED
DISTRIBUTION OTHER TOTAL
-------------- ------- --------
THREE MONTHS ENDED DECEMBER 31, 2004
Net sales $376,269 $27,870 $404,139
Operating income 16,750 1,720 18,470
Depreciation 3,284 172 3,456
Capital expenditures 2,109 106 2,215
-------- ------- --------
THREE MONTHS ENDED DECEMBER 31, 2003
Net sales $335,633 $24,078 $359,711
Operating income 10,844 1,299 12,143
Depreciation 3,673 167 3,840
Capital expenditures 1,546 23 1,569
-------- ------- --------
A reconciliation from the segment operating profit to the condensed consolidated
balances is as follows:
THREE MONTHS ENDED
DECEMBER 31
--------------------
2004 2003
-------- --------
Operating income:
Service Center based distribution $ 16,750 $ 10,844
Other 1,720 1,299
Adjustments for:
Other intangible amortization (185) (188)
Corporate and other income (expense),
net of allocations (a) (1,062) (2,705)
-------- --------
Total operating income 17,223 9,250
Interest expense, net 1,331 1,405
Other (income) expense, net 112 (108)
-------- --------
Income before income taxes $ 15,780 $ 7,953
======== ========
6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
SERVICE CENTER
BASED
DISTRIBUTION OTHER TOTAL
-------------- ------- --------
SIX MONTHS ENDED DECEMBER 31, 2004
Net sales $761,896 $55,369 $817,265
Operating income 35,908 3,636 39,544
Assets used in business 585,032 27,367 612,399
Depreciation 6,616 339 6,955
Capital expenditures 3,839 134 3,973
-------- ------- --------
SIX MONTHS ENDED DECEMBER 31, 2003
Net sales $673,536 $47,321 $720,857
Operating income 20,647 2,011 22,658
Assets used in business 532,514 23,986 556,500
Depreciation 6,974 337 7,311
Capital expenditures 10,248 63 10,311
-------- ------- --------
SIX MONTHS ENDED
DECEMBER 31
--------------------
2004 2003
-------- --------
Operating income for
reportable segment $ 35,908 $ 20,647
Other operating income 3,636 2,011
Adjustments for:
Other intangible amortization (364) (377)
Corporate and other income (expense),
net of allocations (a) (454) (4,035)
-------- --------
Total operating income 38,726 18,246
Interest expense, net 2,634 2,723
Other (income) expense, net (158) 58
-------- --------
Income before income taxes $ 36,250 $ 15,465
======== ========
(a) The change in corporate and other income (expense), net, is due to
various changes in the levels and amounts of expense being allocated
to the segments. The expenses being allocated include corporate
charges for working capital, logistics support and other items.
The Company has operations in the United States, Canada and Mexico.
Operations in Canada and Mexico represent approximately 10.0% of the total
net sales of Applied for the six months ended December 31, 2004. In
addition, approximately 29.3% of these operations' net sales are included
in the "Other" column relating to the fluid power business. The long-lived
assets located outside of the United States are not material.
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
December 31 December 31
------------------ -----------------
2004 2003 2004 2003
------- -------- ------- -------
Net income $ 9,980 $5,133 $23,020 $ 9,965
Other comprehensive income (loss)
Foreign currency translation
adjustment 2,668 794 3,127 (161)
------- ------ ------- -------
Total comprehensive income $12,648 $5,927 $26,147 $ 9,804
======= ====== ======= =======
5. BENEFIT PLANS
The following table provides summary disclosures of the net periodic
benefit costs recognized for the Company's Supplemental Executive
Retirement Benefits Plan, qualified retirement plan, salary
continuation benefits and retiree medical benefits:
Pension Benefits Other Benefits
---------------- --------------
2004 2003 2004 2003
----- ----- ----- -----
THREE MONTHS ENDED DECEMBER 31
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 318 $ 263 $ 12 $ 14
Interest cost 377 313 73 76
Expected return on plan assets (88) (79)
Recognized net actuarial loss 120 55 4 5
Amortization of prior service cost 157 147 12 12
----- ----- ---- ----
Net periodic pension cost $ 884 $ 699 $101 $107
===== ===== ==== ====
Pension Benefits Other Benefits
------------------ --------------
2004 2003 2004 2003
------- ------- ----- -----
SIX MONTHS ENDED DECEMBER 31
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 637 $ 525 $ 24 $ 29
Interest cost 755 625 146 152
Expected return on plan assets (177) (157)
Recognized net actuarial loss 240 110 7 10
Amortization of prior service cost 313 295 24 24
------- ------- ---- ----
Net periodic pension cost $ 1,768 $ 1,398 $201 $215
======= ======= ==== ====
The company contributed $843 to its pension benefit plans and $9 to its
other benefit plans in the six months ended December 31, 2004. Expected
contributions for the full fiscal year remain the same as previously
disclosed at $1,100 for the pension benefit plans and $300 for its other
benefit plans.
