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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, 2002
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 [ ]
Shares of common stock outstanding on January 31, 2003 18,985,770
(No par value)
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Part I: FINANCIAL INFORMATION Page No.
Item 1: Financial Statements
Condensed Statements of Consolidated Income -
Three Months and Six Months Ended
December 31, 2002 and 2001 2
Condensed Consolidated Balance Sheets -
December 31, 2002 and June 30, 2002 3
Condensed Statements of Consolidated Cash Flows -
Six Months Ended December 31, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements 5-10
Review By Independent Public Accountants 11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 16
Item 4: Controls and Procedures 17
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications of Disclosure 21-23
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
2002 2001 2002 2001
--------- --------- --------- ---------
Net Sales $ 355,707 $ 347,550 $ 723,726 $ 715,540
Cost of sales 264,516 260,537 542,633 536,096
--------- --------- --------- ---------
Gross Profit 91,191 87,013 181,093 179,444
Selling, distribution and
administrative expenses 83,871 80,981 165,929 163,300
--------- --------- --------- ---------
Operating Income 7,320 6,032 15,164 16,144
Interest expense, net 1,342 1,754 2,603 3,647
Other, net 38 (450) 326 (200)
--------- --------- --------- ---------
Income Before Income Taxes 5,940 4,728 12,235 12,697
Income Taxes 2,080 1,810 4,470 4,890
--------- --------- --------- ---------
Income before cumulative effective of change in accounting 3,860 2,918 7,765 7,807
Cumulative effect of change in accounting (12,100)
--------- --------- --------- ---------
Net Income (Loss) $ 3,860 $ 2,918 $ 7,765 $ (4,293)
========= ========= ========= =========
Earnings Per Share - Basic
Before cumulative effect of change in accounting $ 0.20 $ 0.15 $ 0.41 $ 0.41
Cumulative effect of change in accounting (0.63)
--------- --------- --------- ---------
Net Income (Loss) $ 0.20 $ 0.15 $ 0.41 $ (0.22)
========= ========= ========= =========
Earnings Per Share - Diluted
Before cumulative effect of change in accounting $ 0.20 $ 0.15 $ 0.40 $ 0.40
Cumulative effect of change in accounting (0.63)
--------- --------- --------- ---------
Net Income (Loss) $ 0.20 $ 0.15 $ 0.40 $ (0.23)
========= ========= ========= =========
Cash dividends per common
share $ 0.12 $ 0.12 $ 0.24 $ 0.24
========= ========= ========= =========
Weighted average common shares
outstanding for basic computation 18,954 18,972 18,985 19,163
Dilutive effect of stock options
and awards 279 313 282 326
--------- --------- --------- ---------
Adjusted average common shares
outstanding for diluted computation 19,233 19,285 19,267 19,489
========= ========= ========= =========
See notes to condensed consolidated financial statements.
2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
December 31 June 30
2002 2002
------------ ------------
ASSETS
Current assets
Cash and temporary investments $ 25,479 $ 23,060
Accounts receivable, less allowances
of $6,200 and $5,600 164,483 180,904
Inventories (at LIFO) 181,791 166,083
Other current assets 11,452 11,011
------------ ------------
Total current assets 383,205 381,058
Property, less accumulated depreciation
of $82,383 and $81,229 79,101 83,095
Goodwill 49,938 46,410
Other assets 22,676 24,003
------------ ------------
TOTAL ASSETS $ 534,920 $ 534,566
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 81,319 $ 76,316
Other accrued liabilities 50,575 54,098
------------ ------------
Total current liabilities 131,894 130,414
Long-term debt 78,953 83,478
Other liabilities 23,671 22,527
------------ ------------
TOTAL LIABILITIES 234,518 236,419
------------ ------------
Shareholders' Equity
Preferred stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 24,096 shares issued 10,000 10,000
Additional paid-in capital 84,660 84,517
Income retained for use in the business 282,215 279,046
Treasury shares - at cost, 5,003 and 4,893 shares (76,971) (74,900)
Unearned restricted common stock compensation (427) (832)
Accumulated other comprehensive income 925 316
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 300,402 298,147
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 534,920 $ 534,566
============ ============
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
2002 2001
-------- --------
Cash Flows from Operating Activities
Net income $ 7,765 $ (4,293)
Adjustments to reconcile net income to cash provided by
operating activities:
Cumulative effect of accounting change 12,100
Depreciation and amortization 7,623 9,508
Gain on sale of property (2,577) (294)
Changes in operating assets and liabilities, net of
effects from acquisition of businesses 8,206 11,174
Other - net 1,581 1,548
-------- --------
Net Cash provided by Operating Activities 22,598 29,743
-------- --------
Cash Flows from Investing Activities
Property purchases (5,049) (5,872)
Proceeds from property sales 5,151 1,223
Net cash paid for acquisition of businesses (10,255) (2,574)
Deposits and other 1,426 (520)
-------- --------
Net Cash used in Investing Activities (8,727) (7,743)
-------- --------
Cash Flows from Financing Activities
Borrowings and repayments under revolving credit agreements - net 3,718
Long-term debt repayments (5,714) (5,714)
Proceeds from termination of interest rate swap 2,517 2,038
Dividends paid (4,596) (4,665)
Purchases of treasury shares (3,934) (11,741)
Other 275 1,376
-------- --------
Net Cash used in Financing Activities (11,452) (14,988)
-------- --------
Increase in cash and temporary
investments 2,419 7,012
Cash and temporary investments
at beginning of period 23,060 13,981
-------- --------
Cash and Temporary Investments
at End of Period $ 25,479 $ 20,993
======== ========
See notes to condensed consolidated financial statements.
