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, 2005
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check One:
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Shares of common stock outstanding on January 15, 2006 29,434,775
(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 - Three Months
and Six Months Ended December 31, 2005 and 2004 2
Condensed Consolidated Balance Sheets -
December 31, 2005 and June 30, 2005 3
Condensed Statements of Consolidated Cash Flows -
Six Months Ended December 31, 2005 and 2004 4
Notes to Condensed Consolidated Financial Statements 5-10
Report of Independent Registered Public Accounting Firm 11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Item 3: Quantitative and Qualitative Disclosures About Market Risk 19
Item 4: Controls and Procedures 20
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 21
Item 2: Unregistered Sales of Equity Securities and Use of
Proceeds 21
Item 4: Submission of Matters to a Vote of Security Holders 22
Item 6: Exhibits 23
Signatures 25
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
------------------- --------------------
2005 2004 2005 2004
--------- -------- --------- ---------
Net Sales $456,180 $404,139 $899,385 $817,265
Cost of Sales 334,783 300,191 655,684 603,795
-------- -------- -------- --------
Gross Profit 121,397 103,948 243,701 213,470
Selling, Distribution and
Administrative Expenses 96,183 86,725 190,685 174,744
-------- -------- -------- --------
Operating Income 25,214 17,223 53,016 38,726
Interest Expense, net 964 1,331 1,736 2,634
Other (Income) Expense, net (314) 112 (164) (158)
-------- -------- -------- --------
Income Before Income Taxes 24,564 15,780 51,444 36,250
Income Taxes 9,270 5,800 19,300 13,230
-------- -------- -------- --------
Net Income $ 15,294 $ 9,980 $ 32,144 $ 23,020
======== ======== ======== ========
Earnings Per Share - Basic $ 0.52 $ 0.34 $ 1.08 $ 0.78
======== ======== ======== ========
Earnings Per Share - Diluted $ 0.50 $ 0.33 $ 1.04 $ 0.76
======== ======== ======== ========
Cash dividends per common
share $ 0.15 $ 0.09 $ 0.27 $ 0.19
======== ======== ======== ========
Weighted average common shares
outstanding for basic computation 29,662 29,580 29,819 29,409
Dilutive effect of stock options
and awards 1,016 1,091 1,059 1,061
-------- -------- -------- --------
Adjusted average common shares
outstanding for diluted computation 30,678 30,671 30,878 30,470
======== ======== ======== ========
See notes to condensed consolidated financial statements.
2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands)
December 31 June 30
2005 2005
----------- --------
ASSETS
Current assets
Cash and temporary investments $ 55,110 $127,136
Accounts receivable, less allowances
of $6,200 and $6,500 212,743 202,226
Inventories (at LIFO) 217,898 175,533
Other current assets 32,210 22,606
-------- --------
Total current assets 517,961 527,501
Property, less accumulated depreciation
of $113,201 and $106,619 70,340 71,441
Goodwill 52,231 51,083
Other assets 40,827 40,145
-------- --------
TOTAL ASSETS $681,359 $690,170
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 94,370 $ 99,047
Other accrued liabilities 60,813 82,648
-------- --------
Total current liabilities 155,183 181,695
Long-term debt 76,581 76,977
Other liabilities 51,587 38,211
-------- --------
TOTAL LIABILITIES 283,351 296,883
-------- --------
Shareholders' Equity
Preferred stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 80,000 and 50,000
shares authorized; 36,143 shares issued 10,000 10,000
Additional paid-in capital 106,370 103,240
Income retained for use in the business 378,581 354,521
Treasury shares - at cost, 6,703 and 6,142 shares (98,873) (72,660)
Unearned restricted common stock compensation (825)
Accumulated other comprehensive income (loss) 1,930 (989)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 398,008 393,287
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $681,359 $690,170
======== ========
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
-------------------
2005 2004
-------- --------
Cash Flows from Operating Activities
Net income $ 32,144 $ 23,020
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation 6,624 6,955
Stock based compensation and amortization of other intangible assets 1,505 1,089
Gain on sale of property (60) (531)
Changes in operating assets and liabilities, net of
effects from acquisition of business (61,562) (39,894)
Treasury shares contributed to employee benefit and deferred
compensation plans 4,435 5,492
Other - net (396) (395)
-------- --------
Net Cash used in Operating Activities (17,310) (4,264)
-------- --------
Cash Flows from Investing Activities
Property purchases (4,189) (3,973)
Proceeds from property sales 145 1,661
Net cash paid for acquisition of businesses (16,298)
Deposits and other (195) (1,095)
-------- --------
Net Cash used in Investing Activities (20,537) (3,407)
-------- --------
Cash Flows from Financing Activities
Dividends paid (8,084) (5,539)
Purchases of treasury shares (28,096) (7,234)
Exercise of stock options 1,165 7,556
-------- --------
Net Cash used in Financing Activities (35,015) (5,217)
-------- --------
Effect of exchange rate changes on cash 836 526
-------- --------
Decrease in cash and temporary investments (72,026) (12,362)
Cash and temporary investments at beginning of period 127,136 69,667
-------- --------
Cash and Temporary Investments at End of Period $ 55,110 $ 57,305
======== ========
See notes to condensed consolidated financial statements.