8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The accompanying condensed consolidated financial statements of the Company have
been reviewed by the Company's independent registered public accountants,
Deloitte & Touche LLP, whose report covering their review of the financial
statements follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Applied Industrial Technologies,
Inc. Cleveland, Ohio
We have reviewed the accompanying condensed consolidated balance sheet of
Applied Industrial Technologies, Inc. and subsidiaries (the "Company") as of
December 31, 2004, and related condensed statements of consolidated income for
the three-month and six-month periods ended December 31, 2004 and 2003, and of
consolidated cash flows for the six-month periods ended December 31, 2004 and
2003. These interim financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Applied Industrial Technologies, Inc. and subsidiaries as of June 30,
2004, and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated August 6, 2004, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of June 30, 2004 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
January 26, 2005
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of certain significant
factors which have affected the Company's (1) financial condition at December
31, 2004 and (2) results of operations and cash flows during the periods
included in the accompanying Condensed Statements of Consolidated Income and
Consolidated Cash Flows.
Overview
Net income for the three months ended December 31, 2004 increased 94.4% compared
to the same quarter in the prior year on a 12.4% increase in sales. Underlying
this improvement in net income were an increase in sales and limited growth in
selling, distribution and administrative (SD&A) expenses, partially offset by a
decline in gross margin.
The balance sheet continues to strengthen as shareholders' equity reached $366.7
million and our current ratio improved to 3.4 to 1. Overall inventory balances
increased $18.8 million for the quarter and $32.5 million since June 30, 2004 as
the Company purchased inventory in advance of scheduled calendar year end
supplier price increases and to meet increased demand for our products.
Inventory balances are expected to decline beginning in January and this trend
is expected to continue through the fiscal year end. Accounts receivable remains
at June 30, 2004 levels. Days sales outstanding remains stable at 43 days.
The Company monitors the Purchasing Managers Index (ISM) as published by the
Institute for Supply Management and the Manufacturers Capacity Utilization (MCU)
index published by the Federal Reserve Board and considers these indexes key
indicators of potential Company business environment changes. These indicators
continue to show signs of growth in the economy. The Company believes its sales
trends traditionally lag these key indicators by approximately 6 months.
The Company expects that fiscal 2005 third quarter sales will rise between 10%
and 12.5% compared to the same quarter last year. Sales for the entire 2005
fiscal year are expected to be in the range of $1.68 billion to $1.70 billion.
Liquidity and Capital Resources
Cash used in operating activities for the six months ended December 31, 2004 was
$2.7 million. This compares to $6.6 million used in operating activities in the
same period a year ago. The improvement in cash used in operating activities is
due to cash generated from our increased sales and operating income over the
prior year partially offset by our increased investment in inventory and the
payment of accrued expenses for employee benefit programs.
Cash flow from operations depends primarily upon generating operating income,
controlling the investment in inventories and receivables, and managing the
timing of payments to suppliers. During the six month period ended December 31,
2004, inventories increased approximately $32.5 million as the Company added
inventory to meet increased demand for our products and in advance of supplier
price increases. Accounts receivable remained at June 30, 2004 levels. The
10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Company expects cash from operations for the remainder of fiscal 2005 to exceed
the levels we accomplished in fiscal 2004.
