1
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
-----------------------
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
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APPLIED INDUSTRIAL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 34-0117420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
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(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
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Shares of common stock outstanding on April 30, 1998 22,067,009
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(No par value)
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APPLIED INDUSTRIAL TECHNOLOGIES, INC.
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INDEX
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Page No.
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Statements of Consolidated Income - 2
Three Months and Nine Months
Ended March 31, 1998 and 1997
Consolidated Balance Sheets - 3
March 31, 1998 and June 30, 1997
Statements of Consolidated Cash Flows 4
Nine Months Ended March 31, 1998 and 1997
Statements of Consolidated Shareholders' Equity - 5
Nine Months Ended March 31, 1998 and
Year Ended June 30, 1997
Notes to Consolidated Financial Statements 6 - 9
Item 2: Management's Discussion and Analysis of 10 - 15
Financial Condition and Results of Operations
Part II: OTHER INFORMATION 16
Item 1: Legal Proceedings 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 18
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PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31 March 31
1998 1997 1998 1997
---------------------- ----------------------------
Net Sales $393,871 $297,190 $1,107,220 $854,431
-------- -------- ---------- ---------
Cost and Expenses
Cost of sales 291,380 221,991 821,379 630,791
Selling, distribution and
administrative 85,088 62,752 244,365 188,766
-------- -------- ---------- ---------
376,468 284,743 1,065,744 819,557
-------- -------- ---------- ---------
Operating Income 17,403 12,447 41,476 34,874
-------- -------- ---------- ---------
Interest
Interest expense 2,408 1,673 7,238 4,829
Interest income (182) (124) (660) (695)
-------- -------- ---------- ---------
2,226 1,549 6,578 4,134
-------- -------- ---------- ---------
Income Before Income Taxes 15,177 10,898 34,898 30,740
-------- -------- ---------- ---------
Income Taxes
Federal 5,601 3,379 12,098 10,338
State and local 461 764 1,474 2,239
-------- -------- ---------- ---------
6,062 4,143 13,572 12,577
--------- --------- ----------- ---------
Net Income $ 9,115 $ 6,755 $ 21,326 $ 18,163
======== ======== ========== =========
Net Income per share - Basic $ 0.42 $ 0.37 $ 1.00 $ 0.98
======== ======== ========== =========
Net Income per share - Diluted $ 0.41 $ 0.36 $ 0.98 $ 0.97
======== ======== ========== =========
Cash dividends per common
share $ 0.12 $ 0.11 $ 0.35 $ 0.31
======== ======== ========== =========
See notes to consolidated financial statements.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
March 31 June 30
1998 1997
--------- ---------
(Unaudited)
Assets
Current assets
Cash and temporary investments $ 17,698 $ 22,405
Accounts receivable, less allowance
of $3,299 and $2,400 195,363 153,080
Inventories (at LIFO) 190,195 103,069
Other current assets 5,666 6,905
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Total current assets 408,922 285,459
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Property - at cost
Land 12,685 12,281
Buildings 73,577 66,157
Equipment 87,575 81,132
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173,837 159,570
Less accumulated depreciation 63,329 68,809
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Property - net 110,508 90,761
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Goodwill 54,932 5,604
Other assets 17,185 12,290
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TOTAL ASSETS $ 591,547 $ 394,114
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Notes payable $ 21,132 $ 25,415
Current portion of long-term debt 19,429 11,429
Accounts payable 96,840 49,469
Compensation and related benefits 22,854 19,025
Other accrued liabilities 22,276 15,398
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Total current liabilities 182,531 120,736
Long-term debt 95,714 51,428
Other liabilities 28,427 14,366
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TOTAL LIABILITIES 306,672 186,530
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Shareholders' Equity
Preferred Stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 24,095 and 20,931 shares issued 10,000 10,000
Additional paid-in capital 81,412 10,311
Income retained for use in the business 230,340 216,642
Less 2,051 and 2,310 treasury shares -
at cost (25,036) (22,983)
Less shares held in trust for
deferred compensation plans (6,853) (5,436)
Less unearned restricted common
stock compensation (4,988) (950)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 284,875 207,584
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 591,547 $ 394,114
========= =========
See notes to consolidated financial statements.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended
March 31
----------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 21,326 $ 18,163
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation 11,798 10,178
Amortization of goodwill and restricted common
stock compensation 3,345 606
Provision for losses on accounts receivable 1,465 599
Gain on sale of property (574) (399)