4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar 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 accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring items) considered necessary for a fair presentation of the
condensed consolidated balance sheet as of December 31, 2005 and the
condensed statements of consolidated income for the three-month and
six-month periods ended December 31, 2005 and 2004 and of consolidated cash
flows for the six-month periods ended December 31, 2005 and 2004 have been
included. 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, 2005.
Operating results for the three-month and six-month periods ended December
31, 2005 are not necessarily indicative of the results that may be expected
for the remainder of the fiscal year ending June 30, 2006.
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.
Certain reclassifications have been made to prior year amounts to be
consistent with the presentation in the current year.
2. STOCK OPTIONS
The Company has been recording expense for stock options and appreciation
rights under SFAS No. 123, "Accounting for Stock-Based Compensation", since
July 1, 2003. Effective July 1, 2005, the Company adopted SFAS No. 123(R)
(revised 2004), "Share-Based Payments", which is a revision of SFAS No.
123. Generally, the approach in SFAS No. 123(R) is similar to the fair
value approach described in SFAS No. 123. The adoption of SFAS No. 123(R)
did not have a material impact on the Company's consolidated financial
statements.
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.
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
SEGMENT FINANCIAL INFORMATION:
SERVICE CENTER
BASED DISTRIBUTION OTHER TOTAL
------------------ ------- --------
THREE MONTHS ENDED DECEMBER 31, 2005
Net sales $412,420 $43,760 $456,180
Operating income 26,291 2,774 29,065
Depreciation 3,154 272 3,426
Capital expenditures 2,400 119 2,519
======== ======= ========
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
======== ======= ========
A reconciliation from the segment operating profit to the condensed consolidated
balances is as follows:
THREE MONTHS ENDED
DECEMBER 31,
------------------
2005 2004
------- -------
Operating income:
Service Center based distribution $26,291 $16,750
Other 2,774 1,720
Adjustments for:
Other intangible amortization expense (141) (185)
Corporate and other expenses,
net of allocations (a) (3,710) (1,062)
------- -------
Total operating income 25,214 17,223
Interest expense, net 964 1,331
Other (income) expense, net (314) 112
------- -------
Income before income taxes $24,564 $15,780
======= =======
6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
SERVICE CENTER
BASED DISTRIBUTION OTHER TOTAL
------------------ ------- --------
SIX MONTHS ENDED DECEMBER 31, 2005
Net sales $824,987 $74,398 $899,385
Operating income 50,265 4,893 55,158
Assets used in business 630,678 50,681 681,359
Depreciation 6,170 454 6,624
Capital expenditures 4,028 161 4,189
======== ======= ========
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,
-----------------
2005 2004
------- -------
Operating income for
reportable segment $50,265 $35,908
Other operating income 4,893 3,636
Adjustments for:
Other intangible amortization expense (267) (364)
Corporate and other expenses,
net of allocations (a) (1,875) (454)
------- -------
Total operating income 53,016 38,726
Interest expense, net 1,736 2,634
Other income, net (164) (158)
------- -------
Income before income taxes $51,444 $36,250
======= =======
(a) The change in corporate and other income, 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.