4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of only
normal recurring adjustments) necessary to a fair statement of operations
of the interim periods have been made. This Quarterly Report on Form 10-Q
should be read in conjunction with the Company's Annual Report on Form
10-K for year ended June 30, 2002.
The results of operations for the three and six month periods ended
December 31, 2002 are not necessarily indicative of the results to be
expected for the fiscal year.
Cost of sales for interim financial statements are computed using
estimated gross profit percentages which are adjusted throughout the year
based upon available information. Adjustments to actual cost are made
based on periodic physical inventories and the effect of year-end
inventory quantities on LIFO costs.
2. SEGMENT INFORMATION
The accounting policies of the segments are the same as those used to
prepare the condensed consolidated financial statements. Certain
reclassifications have been made to prior year amounts to be consistent
with the presentation in the current year. Intersegment sales are not
significant. Operating results are in the United States, Canada, Mexico
and Puerto Rico. Operations in Canada, Mexico and Puerto Rico represent
approximately 6.7% of the total net sales of Applied for the six months
ended December 31, 2002 and therefore are not presented separately. In
addition, over 32% of these operations' net sales are included in the
"Other" segment related to the fluid power business. The long-lived assets
located outside of the United States are not material.
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
SEGMENT FINANCIAL INFORMATION:
SERVICE CENTER
BASED
DISTRIBUTION OTHER TOTAL
-----------------------------------------
THREE MONTHS ENDED DECEMBER 31, 2002
Net sales $ 333,559 $ 22,148 $ 355,707
Operating income 8,423 13 8,436
Depreciation 3,168 277 3,445
Capital expenditures 2,679 175 2,854
---------- ---------- ----------
THREE MONTHS ENDED DECEMBER 31, 2001
Net sales $ 325,540 $ 22,010 $ 347,550
Operating income (loss) 3,571 (809) 2,762
Depreciation 3,858 142 4,000
Capital expenditures 2,201 88 2,289
---------- ---------- ----------
A reconciliation from the segment operating profit to the condensed consolidated
balances is as follows:
THREE MONTHS ENDED
DECEMBER 31
-------------------------
2002 2001
-------------------------
Operating income for
reportable segment $ 8,423 $ 3,571
Other operating income (loss) 13 (809)
Adjustments for:
Other intangible amortization (174) (499)
Corporate and other income (expense),
net of allocations (a) (942) 3,769
---------- ----------
Total operating income 7,320 6,032
Interest expense, net 1,342 1,754
Other expense (income) 38 (450)
---------- ----------
Income before income taxes $ 5,940 $ 4,728
========== ==========
SERVICE CENTER
BASED
DISTRIBUTION OTHER TOTAL
----------------------------------------
SIX MONTHS ENDED DECEMBER 31, 2002
Net sales $ 678,193 $ 45,533 $ 723,726
Operating income 17,886 73 17,959
Assets used in the business 510,346 24,574 534,920
Depreciation 6,765 393 7,158
Capital expenditures 4,723 329 5,049
---------- ---------- ----------
6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
SERVICE CENTER
BASED
DISTRIBUTION OTHER TOTAL
-----------------------------------------
SIX MONTHS ENDED DECEMBER 31, 2001
Net sales $ 668,451 $ 47,089 $ 715,540
Operating income (loss) 10,228 (1,079) 9,149
Assets used in the business 528,751 27,099 555,850
Depreciation 7,678 293 7,971
Capital expenditures 5,723 149 5,872
---------- ---------- ----------
A reconciliation from the segment operating profit to the condensed consolidated
balances is as follows:
SIX MONTHS ENDED
DECEMBER 31
-------------------------
2002 2001
-------------------------
Operating income for
reportable segment $ 17,886 $ 10,228
Other operating income (loss) 73 (1,079)
Adjustments for:
Other intangible amortization (417) (961)
Corporate and other income, net of
allocations (a) (2,378) 7,956
---------- ----------
Total operating income 15,164 16,144
Interest expense, net 2,603 3,647
Other expense (income) 326 (200)
---------- ----------
Income before income taxes $ 12,235 $ 12,697
========== ==========
(a) The change in corporate and other income (expense), net, is due to various
changes in the levels and amounts of expense being allocated to the
segments. The expenses being allocated include corporate charges for
working capital, logistics support and other items.