Treasury shares contributed to employee
benefit plans 3,261 2,502
Changes in current assets and liabilities, net of
effects from acquisition and disposal of
businesses:
Accounts receivable 20 (426)
Inventories (32,686) 3,765
Other current assets 4,815 (4,792)
Accounts payable and accrued expenses (1,067) (3,637)
Other - net 650 938
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Net Cash provided by Operating Activities 12,353 27,497
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Cash Flows from Investing Activities
Property purchases (26,126) (10,855)
Proceeds from property sales 6,536 3,068
Net cash paid for acquisition of businesses (31,328)
Proceeds from sale of Aircraft Division 9,090
Deposits and other 9,193 1,976
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Net Cash (used in) provided by Investing Activities (41,725) 3,279
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Cash Flows from Financing Activities
Net repayments under Line-of-credit
agreements (4,283) (9,159)
Long-term debt borrowings 50,000
Long-term debt repayments (6,361) (5,714)
Exercise of stock options 938 510
Dividends paid (7,628) (5,701)
Purchase of treasury shares (8,001) (4,434)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash provided by (used in) Financing Activities 24,665 (24,498)
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease ) in cash and temporary
investments (4,707) 6,278
Cash and temporary investments
at beginning of period 22,405 9,243
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Temporary Investments
at End of Period $ 17,698 $ 15,521
==============================================================================================================================
Supplemental Cash Flow Information Cash paid during the period for:
Income taxes $ 10,997 $ 16,740
Interest $ 7,171 $ 5,161
Significant noncash investing activity:
Issuance of common stock for the acquisition of Invetech Company $ 63,374
See notes to consolidated financial statements.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Nine Months Ended March 31, 1998 (Unaudited)
and Year Ended June 30, 1997
(Thousands, except per share amounts )
Income
Shares of Additional Retained Treasury
Common Stock Common Paid-in for Use in Shares
Outstanding Stock Capital the Business -at Cost
- ------------------------------------------------------------------------------------------------------------------------------
Balance at July 1, 1996 18,566 $ 10,000 $ 7,528 $ 197,232 $ (21,260)
Net income 27,092
Cash dividends - $.41 per share (7,682)
Purchase of common stock
for treasury (249) (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 164 1,809 1,568
Exercise of stock options 78 342 747
Deferred compensation plans 53 532 463
Restricted common stock awards 9 68 67
Amortization of restricted common
stock compensation 32
Increase in fair value of shares
held in trust
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 18,621 10,000 10,311 216,642 (22,983)
Net income 21,326
Cash dividends - $.35 per share (7,628)
Purchase of common stock
for treasury (284) (8,001)
Issuance of common stock for the
acquisition of Invetech Company 3,165 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 113 1,970 1,291
Exercise of stock options 81 22 916
Deferred compensation plans 24 405 245
Restricted common stock awards 201 3,560 2,005
Acquisition of Associated Bearings 123 1,770 1,491
Amortization of restricted common
stock compensation
Increase in fair value of shares
held in trust
- -----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 22,044 $ 10,000 $ 81,412 $ 230,340 $ (25,036)
=============================================================================================================================
Shares Held in Unearned
Trust for Restricted Total
Deferred Common Stock Shareholders'
Compensation Plans Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance at July 1, 1996 $ (3,008) $ (1,200) $ 189,292
Net income 27,092
Cash dividends - $.41 per share (7,682)
Purchase of common stock
for treasury (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 3,377
Exercise of stock options 1,089
Deferred compensation plans (995)
Restricted common stock awards (135)
Amortization of restricted common
stock compensation 385 417
Increase in fair value of shares
held in trust (1,433) (1,433)
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 (5,436) (950) 207,584
Net income 21,326
Cash dividends - $.35 per share (7,628)
Purchase of common stock
for treasury (8,001)
Issuance of common stock for the
acquisition of Invetech Company 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 3,261
Exercise of stock options 938
Deferred compensation plans (650)
Restricted common stock awards (5,565)
Acquisition of Associated Bearings 3,261
Amortization of restricted common
stock compensation 1,527 1,527
Increase in fair value of shares
held in trust (767) (767)
- ------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ (6,853) $ (4,988) $ 284,875
========================================================================================================================
See notes to consolidated financial statements.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands) (Unaudited)
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1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of March 31, 1998 and June 30, 1997, and the results of
operations for the three months and nine months ended March 31, 1998
and 1997, and cash flows for the nine months ended March 31, 1998 and
1997.