Capital expenditures were $4.0 million for the six months ended December 31,
2004 compared to $10.3 million in the prior year. In September 2003, the Company
purchased, for $7.5 million, four operating facilities which had previously been
leased. For the entire year we expect our total capital expenditures to be in
the $10.0 million range. Our depreciation for the entire year is expected to be
within the range of $13.5 million to $14.5 million.
The Company has a $100.0 million revolving credit facility with a group of banks
expiring in November 2008. The Company had no borrowings outstanding under this
facility at December 31, 2004. Unused lines under this facility, net of
outstanding letters of credit, total $91.5 million, and are available to fund
future acquisitions or other capital and operating requirements.
The Company has an agreement with Prudential Investment Management, Inc.
expiring in February 2007, for an uncommitted shelf facility that enables the
Company to borrow up to $100.0 million in additional long-term financing at the
Company's discretion with terms of up to twelve years. At December 31, 2004,
there was no borrowing under this agreement.
The Company's long-term debt matures as follows: $50.0 million due in fiscal
2008 and $25.0 million due in fiscal 2011.
The Board of Directors authorized a three-for-two stock split effective December
17, 2004. All share and per share data have been restated.
The Board of Directors has authorized the purchase of shares of the Company's
common stock to fund employee benefit programs, stock option and award programs,
and future business acquisitions. These purchases are made in open market and
negotiated transactions, from time to time, depending upon market conditions.
The Company acquired 356,000 shares of its common stock for $7.2 million during
the six months ended December 31, 2004 compared to 144,000 shares for $2.1
million during the six months ended December 31, 2003. At December 31, 2004, the
Company had remaining authorization to repurchase approximately 1,001,000
additional shares.
The Company raised its quarterly dividend in January 2005 approximately 29% to
12 cents per share. Prior to that increase, the Company's dividend was 9.33
cents per share per quarter. The amount of the dividend is approved by the
Company's Board of Directors, which takes into consideration financial
performance, cash flow and payout guidelines consistent with other industrial
companies.
11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
Net sales increased 12.4% compared to the prior year due to a $33.7 million or
10.7% increase in US service center same store sales, increases in sales in our
Canadian operations and in our US fluid power subsidiaries, as well as the
impact of a November 2003 Mexican acquisition. The number of selling days in the
quarters ended December 31, 2004 and 2003 were 61 days and 62 days,
respectively.
The US service center sales increase was driven by sales mix, volume and the
impact of supplier price increases passed on to customers. The Company estimates
that slightly less than half of this sales increase was a result of the supplier
price increases passed on to customers.
Sales in our Canadian operations improved by $5.0 million due to sales mix,
pricing, volume and $2.5 million related to currency translation from the
strengthening of the Canadian dollar compared to the prior year. Our U.S. fluid
power subsidiaries had a sales increase of $1.8 million over the prior year
second quarter.
Approximately $2.0 million of the sales increase in the current year quarter was
a result of the acquisition of Rybalsa in Mexico during the second quarter of
fiscal 2004.
Gross profit as a percentage of sales decreased to 25.7% from 26.5%. The
decrease is primarily the result of several factors, including difficulties in
passing along supplier price increases; our inability in certain instances to
immediately increase prices to customers due to contractual agreements and an
increase in sales of products for use in customers' large capital projects,
which sales traditionally are at lower margins. In addition, the impact of the
physical inventory write-up recorded in the quarter was lower than the same
quarter in the prior year. These decreases were partially offset by lower
freight costs and improved supplier rebates. The pressure on margins from
supplier price increases will continue to challenge us as another round of
supplier price increases occurred around calendar year end.
Selling, distribution and administrative expenses increased 0.9% compared to the
prior year; however, as a percentage of sales, they decreased to 21.5% compared
to 23.9% in the prior year. This overall increase in SD&A was primarily driven
by higher employee compensation and benefits related to performance driven
incentives.
Interest expense-net for the quarter decreased 5.3% as compared to the prior
year due to an increase in income earned on overnight investments in treasury,
money market funds and certain other tax-free investments. Average outstanding
borrowings and rates paid on borrowings were comparable for the quarters ended
December 31, 2004 and 2003.