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
3. DERIVATIVE INSTRUMENTS
In August 2002, the Company terminated a November 2001 interest rate swap
agreement for a favorable settlement of $2,517. This gain will be
amortized as a reduction in interest expense over the remaining life of
the Company's $50,000 6.6% senior unsecured term notes, which mature in
December 2007.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangible Assets." Effective July 1, 2001, the Company adopted this
standard. Under SFAS 142, goodwill is no longer amortized, but is tested
for impairment upon adoption and at least annually thereafter. The
Company's other intangible assets relate to non-competition agreements and
continue to be amortized over the lives of the agreements which primarily
are five years. Upon adoption of SFAS 142, a non-cash charge totaling
$17,600, $12,100 after tax, was retroactively recorded as a change in
accounting principle effective July 1, 2001 to write-off the remaining
goodwill relating to the fluid power business. The Company has established
January 1 as its annual impairment testing date and is in the process of
performing the test at this time. Results of these tests will be disclosed
in the Form 10-Q for the quarter ended March 31, 2003.
5. BUSINESS COMBINATION
In October 2002, the Company acquired assets of a Canadian distributor of
industrial products for approximately $12,000. The results of the acquired
business operations are included in our service center based distribution
segment from the acquisition date. Results of operations for this
acquisition are not material for all periods presented. Goodwill and
non-compete agreements, based on preliminary allocations of fair values to
assets and liabilities acquired, of $4,100 were recognized in connection
with the acquisition. The Company has not yet completed its evaluation of
other potential intangible assets in accordance with SFAS 141.
6. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for Impairment or Disposals of Long-Lived Assets". The Company
adopted SFAS 144 as of July 1, 2002. The adoption of SFAS 144 did not have
a material impact on the consolidated statements.
8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
In June 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
statement is effective for exit or disposal activities that are initiated
after December 31, 2002, but earlier adoption is permitted. The Company
adopted SFAS 146 effective July 1, 2002. The adoption of this statement
did not have a material impact on the consolidated statements.
In December 2002 the Financial Accounting Standards Board issued
Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure
Requirements". FIN 45 requires the disclosure of any guarantees in place
at December 31, 2002 and the recognition of a liability for any guarantees
entered into or modified after that date. The Company is a guarantor in
three arrangements entered into prior to December 31, 2002 that require
disclosure under FIN 45 as follows:
- The Company has a construction and lease facility under which a
distribution center and several service centers were constructed by
the lessor and leased to the Company under operating lease
arrangements. These leases expire in September 2003 and permit the
Company to purchase the facilities for $7,500. If the Company does
not exercise this option, residual value guarantee provisions
obligate the Company to compensate the lessor for up to an
additional $6,000 at lease termination depending on the properties'
market values at that time.
- In connection with the construction and lease of its corporate
headquarters facility, the Company has guaranteed repayment of a
total of $5,678 of taxable development revenue bonds issued by
Cuyahoga County and the Cleveland-Cuyahoga County Port Authority.
These bonds were issued with a 20-year term and are scheduled to
mature in March 2016. Any default, as defined in the guaranty
agreements, would obligate Applied for the full amount of the
outstanding bonds through maturity.
- The Company also has guaranteed, under an agreement scheduled to
expire in December 2003, a related entity's repayment of borrowings
under a line of credit. This guarantee was entered into to induce a
financial institution to provide a line of credit for a joint
venture, iSource Performance Materials L.L.C. (iSource), of which
the Company is a minority owner. iSource is a certified
minority-owned distributor of standard-use industrial specialty and
general maintenance items requiring special shipping and handling.