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
INFORMATION ABOUT SALES IN DIFFERENT GEOGRAPHIC AREAS IS AS FOLLOWS:
UNITED
STATES CANADA OTHER TOTAL
-------- ------- ------ --------
Three Months Ended December 31, 2005 $404,371 $46,794 $5,015 $456,180
Three Months Ended December 31, 2004 $363,387 $36,435 $4,317 $404,139
UNITED
STATES CANADA OTHER TOTAL
-------- ------- ------- --------
Six Months Ended December 31, 2005 $795,497 $93,348 $10,540 $899,385
Six Months Ended December 31, 2004 $735,169 $73,580 $ 8,516 $817,265
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE MONTHS ENDED
DECEMBER 31,
------------------
2005 2004
------- -------
Net income $15,294 $ 9,980
Other comprehensive income:
Unrealized gain on hedge transactions, net of
income tax of $296 460
Foreign currency translation adjustment,
net of income tax of $162 and $921 792 2,668
Unrealized gain on investment securities available for
sale, net of income tax of $2 3
------- -------
Total comprehensive income $16,549 $12,648
======= =======
SIX MONTHS ENDED
DECEMBER 31,
-----------------
2005 2004
------- -------
Net income $32,144 $23,020
Other comprehensive income:
Unrealized gain on hedge transactions, net of
income tax of $178 277
Foreign currency translation adjustment,
net of income tax of $732 and $1,165 2,614 3,127
Unrealized gain on investment securities available for
sale, net of income tax of $17 28
------- -------
Total comprehensive income $35,063 $26,147
======= =======
8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
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
---------------- --------------
THREE MONTHS ENDED DECEMBER 31, 2005 2004 2005 2004
- ------------------------------- ------ ---- ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 362 $318 $14 $ 12
Interest cost 396 377 63 73
Expected return on plan assets (95) (88)
Recognized net actuarial loss 196 120 7 4
Amortization of prior service cost 157 157 12 12
------ ---- --- ----
Net periodic pension cost $1,016 $884 $96 $101
====== ==== === ====
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
SIX MONTHS ENDED DECEMBER 31, 2005 2004 2005 2004
- ----------------------------- ------ ------ ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 725 $ 637 $ 28 $ 24
Interest cost 793 755 126 146
Expected return on plan assets (191) (177)
Recognized net actuarial loss 392 240 14 7
Amortization of prior service cost 313 313 24 24
------ ------ ---- ----
Net periodic pension cost $2,032 $1,768 $192 $201
====== ====== ==== ====
The Company contributed $398 to its pension benefit plan and $14 to its
other benefit plans in the six months ended December 31, 2005. Expected
contributions for the full fiscal year are $740 for the pension benefit
plans and $300 for its other benefit plans.
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
6. BUSINESS COMBINATION
On September 30, 2005, the Company acquired certain assets and assumed
certain liabilities of Spencer Industries, Inc. ("Spencer Fluid Power"), a
distributor of fluid power products, for $16,298 in cash. The results of
the acquired operations have been included in the condensed statement of
consolidated income and in the "Other" segment for segment reporting for
the three-month period ended December 31, 2005.
7. SHAREHOLDERS' EQUITY
In October 2005, the shareholders approved an amendment to the Company's
Articles of Incorporation to increase the number of authorized shares of
common stock from 50 million shares to 80 million shares.