The results of operations for the three and nine month periods ended
March 31, 1998 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 the annual physical inventory and the effect of year-end
inventory quantities on LIFO costs.
2. NET INCOME PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. All prior amounts
have been restated to conform to the basic and diluted presentation.
The impact to previously reported earnings per share amounts is not
significant.
All share and per share data have also been restated to reflect a three
for two stock split effective September 15, 1997.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
The following is a computation of the basic and diluted earnings per share:
Three Months Ended Nine Months Ended
March 31 March 31
1998 1997 1998 1997
-----------------------------------------------------
Net Income
- ----------
Net income as reported in statements of
consolidated income $9,115 $6,755 $21,326 $18,163
=====================================================
Average Shares Outstanding
- --------------------------
Weighted average common shares outstanding for basic
computation 21,776 18,412 21,343 18,467
Dilutive effect of:
Stock options 297 251 325 227
Performance Accelerated
Restricted Stock (PARS) 41 53 54 53
-----------------------------------------------------
Adjusted average common shares outstanding for
diluted computation 22,114 18,716 21,722 18,747
=====================================================
Net Income Per Share
- --------------------
Net income per common share - basic $0.42 $0.37 $1.00 $0.98
=====================================================
Net income per common share - diluted $0.41 $0.36 $0.98 $0.97
=====================================================
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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3. BUSINESS COMBINATIONS
Effective August 1, 1997, the Company completed the acquisition of
Invetech Company (Invetech), a distributor of bearings, mechanical and
electrical drive system products, industrial rubber products and
specialty maintenance and repair products. The aggregate purchase price
including the issuance of 2,110 shares of Company common stock, was
$93,900. The cash portion of the purchase price of $23,400 was financed
through available short-term lines of credit.
The Company accounted for the acquisition as a purchase and has
included Invetech's results of operations from the effective date of
the acquisition. The Company incurred a pre-tax nonrecurring charge of
$4,000 in the quarter ending September 30, 1997 for consolidation
expenses and costs associated with disposal of duplicative property and
other assets. The purchase price was allocated based on estimated fair
values at the date of acquisition. Goodwill representing the excess of
the purchase price over assets acquired of $35,840 is being amortized
on a straight-line basis over 30 years.
The following table summarizes the unaudited consolidated pro forma
results of operations, as if the acquisition had occurred at the
beginning of the following periods:
Nine Months Ended March 31
1998 1997
---- ----
(Unaudited)
Net sales $1,132,359 $1,092,405
Income before income taxes 33,983 32,968
Net income 20,777 19,904
Net income per share-basic .96 .92
Net income per share-diluted .94 .90
The unaudited pro forma amounts include the pre-tax nonrecurring charge
of $4,000 for the nine months ended March 31, 1998.