Any default, as defined in the guaranty agreement, will obligate the
Company for any unpaid balance under the line of credit up to a
maximum of $3,000.
Due to the nature of these guarantees, the Company has not recorded any
liability on the financial statements. In the event of a default and
subsequent payout under any or all of these guarantees, the Company
maintains the right to pursue all legal options available to mitigate its
exposure.
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
In December 2002, the Financial Accounting Standards Board issued SFAS
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". The only impacts of this statement on the Company's current
accounting policies are to amend the disclosure requirements of SFAS 123,
"Accounting for Stock-Based Compensation" and require additional
disclosure in the Company's quarterly financial statements. The Company
will adopt SFAS 148 effective January 1, 2003.
In January 2003, the Financial Accounting Standards Board issued FIN 46,
"Consolidation of Variable Interest Entities". As disclosed above, the
Company is a minority owner in iSource and has guaranteed iSource's line
of credit debt up to $3,000. iSource maintains assets of approximately
$3,700.
10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The condensed consolidated balance sheet of the Company as of December 31, 2002,
and the related condensed statements of consolidated income and cash flows for
the three-month and six-month periods ended December 31, 2002 and 2001, have
been reviewed by the Company's independent accountants, Deloitte & Touche LLP,
whose report covering their review of the financial statements follows.
INDEPENDENT ACCOUNTANTS' REPORT
Applied Industrial Technologies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Applied Industrial Technologies, Inc. and subsidiaries (the "Company") as of
December 31, 2002, and the related condensed statements of consolidated income
and cash flows for the three-month and six-month periods ended December 31, 2002
and 2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, 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 review, we are not aware of any material modifications that should
be made to such condensed consolidated 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 auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Applied Industrial Technologies, Inc. and subsidiaries as of June 30, 2002, 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 6, 2002, 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, 2002 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 15, 2003
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, 2002 and June 30, 2002, and (2) results of operations and cash flows during
the periods included in the accompanying Condensed Statements of Consolidated
Income and Consolidated Cash Flows.
Liquidity and Capital Resources
Cash provided by operating activities was $22.6 million in the six months ended
December 31, 2002. This compares to $29.7 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 its investments in inventories and receivables. During the six month
period ended December 31, 2002, inventories increased approximately $11.4
million due to purchases we made under special calendar year-end programs
maintained by certain of our suppliers. These inventories of standard product
are expected to be sold off in the normal course of business and the inventory
increase is expected to be eliminated over the next two quarters. Accounts
receivable decreased $19.1 million due to improved collections, and accounts
payable increased $1.2 million due to timing of trade payments. Cash flow from
operations decreased $7.1 million for the period ended December 31, 2002
compared to the comparable period in the prior year primarily due a greater
reduction in account receivables for the period ended December 31, 2001 offset
by the timing of payments on trade payables.
The Company has a committed revolving credit agreement expiring in November 2003
with a group of banks. This agreement provides for unsecured borrowings of up to
$150.0 million. The Company had no borrowings outstanding under this facility at
December 31, 2002. The Company also has a $10.0 million short-term uncommitted
line of credit with a commercial bank. The Company had no borrowings outstanding
under this facility at December 31, 2002. Unused lines under these facilities,
net of outstanding letters of credit, totaling $154.8 million are available to
fund future acquisitions or other capital and operating requirements.
In August 2002, the Company terminated an interest rate swap agreement for a
favorable settlement of $2.5 million. This gain is being amortized as a
reduction in interest expense over the remaining life of the Company's $50.0
million 6.6% senior unsecured term notes, which mature in December 2007.
The Board of Directors has authorized the purchase of shares of the Company's
common stock to fund employee benefit programs, stock option and award programs,
and future business acquisitions. These purchases are made in open market and
negotiated transactions, from time to time, depending upon market conditions.
The Company acquired 232,000 shares of its common stock for $3.9 million during
the six months ended December 31, 2002. At December 31, 2002, the Company had
remaining authorization to repurchase up to 579,000 additional shares.
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other Matters
In October 2002, the Company acquired assets of a Canadian distributor of
industrial products for approximately $12.0 million. The results of the acquired
business operations are included in our service center based distribution
segment from the acquisition date.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
Net sales increased 2.3% compared to the prior year. This increase was primarily
attributed to having one additional sales day in the quarter when compared to
the prior year. The acquisition of IECO added approximately $3.7 million in
sales during the quarter. Gross profit as a percentage of sales increased to
25.6% from 25.0%. This increase primarily is due to higher discounts and
allowances from suppliers.