Other (income) expense, net decreased $0.2 million compared to the prior year
due to a mark-to-market loss on a US/Canadian dollar cross currency swap which
was not designated as a hedge.
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Income tax expense as a percentage of income before taxes was 36.75% for the
quarter ended December 31, 2004 compared to 35.5% for the quarter ended December
31, 2003. This increase is due to higher effective foreign, state and local
rates. We expect the effective tax rate to remain at approximately 36.5% for the
remainder of the fiscal year.
As a result of the above factors, net income increased by 94.4% compared to the
same quarter of last year and net income per share increased 94.1%.
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
Net sales increased 13.4% compared to the prior year due to a $70.8 million or
11.2% increase in US service center same store sales, increases in sales in our
Canadian operations and in our US fluid power subsidiaries, as well as the
impact of a November 2003 Mexican acquisition. The number of selling days in the
period ended December 31, 2004 and 2003 were 125 days and 126 days,
respectively.
The US service center sales increase was driven by sales mix, volume and the
impact of supplier price increases passed on to customers.
Sales in our Canadian operations improved by $12.4 million due to sales mix,
pricing, volume and $3.6 million related to currency translation from the
strengthening of the Canadian dollar compared to the prior year. Our U.S. fluid
power subsidiaries had a sales increase of $4.3 million over the same period in
the prior year.
Approximately $4.7 million of the sales increase in this period was a result of
the acquisition of Rybalsa in Mexico during the second quarter of fiscal 2004.
Gross profit as a percentage of sales decreased slightly to 26.1%. The decrease
is primarily the result of several factors, including difficulties in passing
along supplier price increases, the inability in certain instances to
immediately increase prices based on contractual agreements and an increase in
customer large capital projects which traditionally are at lower margins. These
decreases were partially offset by lower freight costs and improved supplier
rebates. The pressure on margins from supplier price increases will continue to
challenge us as another round of supplier price increases occurred around
calendar year end.
Selling, distribution and administrative expenses increased 2.6% compared to the
prior year, however, as a percentage of sales; they decreased to 21.4% compared
to 23.6% in the prior year. This overall increase in SD&A was primarily driven
by higher employee compensation and benefits related to performance driven
incentives.
Interest expense-net for the six months ended December 31, 2004 decreased 3.3%
as compared to the prior year due to an increase in interest income earned on
overnight investments in treasury, money market funds and certain other tax-free
investments.
13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average outstanding borrowings and rates paid on borrowings were comparable for
the period ended December 31, 2004 and 2003.
Other (income) expense, net improved $0.2 million compared to the prior year due
to a non-operating gain of $0.7 million related to the settlement of a life
insurance policy. The gain was partially offset by a mark-to-market loss on a
US/Canadian dollar cross currency swap which was not designated as a hedge.
Income tax expense as a percentage of income before taxes was 36.5% for the
period ended December 31, 2004 compared to 35.6% for the period ended December
31, 2003. This increase is due to higher effective foreign, state and local
rates. We expect the effective tax rate to remain at approximately 36.5% for the
remainder of the fiscal year.
As a result of the above factors, net income increased by 131.0% compared to the
same quarter of last year and net income per share increased 123.5%.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
Management's Discussion and Analysis and other sections of this Form 10-Q
contain statements that are forward-looking, based on management's current
expectations about the future. Forward-looking statements are often identified
by qualifiers such as "expect," "believe," "intend," "will," "should,"
"anticipate," and similar expressions. The Company intends that the
forward-looking statements be subject to the safe harbors established in the
Private Securities Litigation Reform Act of 1995 and by the Securities and
Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking
statements. All forward-looking statements are based on current expectations
regarding important risk factors. 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 a representation by the
Company or any other person that the results expressed in the statements will be
achieved. In addition, the Company undertakes no obligation publicly to update
or revise any forward-looking statements, whether because of new information or
events, or otherwise.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industry sectors; reduced demand for our
products in targeted markets due to reasons including consolidation in customer
industries and the transfer of manufacturing capacity to foreign countries;
changes in interest rates and inflation; changes in customer procurement
policies and practices; changes in product manufacturer sales policies and
practices; the availability of products and labor; changes in operating
expenses; product cost and price changes, and our ability to pass supplier price
increases on to customers; the variability and timing of business opportunities
including acquisitions, alliances, customer relationships and supplier
authorizations; the Company's ability to realize the anticipated benefits of
acquisitions and other
14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
business strategies; the incurrence of debt and contingent liabilities in
connection with acquisitions; changes in accounting policies and practices;
organizational changes within the Company; the emergence of new competitors,
including firms with greater financial resources than the Company; risks and
uncertainties associated with the Company's foreign operations, including
inflation, recessions, and foreign currency exchange rates; adverse results in
significant litigation matters; adverse regulation and legislation; and the
occurrence of extraordinary events (including prolonged labor disputes, natural
events and acts of God, terrorist acts, fires, floods and accidents).