This pro forma information is not necessarily indicative of the results
that actually would have been attained if the operations had been
combined during the periods presented and is not intended to be a
projection of future results.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands) (Unaudited)
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During the nine months ended March 31, 1998 the Company acquired
certain assets of a rubber fabrication and repair shop, the stock of
two distributors of fluid power products, and a distributor of
bearings, power transmission products and industrial supplies for a
total of 123 shares of Company stock and $12,278 in cash. The
acquisitions of these businesses were accounted for as purchases and
their results of operations are included in the accompanying
consolidated financial statements from their respective acquisition
dates. Results of operations for these acquisitions are not material
for all periods presented. Goodwill recognized in connection with these
combinations is being amortized over 15 years.
4. LONG-TERM DEBT
In connection with the Invetech acquisition, the Company assumed an
$8,000 bank term loan, at an interest rate of 5.97%, payable in
December 1998.
In January 1998 the Company borrowed $50,000 of long-term debt under a
shelf facility agreement with The Prudential Insurance Company of
America. Proceeds from these 6.6% Senior Unsecured Term Notes were used
to repay short-term debt. Interest is payable quarterly. The principal
amount is to be paid in December 2007.
5. SHAREHOLDER RIGHTS PLAN
On January 15, 1998 the Company's Board of Directors adopted a
Shareholder Rights Plan and declared a dividend distribution of one
preferred share purchase right for each outstanding share of Company
common stock held of record as of February 2, 1998. The rights become
exercisable only if a person or group acquires beneficial ownership of
20% or more of the Company's common stock or commences a tender or
exchange offer for 20% or more of the Company's common stock, unless
the tender or exchange offer is for all outstanding shares of the
Company upon terms determined by the Company's continuing directors to
be in the best interests of the Company and its shareholders. When
exercisable, the Rights would entitle the holders (other than the
acquirer) to buy shares of the Company's common stock having a market
value equal to two times the right's exercise price or, in certain
circumstances, to buy shares of the acquiring company having a market
value equal to two times the right's exercise price.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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The following is Management's discussion and analysis of certain significant
factors which have affected the Company's: (1) financial condition at March 31,
1998 and June 30, 1997, and (2) results of operations and cash flows during the
periods included in the accompanying statements of Consolidated Income and
Consolidated Cash Flows.
FINANCIAL CONDITION
Liquidity and Working Capital
- -----------------------------
Cash provided by operating activities was $12.3 million in the nine months ended
March 31, 1998. This compares to $27.5 million provided by operating activities
in the same period a year ago.
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. The Company has continuing programs to monitor
and control these investments. During the six month period ended December 31,
1997 inventories (excluding inventories purchased in the Invetech transaction
and other acquisitions) increased approximately $35.5 million due to timing of
purchases relating to the calendar year end. Inventories declined approximately
$3.0 million from December 1997 through March 1998 and are expected to continue
to decline through the remainder of the fiscal year. Accounts receivable,
exclusive of receivables acquired in the Invetech transaction and other
acquisitions, remained constant.
Investments in property totaled $26.1 million and $10.9 million in the nine
months ended March 31, 1998 and 1997 respectively. The increases in capital
expenditures were primarily made for integrating and improving facilities, data
processing equipment and vehicles related to Invetech and other acquisitions.
The Company entered into an agreement to build a new 160,000 square foot
distribution center in the city of Corona, California, in the greater Los
Angeles area. Construction is expected to begin in the fourth quarter and be
completed by the third quarter of fiscal 1999. This build-to-suit facility will
be leased by the Company under a 10 year lease which is expected to be accounted
for as an operating lease. The Company is planning to move out of its current
Corona Distribution Center and into the new facility upon expiration of its
current lease.