10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The accompanying condensed consolidated financial statements of the Company have
been reviewed by the Company's independent registered public accounting firm,
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 Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio
We have reviewed the accompanying condensed consolidated balance sheet of
Applied Industrial Technologies, Inc. and subsidiaries (the "Corporation") as of
December 31, 2005, and the related condensed statements of consolidated income
for the three-month and six-month periods ended December 31, 2005 and 2004, and
of consolidated cash flows for the six-month periods ended December 31, 2005 and
2004. These interim financial statements are the responsibility of the
Corporation'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,
2005, and the related statements of consolidated income, shareholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated August 19, 2005, 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, 2005 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 17, 2006
11
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, 2005 and June 30, 2005, 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, 2005 increased 53.2% compared
to the same quarter in the prior year on a 12.9% increase in sales and a higher
gross margin. Selling, distribution and administrative expenses increased at a
rate less than sales and are down as a percentage of net sales.
The balance sheet continued to strengthen as shareholders' equity increased to
$398.0 million and our current ratio improved to 3.3 to 1. Overall inventory
balances grew during the quarter as the Company took advantage of buying
opportunities with certain suppliers and continued to purchase inventory to meet
anticipated demand for our products.
The Company monitors the Purchasing Managers Index (PMI) as published by the
Institute for Supply Management and the Manufacturers Capacity Utilization (MCU)
index published by the Federal Reserve Board and considers these indices key
indicators of potential Company business environment changes. During the quarter
these indicators continued to show relative strength in the economy. The
Company's performance traditionally lags these key indicators by approximately 6
months.
The Company expects that fiscal 2006 third quarter sales will rise between 8.2%
and 10.4% in comparison to the same quarter in the prior year. Sales for the
entire 2006 fiscal year are expected to be in the range of $1.86 billion to
$1.89 billion.
The Company had 4,573 associates at December 31, 2005 and 4,322 associates at
December 31, 2004.
The Company had a total of 441 operating facilities at December 31, 2005 and 433
operating facilities at December 31, 2004.
Results Of Operations
THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
Sales during the three months ended December 31, 2005 increased $52.0 million or
12.9% compared to the prior year, reflecting increased sales in both our service
center based distribution segment and other businesses. The number of selling
days in both quarters was 61 days.
Sales from our service center based distribution segment increased $36.2 million
or 9.6% during the three months ended December 31, 2005 from the same period in
the prior year.
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Approximately one-third to one-half of the sales increase between the two
periods was a result of supplier price increases passed on to customers. The
remainder of the net sales increase between the two periods was driven by sales
mix, favorable currency translation, and sales generated by a business acquired
since the prior year period.
Sales from our other businesses increased $15.9 million or 57.0% during the
three months ended December 31, 2005 from the same period in the prior year. The
increase between the two periods was due primarily to sales generated by a
business acquired since the prior year period.
From a geographical perspective, sales from our Canadian operations increased
$10.4 million or 28.4% during the three months ended December 31, 2005 from the
same period in the prior year. Approximately two-thirds of the increase between
the two periods represents sales generated by a business acquired since the
prior year period as well as favorable currency translation. The remaining net
sales increase was due to a combination of sales mix, pricing and increased
volume.
During the three months ended December 31, 2005, industrial products and fluid
power products accounted for 81.4% and 18.6%, respectively, of sales. In
comparison, industrial products and fluid power products accounted for 83.8% and
16.2%, respectively, of sales for the same period in the prior year. The
increase in sales of fluid power products was a result of the Company's
acquisition of Spencer Fluid Power.
Gross profit as a percentage of sales during the three months ended December 31,
2005 increased to 26.6% from 25.7% from the same period in the prior year. The
increase in the gross profit percentage between the two periods primarily
reflects improved customer pricing and lower net freight costs.
Selling, distribution and administrative ("SD&A") expenses increased at a rate
less than sales and were down as a percentage of sales. SD&A as a percentage of
sales for the three months ended December 31, 2005 decreased to 21.1% from 21.5%
during the same period in the prior year while in absolute dollar amounts, SD&A
increased by $9.5 million or 10.9%. The increase in dollars primarily relates to
increases in associate compensation tied to improved performance and the normal
SD&A amounts of businesses acquired since the prior year period.
Interest expense-net for the three months ended December 31, 2005 decreased $0.4
million or 27.6% in comparison to the same period in the prior year, primarily
due to an increase in interest income earned on temporary investments.