15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has evaluated its exposure to various market risk factors, including
but not limited to, interest rate, foreign currency exchange and commodity price
risks. The Company is primarily affected by market risk exposure through the
effects of changes in interest rates and foreign exchange rates.
The Company manages interest rate risk through the use of a combination of fixed
rate long-term debt and variable rate borrowings under its committed revolving
credit agreement and interest rate swaps. The Company had no variable rate
borrowings outstanding under its committed revolving credit agreement at
December 31, 2004. The Company has no interest rate swap agreements outstanding.
All of the Company's outstanding long-term debt is currently at fixed interest
rates at December 31, 2004 and scheduled for repayment in December 2007 and
beyond.
The Company mitigates its foreign currency exposure from the Canadian dollar
through the use of cross currency swap agreements as well as foreign-currency
denominated debt. Hedging of the U.S. dollar denominated debt, used to fund a
substantial portion of the Company's net investment in its Canadian operations,
is accomplished through the use of cross currency swaps. Any gain or loss on the
hedging instrument offsets the gain or loss on the underlying debt. Translation
exposures with regard to our Mexican business are not hedged because the Mexican
activity is not material. For the six months ended December 31, 2004, a uniform
10% strengthening of the U.S. dollar relative to foreign currencies that affect
the Company would have resulted in a $0.4 million decrease in net income. A
uniform 10% weakening of the U.S. dollar would have resulted in a $0.4 million
increase in net income.
16
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
Management, under the supervision and with the participation of the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), has evaluated the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the CEO and the CFO have concluded
that the disclosure controls and procedures are effective in timely alerting
them to material information about the Company required to be included in the
Company's Exchange Act reports.
Management has not identified any change in internal control over financial
reporting occurring during the quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Applied Industrial Technologies, Inc. and/or one of its subsidiaries is a
party to various pending judicial and administrative proceedings. Based on
circumstances currently known, the Company does not believe that any
liabilities that may result from these proceedings are reasonably likely
to have a material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Repurchases in the quarter ended December 31, 2004 were as follows:
(c)Total Number (d) Maximum
of Shares Number of Shares
Purchased as Part that May Yet Be
(b) Average of Publicly Purchased Under
(a)Total Number Price Paid Announced Plans the Plans or
Period of Shares per Share or Programs Programs
- ------------------- --------------- ----------- ----------------- ----------------
October 1, 2004 to
October 31, 2004 -0- -0- 1,001,363
--- --- ---------
November 1, 2004 to
November 30, 2004 -0- -0- 1,001,363
--- --- ---------
December 1, 2004 to
December 31, 2004 -0- -0- 1,001,363
--- --- ---------
Total -0- -0- 1,001,363
--- --- ---------
(1) All share and per share data have been restated to reflect a 3 for 2
stock split paid on December 17, 2004.
(2) On July 16, 2003, the Board of Directors authorized the purchase of
up to 1.5 million shares of the Company's common stock. The Company
announced the authorization on July 16, 2003. These purchases may be
made in the open market or in privately negotiated transactions.
This authorization is in effect until all shares are purchased or
the authorization is revoked or amended by the Board of Directors.