Working capital at March 31, 1998 was $226.4 million compared to $164.7 million
at June 30, 1997. This increase is primarily due to the acquisition of Invetech
and other companies, the increase in inventories and the refinancing of short
term borrowings to long term debt.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Capital Resources
- -----------------
Capital resources are obtained from income retained in the business,
indebtedness under the Company's lines of credit and long-term debt agreements,
and operating lease arrangements. Average combined short-term and long-term
borrowing was $121.2 and $90.7 million for the nine months ended March 31, 1998
and 1997, respectively. The average effective interest rate on the short-term
borrowings for the nine months ended March 31, 1998 decreased to 6.0% from an
average rate of 6.5% for the nine months ended March 31, 1997 due to lower
interest rates on short-term debt. The Company has $160 million of short-term
lines of credit with commercial banks that provide for payment of interest at
various interest rate options, none of which are in excess of the banks' prime
rate. The Company had $21.1 million of borrowings outstanding under short-term
bank lines of credit on March 31, 1998. Unused lines of credit totaling $138.9
million are available for future short-term financing needs.
In January 1998 the Company borrowed $50 million at a 6.6% interest rate with a
ten-year term under a previously unused $50 million shelf facility agreement in
place with The Prudential Insurance Company of America. Proceeds from these
notes were used to repay short term debt.
The Board of Directors has authorized an ongoing program to purchase shares of
the Company's common stock to fund employee benefit programs and stock option
and award programs. These purchases are made in open market and negotiated
transactions, from time to time, depending upon market conditions. The Company
acquired 284,000 shares of its common stock for $8.0 million during the nine
months ended March 31, 1998.
Management expects that capital resources provided from operations, available
lines of credit and long-term debt and operating leases will be sufficient to
finance normal working capital needs, business acquisitions, enhancement of
facilities and equipment and the purchase of additional Company common stock.
Management also believes that additional long-term debt and line of credit
financing could be obtained if desired.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year 2000 Issue
- ---------------
The Company's plan for assessment, remediation and replacement of those of its
internal computer systems affected by the Year 2000 issue is on schedule. The
Company expects all internal systems to be fully tested and compliant by the end
of calendar year 1999. In addition, the Company is seeking assurances from its
product and service suppliers and major customers as to their Year 2000
compliance plans. The Company's progress in completing its Year 2000 activities
is overseen by an executive task force made up of representatives from all key
management areas. Additionally, the Company has retained an outside Year 2000
consultant to provide an independent assessment of the Company's Year 2000
efforts. The Company expects that the actions described above will significantly
reduce the likelihood that Year 2000 issues would have a material adverse effect
on the Company's business, financial condition or results of operations.
Based on currently available information, the total cost of the Company's Year
2000 activities is not expected to be material to its financial condition or
results of operations. If the requisite changes to the Company's systems are not
made or are not completed in a timely manner, or if the Company's suppliers and
customers fail to achieve Year 2000 compliance in a timely manner, then the Year
2000 issue could have a material adverse effect on the Company.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
A summary of the period-to-period changes in principal items included in the
statements of consolidated income follows:
Increase (Decrease)
(Dollars in Thousands Except per Share Amounts)
Three Months Ended Nine Months Ended
March 31 March 31
1998 and 1997 1998 and 1997
Amount Change Amount Change
------ ------ ------ ------
Net sales $96,681 32.5% $252,789 29.6%
Cost of sales 69,389 31.3% 190,588 30.2%
Selling,distribution and
administrative expenses 22,336 35.6% 55,599 29.5%
Operating income 4,956 39.8% 6,602 18.9%
Interest expense - net 677 43.7% 2,444 59.1%
Income before income taxes 4,279 39.3% 4,158 13.5%
Income taxes 1,919 46.3% 995 7.9%
Net income 2,360 34.9% 3,163 17.4%
Net income per share - diluted .05 13.9% .01 1.0%
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three Months Ended March 31, 1998 and 1997
- ------------------------------------------
The increase in net sales, cost of sales and selling, distribution and
administrative expenses from the prior year relate primarily to the operations
of Invetech. Gross profit as a percentage of sales increased to 26.0% from
25.3%. This increase primarily relates to a reduction in estimated year to date
costs used to determine cost of sales offset by higher freight costs and changes
in the product mix due to the Invetech acquisition.