Average rates paid on borrowings were 6.7% for the three months ended December
31, 2005 and 6.3% for the same period in the prior year. The increase in the
average interest rate on borrowings between the two periods reflects the impact
of the strengthening of the Canadian dollar.
13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other (income) expense, net during the three months ended December 31, 2005
improved $0.4 million from the same period in the prior year primarily due to
favorable changes in the fair value of the Company's cross currency swap.
Income tax expense as a percentage of income before taxes during the three
months ended December 31, 2005 increased to 37.7% from 36.8% for the same period
in the prior year. The increase in the effective income tax rate between the two
periods is due to higher foreign income taxes.
As a result of the above factors, net income during the three months ended
December 31, 2005 increased by $5.3 million or 53.2% from the same period in the
prior year. Earnings per share for the three months ended December 31, 2005
increased to $.50 per share from $.33 per share during the same period in the
prior year.
SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
Sales during the six months ended December 31, 2005 increased $82.1 million or
10.0% from the same period in the prior year, reflecting increased sales in both
our service center based distribution segment and other businesses. The number
of selling days in both periods was 125 days.
Sales from our service center based distribution segment increased $63.1 million
or 8.3% during the six months ended December 31, 2005 from the same period in
the prior year. Approximately one-third to one-half of the sales increase
between the two periods was a result of supplier price increases passed on to
customers. The remainder of the sales increase between the two periods was
driven by sales mix, favorable currency translation and sales generated by a
business acquired since the prior year period.
Sales from our other businesses increased $19.0 million or 34.4% during the six
months ended December 31, 2005 from the same period in the prior year. The
increase between the two periods was due primarily to sales generated by a
business acquired since the prior year period.
From a geographical perspective, sales from our Canadian operations increased
$19.8 million or 26.9% during the six months ended December 31, 2005 from the
same period in the prior year. Approximately three-quarters of the increase
between the two periods represents sales generated by a business acquired since
the prior year period and favorable currency translation. The remaining sales
increase was due to a combination of sales mix, pricing and increased volume.
During the six months ended December 31, 2005, industrial products and fluid
power products accounted for 82.5% and 17.5%, respectively, of sales. In
comparison, industrial products and fluid power products accounted for 84.0% and
16.0%, respectively, of sales for the same period in the prior year. The
relative increase in sales of fluid power products was a result of the Company's
acquisition of Spencer Fluid Power.
14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Gross profit as a percentage of sales increased to 27.1% for the six months
ended December 31, 2005 from 26.1% during the same period in the prior year. The
increase in the gross profit percentage between the two periods reflects
improved customer pricing and lower net freight costs.
SD&A expenses increased at a rate less than sales and were down as a percentage
of sales. SD&A as a percentage of sales for the six months ended December 31,
2005 decreased to 21.2% from 21.4% during the same period in the prior year
while in absolute dollar amounts, SD&A increased by $15.9 million or 9.1%. The
increase in dollars primarily relates to increases in associate compensation
tied to improved performance and the normal SD&A amounts of businesses acquired
since the prior year period.
Interest expense-net for the six months ended December 31, 2005 decreased $0.9
million or 34.1% in comparison to the same period in the prior year primarily
due to an increase in interest income earned on temporary investments.
Average rates paid on borrowings were 6.6% for the six months ended December 31,
2005 and 6.4% for the same period in the prior year. The increase in the average
interest rate on borrowings reflects the impact of the strengthening of the
Canadian dollar during the current period.
Other (income) expense, net during the six months ended December 31, 2005
remained consistent with the amount from the same period in the prior year. The
absence of the $0.7 million non-operating gain related to the settlement of a
life insurance policy recorded during the same period in the prior year was
offset by favorable changes in the fair value of the Company's cross currency
swap.
Income tax expense as a percentage of income before taxes during the six months
ended December 31, 2005 increased to 37.5% from 36.5% during the same period in
the prior year. The increase in the effective income tax rate during the current
period is primarily due to higher effective foreign income taxes as well as the
beneficial impact of tax-free life insurance proceeds received during the same
period in the prior year that did not recur in the current year. We expect the
effective tax rate to remain at approximately 37.5% for the remainder of the
fiscal year.