18
(3) During the quarter the Company purchased 95,442 shares in connection
with the exercise of stock options and other employee benefit
programs. These purchases are not counted within the aforementioned
Board authorization.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on October 19, 2004,
there were 19,601,724 shares of common stock entitled to vote. The
shareholders voted on the matters submitted to the meeting as follows:
1. Election of four persons to be directors of Class II for a term of
three years:
For Withheld
---------- --------
William G. Bares 18,023,028 431,340
Roger D. Blackwell 17,925,319 529,049
Edith Kelly-Green 18,201,680 252,688
Stephen E. Yates 18,280,482 173,886
The terms of the Class I directors, including Thomas A. Commes,
Peter A. Dorsman, J. Michael Moore, Jerry Sue Thornton, and of the
Class III directors, including William E. Butler, Russell R.
Gifford, L. Thomas Hiltz, and David L. Pugh, continued after the
meeting.
2. Ratification of the Audit Committee's appointment of Deloitte &
Touche LLP as the Company's independent auditors for the fiscal year
ending June 30, 2005.
For Withheld Abstain
- ---------- -------- -------
17,852,881 585,822 15,664
ITEM 6. Exhibits.
Exhibit No. Description
3(a) Amended and Restated Articles of Incorporation of
Applied Industrial Technologies, Inc., as amended on
October 8, 1998 (filed as Exhibit 3(a) to the
Company's Form 10-Q for the quarter ended September
30, 1998, SEC File No. 1-2299, and incorporated here
by reference).
19
3(b) Code of Regulations of Applied Industrial
Technologies, Inc., as amended on October 19, 1999
(filed as Exhibit 3(b) to the Company's Form 10-Q for
the quarter ended September 30, 1999, SEC File No.
1-2299, and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and
Bearings, Inc. (Delaware) filed with the Ohio
Secretary of State on October 18, 1988, including an
Agreement and Plan of Reorganization dated September
6, 1988 (filed as Exhibit 4(a) to the Company's
Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by
reference).
4(b) Private Shelf Agreement dated as of November 27, 1996,
as amended on January 30, 1998, between the Company
and Prudential Investment Management, Inc. (assignee
of The Prudential Insurance Company of America) (filed
as Exhibit 4(f) to the Company's Form 10-Q for the
quarter ended March 31, 1998, SEC File No. 1-2299, and
incorporated here by reference).
4(c) Amendment dated October 24, 2000 to 1996 Private Shelf
Agreement between the Company and Prudential
Investment Management, Inc. (assignee of The
Prudential Insurance Company of America) (filed as
Exhibit 4(e) to the Company's Form 10-Q for the
quarter ended September 30, 2000, SEC File No. 1-2299,
and incorporated here by reference).
4(d) Amendment dated November 14, 2003 to 1996 Private
Shelf Agreement between the Company and Prudential
Investment Management, Inc. (assignee of The
Prudential Insurance Company of America) (filed as
Exhibit 4(d) to the Company's Form 10-Q for the
quarter ended December 31, 2003, SEC File No. 1-2299,
and incorporated here by reference).
4(e) Amendment dated February 25, 2004 to 1996 Private
Shelf Agreement between the Company and Prudential
Investment Management, Inc. (assignee of The
Prudential Insurance Company of America) (filed as
Exhibit 4(e) to the Company's Form 10-Q for the
quarter ended March 31,
20
2004, SEC File No. 1-2299, and incorporated here by
reference).
4(f) $100,000,000 Credit Agreement dated as of October 31,
2003 among the Company, KeyBank National Association
as Agent, and various financial institutions (filed as
Exhibit 4(e) to the Company's Form 10-Q for the
quarter ended December 31, 2003, SEC File No. 1-2299,
and incorporated here by reference).
4(g) Rights Agreement, dated as of February 2, 1998,
between the Company and Computershare Investor
Services LLP (successor to Harris Trust and Savings
Bank), as Rights Agent, which includes as Exhibit B
thereto the Form of Rights Certificate (filed as
Exhibit No. 1 to the Company's Registration Statement
on Form 8-A filed July 20, 1998, SEC File No. 1-2299,
and incorporated here by reference).
10 1997 Long-Term Performance Plan re-adopted by
shareholders on October 22, 2002, as conformed to
reflect subsequent amendments, including adjustments
in respect of 3-for-2 stock split, as disclosed in
Form 8-K filed on January 21, 2005, SEC File No.