Selling, distribution and administrative expenses as a percent of sales,
increased to 21.6% from 21.1%. The increase was primarily from higher goodwill
amortization, hospitalization and temporary employment expenses as a percent of
sales.
Interest expense-net for the quarter increased by 43.7% as compared to the prior
year primarily as a result of an increase in average borrowings related to
Invetech and other acquisitions.
Income tax expense as a percentage of income before taxes was 39.9% in the
quarter ended March 31, 1998 and 38.0% in the quarter ended March 31, 1997.
Prior year amounts were lowered due to a year to date adjustment recorded in the
quarter ended March 31, 1997, which lowered the effective state and local income
tax rates in the prior year.
As a result of the above factors, net income increased by 34.9% compared to the
same quarter of last year.
Net income per share - diluted increased by 13.9% due to the impact of increased
net income partly offset by an increase in the number of shares outstanding
primarily in connection with the acquisition of Invetech in August 1997.
Nine Months Ended March 31, 1998 and 1997
- -----------------------------------------
The Company acquired Invetech effective August 1, 1997. Invetech's operations
were consolidated with those of the Company beginning as of the acquisition
date. The increases in net sales, cost of sales and selling, distribution and
administrative expenses from the prior year relate primarily to the operations
of Invetech. During the period ended March 31, 1998, the Company incurred a
pre-tax nonrecurring charge of $4,000 included in selling, distribution and
administrative expenses for consolidation expenses and costs associated with
disposal of duplicative property and other assets related to the Invetech
acquisition.
Gross profit as a percent of sales was 25.8% compared to 26.2%. This decrease
primarily relates to higher freight costs, lower purchase allowances and changes
in the product mix due to the Invetech acquisition.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Selling, distribution and administrative expenses, as a percent of sales,
remained constant at 22.1%. Increases in selling, distribution and
administrative expenses resulted primarily from the $4.0 million nonrecurring
charge as well as other nonrecurring expenses and were offset primarily from the
benefits of the consolidation of certain Invetech administrative functions.
Interest expense-net for the period increased by 59.1% as compared to the prior
year primarily as a result of an increase in average borrowings related to the
Invetech acquisition.
Income tax expense as a percentage of income before taxes was 38.9% in the nine
months ended March 31, 1998 and 40.9% in the nine months ended March 31, 1997.
The decrease is primarily attributed to tax savings from lower effective state
and local income tax rates and adjustments to the tax liability accounts from a
change in estimate.
As a result of the above factors, net income increased by 17.4% compared to the
same period last year.
Net income per share - diluted increased by 1.0% due to the impact of the
increase in net income partly offset by the issuance of 3.2 million shares for
the acquisition of Invetech in August 1997.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
- -------------------------------------------------------------------
Management's discussion and analysis contains statements that are
forward-looking, as that term is defined by the Private Securities Litigation
Reform Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. 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 therein will be achieved.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industry sectors; changes in customer
procurement policies and practices; changes in product manufacturer sales
policies and practices; the availability of product; changes in operating
expenses; the effect of price increases; the variability and timing of business
opportunities including acquisitions, customer agreements, supplier
authorizations and other business strategies; the Company's ability to realize
the anticipated benefits of acquisitions and other business opportunities; the
Company's ability to complete, in a timely manner and within cost estimates, its
Year 2000 project; changes in accounting policies and practices; the effect of
organizational changes within the Company; adverse results in significant
litigation matters; adverse state and federal regulation and legislation; and
the occurrence of extraordinary events (including prolonged labor disputes,
natural events and acts of God, fires, floods and accidents).
15
17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
(a) The Company incorporates by reference herein the description of the
case captioned KING BEARING, INC. V. CARYL EDMUND ORANGES, ET AL.,
Superior Court of the State of California, County of Orange, Case No.