As a result of the above factors, net income for the six months ended December
31, 2005 increased by $9.1 million or 39.6% from the same period in the prior
year. Earnings per share for the six months ended December 31, 2005 increased to
$1.04 per share from $.76 per share during the same period in the prior year.
15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash used in operating activities for the six months ended December 31, 2005 was
$17.3 million in comparison to $4.3 million used in operating activities during
the same period in the prior year. Cash flows from operations depend primarily
upon generating operating income, controlling the investment in inventories and
receivables, and managing the timing of payments to suppliers and associates.
During the six months ended December 31, 2005, inventories increased $42.4
million, including $9.7 million associated with the Spencer Fluid Power
acquisition. Besides the inventories related to Spencer, the increase in
inventories during the current period reflects advantageous buying opportunities
with certain suppliers and the purchase of inventories to meet anticipated
demand for our products. Accounts receivable increased $10.5 million during the
six months ended December 31, 2005, including $6.1 million associated with the
Spencer Fluid Power acquisition. The remainder of the increase in accounts
receivable reflects the overall increase in net sales during the current period.
Other accrued liabilities decreased $21.8 million during the six months ended
December 31, 2005, reflecting the pay out of fiscal year end incentives during
the current period.
Cash used in investing activities for the six months ended December 31, 2005 was
$20.5 million in comparison to $3.4 million used in investing activities during
the same period in the prior year. The increase in the use of cash in investing
activities primarily reflects the $16.3 million cash acquisition of Spencer
Fluid Power during the current period. The Company expects total capital
expenditures to be in the range of $12.0 million to $13.0 million during fiscal
2006. Depreciation expense for fiscal 2006 is expected to be within the range of
$13.0 million to $14.0 million.
Cash used in financing activities for the six months ended December 31, 2005 was
$35.0 million in comparison to $5.2 million used in financing activities during
the same period in the prior year. The increase in the use of cash in financing
activities during the current period primarily reflects the increase in common
stock repurchases, the increase in dividends paid due to increases in the
dividend rate and a decrease in cash provided by the exercise of stock options.
The Company has a $100.0 million committed revolving credit facility with a
group of banks expiring in June 2010. The Company had no borrowings outstanding
under this facility at December 31, 2005. Unused lines under this facility, net
of outstanding letters of credit, total $91.0 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, 2005,
there was no borrowing under this agreement.
16
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 has authorized the purchase of shares of the Company's
common stock for the purpose of funding benefit programs, stock option and award
programs, and future business acquisitions. These purchases may be made in open
market and negotiated transactions, from time to time, depending upon market
conditions. The Company acquired 840,200 shares of its common stock for $28.1
million from the open market during the six months ended December 31, 2005. In
January 2006, the board of directors authorized the purchase of up to 1,000,000
shares of the Company's common stock.
Other Matters
On September 30, 2005, the Company acquired certain assets and assumed certain
liabilities of Spencer Industries, Inc., a distributor of fluid power products,
for $16.3 million in cash. The results of the acquired operations have been
included in the condensed statement of consolidated income for the three-month
period ended December 31, 2005.
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" 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.
17
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 for reasons including consolidation in customer
industries, increased efficiency in customer operations, 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; price increases or decreases; 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 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).
18
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, 2005. 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, 2005 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
exposure with regard to our Mexican business is not hedged because the Mexican
activity is not material. For the six months ended December 31, 2005, a uniform
10% strengthening of the U.S. dollar relative to foreign currencies that affect
the Company would have resulted in a $0.5 million decrease in net income. A
uniform 10% weakening of the U.S. dollar would have resulted in a $0.5 million
increase in net income.
19
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. An evaluation was carried
out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, these officers have concluded that the Company's disclosure controls
and procedures are effective.
During the second quarter of Fiscal 2006, there were no material changes in the
Company's internal controls or in other factors that materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company has been named a defendant in pending legal proceedings with
respect to various product liability, commercial, and other matters.