1-2299.
15 Letter from independent accountants regarding
unaudited interim financial information.
31 Rule 13a-14(a)/15d-14(a) certifications.
32 Section 1350 certifications.
Applied will furnish a copy of any exhibit described above and not
contained herein upon payment of a specified reasonable fee which shall be
limited to Applied's reasonable expenses in furnishing the exhibit.
Certain instruments with respect to long-term debt have not been filed as
exhibits because the total amount of securities authorized under any one of the
instruments does not exceed 10 percent of the total assets of Applied and its
subsidiaries on a consolidated basis. Applied agrees to furnish to the
Securities and Exchange Commission, upon request, a copy of each such
instrument.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date: February 8, 2005 By: /s/ David L. Pugh
------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
Date: February 8, 2005 By: /s/ Mark O. Eisele
------------------------------------
Mark O. Eisele
Vice President-Chief Financial
Officer & Treasurer
22
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2004
EXHIBIT NO. DESCRIPTION
3(a) Amended and Restated Articles of Incorporation of Applied
Industrial Technologies, Inc., as amended on October 8, 1998
(filed as Exhibit 3(a) to the Company's Form 10-Q for the
quarter ended September 30, 1998, SEC File No. 1-2299, and
incorporated here by reference).
3(b) Code of Regulations of Applied Industrial Technologies, Inc., as
amended on October 19, 1999 (filed as Exhibit 3(b) to the
Company's Form 10-Q for the quarter ended September 30, 1999,
SEC File No. 1-2299, and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings,
Inc. (Delaware) filed with the Ohio Secretary of State on
October 18, 1988, including an Agreement and Plan of
Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to
the Company's Registration Statement on Form S-4 filed May 23,
1997, Registration No. 333-27801, and incorporated here by
reference).
4(b) Private Shelf Agreement dated as of November 27, 1996, as
amended on January 30, 1998, between the Company and Prudential
Investment Management, Inc. (assignee of The Prudential
Insurance Company of America) (filed as Exhibit 4(f) to the
Company's Form 10-Q for the quarter ended March 31, 1998, SEC
File No. 1-2299, and incorporated here by reference).
4(c) Amendment dated October 24, 2000 to November 27, 1996 Private
Shelf Agreement between the Company and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance Company
of America) (filed as Exhibit 4(e) to the Company's Form 10-Q
for the quarter ended September 30,
2000, SEC File No. 1-2299, and incorporated here by reference).
4(d) Amendment dated November 14, 2003 to 1996 Private Shelf
Agreement between the Company and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance Company
of America) (filed as Exhibit 4(d) to the Company's Form 10-Q
for the quarter ended December 31, 2003, SEC File No. 1-2299,
and incorporated here by reference).
4(e) Amendment dated February 25, 2004 to 1996 Private Shelf
Agreement between the Company and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance Company
of America) (filed as Exhibit 4(e) to the Company's Form 10-Q
for the quarter ended March 31, 2004, SEC File No. 1-2299, and
incorporated here by reference).
4(f) $100,000,000 Credit Agreement dated as of October 31, 2003 among
the Company, KeyBank National Association as Agent, and various
financial institutions (filed as Exhibit 4(e) to the Company's
Form 10-Q for the quarter ended December 31, 2003, SEC File No.
1-2299, and incorporated here by reference).
4(g) Rights Agreement, dated as of February 2, 1998, between the
Company and Computershare Investor Services LLP (successor to
Harris Trust and Savings Bank), as Rights Agent, which includes
as Exhibit B thereto the Form of Rights Certificate (filed as
Exhibit No. 1 to the Company's Registration Statement on Form
8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated
here by reference).
10 1997 Long-Term Performance Plan re-adopted by shareholders on Attached
October 22, 2002, as conformed to reflect subsequent amendments,
including adjustments in respect of 3-for-2 stock split, as
disclosed in Form 8-K filed on January 21, 2005, SEC File No.
1-2299.
15 Letter from independent accountants regarding unaudited interim Attached
financial information.
31 Rule 13a-14(a)/15d-14(a) certifications. Attached
32 Section 1350 certifications. Attached