53-42-31 found in Item 3 "Pending Legal Proceedings" contained in the
Company's Form 10-K for the fiscal year ended June 30, 1997. The
Company believes that this case will have no material adverse effect on
its business or financial condition.
(b) Applied Industrial Technologies, Inc. and/or one of its subsidiaries is
a defendant in several product-related lawsuits. Based on circumstances
presently known, the Company believes that these cases are not material
to its business or financial condition.
ITEM 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
---------
Exhibit No. Description
----------- -----------
4(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on
November 5, 1997 (filed as Exhibit
4(a) to the Company's Form 10-Q for
the quarter ending December 31,
1997, SEC File No. 1-2299, and
incorporated here by reference).
4(b) Code of Regulations of Applied
Industrial Technologies, Inc.
adopted September 6, 1988 (filed as
Exhibit 3(b) to the Company's
Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
4(c) Certificate of Merger of the Company
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).
16
18
4(d) $80,000,000 Maximum Aggregate
Principal Amount Note Purchase and
Private Shelf Facility dated October
31, 1992 between the Company and The
Prudential Insurance Company of
America (filed as Exhibit 4(b) to
the Company's Registration Statement
on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and
incorporated here by reference).
4(e) Amendment to $80,000,000 Maximum
Aggregate Principal Amount Note
Purchase and Private Shelf Facility
dated October 31, 1992 between the
Company and The Prudential Insurance
Company of America (filed as Exhibit
4(g) to the Company's Form 10-Q for
the quarter ended March 31, 1996,
SEC File No. 1-2299, and
incorporated here by reference).
4(f) $50,000,000 Private Shelf Agreement
dated as of November 27, 1996, as
amended on January 30, 1998, between
the Company and The Prudential
Insurance Company of America.
10(a) Non-Qualified Deferred Compensation
Agreement between the Company and
J. Michael Moore.
10(b) Amended and Restated Change in
Control Agreements between the
Company and each of its executive
officers.
27 Financial Data Schedule.
(b) The Company did not file, nor was it required to file, a Report on Form
8-K with the Securities and Exchange Commission during the quarter
ended March 31, 1998.
17
19
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: May 15, 1998 By: /s/ Mark O. Eisele
-----------------------------------------------
Mark O. Eisele
Vice President & Controller
Date: May 15, 1998 By: /s/ Robert C. Stinson
-----------------------------------------------
Robert C. Stinson
Vice President
18
20
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
EXHIBIT NO. DESCRIPTION PAGE
4(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on November
5, 1997 (filed as Exhibit 4(a) to the
Company's Form 10-Q for the quarter ending
December 31, 1997, SEC File No. 1-2299, and
incorporated here by reference).
4(b) Code of Regulations of Applied Industrial
Technologies, Inc., adopted September 6,
1988 (filed as Exhibit 3(b) to the Company's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(c) Certificate of Merger of the Company 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(d) $80,000,000 Maximum Aggregate Principal
Amount Note Purchase and Private Shelf
Facility dated October 31, 1992 between the
Company and The Prudential Insurance Company
of America (filed as Exhibit 4(b) to the
Company's Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
4(e) Amendment to $80,000,000 Maximum Aggregate
Principal Amount Note Purchase
21
and Private Shelf Facility dated October 31,
1992 between the Company and The Prudential
Insurance Company of America (filed as
Exhibit 4(g) to the Company's Form 10-Q for
the quarter ended March 31, 1996, SEC File
No. 1-2299, and incorporated here by
reference).
4(f) $50,000,000 Private Shelf Agreement dated as Attached
Attached of November 27, 1996, as amended on
January 30, 1998, between the Company and
The Prudential Insurance Company of America.
10(a) Non-Qualified Deferred Compensation Attached
Agreement between the Company and
J. Michael Moore.
10(b) Amended and Restated Change in Control Attached
Agreements between the Company and
each of its executive officers.
27 Financial Data Schedule. Attached