Although it is not possible to predict the outcome of these unresolved
actions or the range of possible loss, the Company does not believe, based
on circumstances currently known, 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, 2005 were as follows:
(c) Total Number (d) Maximum
of Shares Number of Shares
Purchased as Part that May Yet Be
(a)Total (b) Average of Publicly Purchased Under
Number of Price Paid per Announced Plans the Plans or
Period Shares Share or Programs Programs
- ------------------- --------- -------------- ----------------- ----------------
October 1, 2005 to
October 31, 2005 5,000 32.66 5,000 995,000
November 1, 2005 to
November 30, 2005 323,700 32.06 323,700 671,300
December 1, 2005 to
December 31, 2005 215,600 34.22 215,600 455,700
Total 544,300 32.92 544,300 455,700
On July 16, 2003, the Board of Directors authorized the purchase of up to
1,500,000 shares of the Company's common stock. Following purchases of 964,437
shares, the Board increased the number of shares authorized for purchase to
1,000,000 shares on October 12, 2005. The Company announced this authorization
on the same date. Then, following the purchases shown in the table, the Board
again increased the number of shares authorized for purchase to 1,000,000 shares
on January 18, 2006, as publicly announced that day. The purchases may be made
in the open market or in privately negotiated transactions. The amended
authorization is in effect until all shares are purchased or the authorization
is revoked or amended by the Board of Directors.
21
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on October 12, 2005,
there were 30,107,112 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 III for a term of
three years:
For Withheld
---------- --------
L. Thomas Hiltz 28,365,163 394,332
John F. Meier 28,587,428 172,067
David L. Pugh 28,384,487 375,008
Peter C. Wallace 28,618,189 141,306
The terms of the Class I directors, including Thomas A. Commes, Peter
A. Dorsman, J. Michael Moore, Jerry Sue Thornton, and of the Class II
directors, including William G. Bares, Edith Kelly-Green, and Stephen
E. Yates, continued after the meeting.
2. Voting on proposal to amend the Amended and Restated Articles of
Incorporation to increase the number of authorized shares of common
stock, without par value, from 50,000,000 to 80,000,000:
For Withheld Abstain
- ---------- --------- -------
26,237,846 2,448,092 73,557
3. Ratification of the Audit Committee's appointment of Deloitte & Touche
LLP as the Company's independent auditors for the fiscal year ending
June 30, 2006.
For Withheld Abstain
- ---------- --------- -------
27,299,846 1,371,144 88,505
22
ITEM 6. Exhibits.
Exhibit No. Description
- ----------- -----------
3(a) Amended and Restated Articles of Incorporation of Applied
Industrial Technologies, Inc., as amended on October 25, 2005
(re-filed to correct the version filed as Exhibit 3(a) to the
Company's Form 10-Q for the quarter ended September 30, 2005).
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) (now named Applied
Industrial Technologies, Inc.) 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
23
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 June 3, 2005 among the
Company, KeyBank National Association as Agent, and various
financial institutions (filed as Exhibit 4 to the Company's Form
8-K dated June 9, 2005, 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).
15 Consent of Independent Registered Public Accounting Firm.
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.
24
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: January 27, 2006 By: /s/ David L. Pugh
------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
Date: January 27, 2006 By: /s/ Mark O. Eisele
------------------------------------
Mark O. Eisele
Vice President-Chief Financial
Officer & Treasurer
25
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2005
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3(a) Amended and Restated Articles of Incorporation of Applied Attached
Industrial Technologies, Inc., as amended on October 25, 2005
(re-filed to correct the version filed as Exhibit 3(a) to the
Company's Form 10-Q for the quarter ended September 30, 2005).
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) (now named Applied
Industrial Technologies, Inc.) 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 June 3, 2005 among the
Company, KeyBank National Association as Agent, and various
financial institutions (filed as Exhibit 4 to the Company's Form
8-K dated June 9, 2005, 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).
15 Consent of Independent Registered Public Accounting Firm. Attached
31 Rule 13a-14(a)/15d-14(a) certifications. Attached
32 Section 1350 certifications. Attached