Selling, distribution and administrative expenses increased 3.6% compared to the
prior year, and increased as a percent of sales to 23.6% from 23.3%. This was
primarily due to higher medical, general insurance and personnel costs. These
additional costs were partially offset by gains of approximately $1.2 million on
sales of unneeded real estate and other property.
Interest expense-net for the quarter decreased by 23.5% as compared to the prior
year due to a decrease in average borrowings.
Income tax expense as a percentage of income before taxes was 35.0% for the
quarter ended December 31, 2002 and 38.3% for the quarter ended December 31,
2001. This decrease related to a change in the tax law that, due to a Company
election, reduces the Company's taxable income beginning in fiscal 2003.
Specifically, the election permits the Company to take a deduction for dividends
on Company stock paid to participant accounts in the Company's Section 401(k)
plan.
As a result of the above factors, net income before cumulative effect of change
in accounting increased by 32.3% compared to the same quarter of last year. This
resulted in a greater impact on net income per share before cumulative effect of
change in accounting, which increased $.05 or 33.3%, due to continued stock
repurchases.
13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
Net sales increased 1.1% compared to the prior year. This increase was primarily
attributed to having one additional sales day in the period when compared to the
prior year. The acquisition of IECO added approximately $3.7 million in sales
during the period. Gross profit as a percentage of sales was 25.0% versus 25.1%
for the same period last year.
Selling, distribution and administrative expenses increased 1.6% compared to the
prior year, and increased slightly as a percent of sales to 22.9% from 22.8%.
This was primarily due to higher medical, general insurance and personnel costs.
These additional costs were partially offset by a benefit of approximately $2.6
million from gains on sales of unneeded real estate and other property including
a $1.5 million gain on the sale of a recently vacated facility located in
Portland, Oregon.
Interest expense-net for the period decreased by 28.6% as compared to the prior
year primarily due to a decrease in average borrowings and lower average
interest rates.
Income tax expense as a percentage of income before taxes was 36.5% for the
period ended December 31, 2002 and 38.5% for the period ended December 31, 2001.
This decrease related to a change in the tax law that, due to a Company
election, reduces the Company's taxable income beginning in fiscal 2003.
Specifically, the election permits the Company to take a deduction for dividends
on Company stock paid to participant accounts in the Company's Section 401(k)
plan.
As a result of the above factors, net income before cumulative effect of change
in accounting decreased by 0.5% compared to the same period of last year.
Because the Company had fewer shares outstanding as a result of repurchases, net
income per share was unchanged from the same period last year.
14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, many of which are outside the Company's
control. Accordingly, actual results may differ materially from those expressed
in the forward-looking statements, and the making of such statements should not
be regarded as a representation by the Company or any other person that the
results expressed in the statements will be achieved. In addition, the Company
undertakes no obligation publicly to update or revise any forward-looking
statements, whether because of new information or events, or otherwise.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industries; reduction in manufacturing
capacity in the Company's targeted geographic markets due to consolidation in
customer industries or the transfer of manufacturing capacity to foreign
countries; changes in interest rates; changes in customer procurement policies
and practices; changes in product manufacturer sales policies and practices; the
availability of product and labor; changes in operating expenses; the effect of
price increases or decreases in both procuring and selling products and
services; the variability and timing of business opportunities including
acquisitions, alliances, customer agreements and supplier authorizations; the
Company's ability to realize the anticipated benefits of acquisitions and
marketing and other business strategies; the incurrence of additional debt and
contingent liabilities in connection with acquisitions; changes in accounting
policies and practices; the effect of 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 expansion into foreign markets, including inflation rates, 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, war, natural events and acts of God,
fires, floods and accidents).
15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have evaluated the Company's 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 effect of changes in interest 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, 2002. In August
2002, the Company terminated a November 2001 interest rate swap agreement. The
Company has no other interest rate swap agreements outstanding, therefore, all
of the Company's outstanding debt is at fixed interest rates at December 31,
2002.
The Company mitigates its foreign currency exposure from the Canadian dollar
through the use of cross currency swap agreements as well as of foreign-currency
denominated debt. Hedging of the US dollar denominated debt used to fund a
substantial portion of Company's net investment in its Canadian operations is
accomplished through the use of cross currency swaps. Any gain or loss on the
hedging instrument offsets the gain or loss on the underlying debt. Translation
exposures with regard to our Mexican business are not hedged, because the
Mexican activity is not material. The impact on the Company's future earnings
from exposure to changes in foreign currency exchange rates is expected to be
immaterial.
16
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
Management, under the supervision and with the participation of the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), has evaluated the
Company's disclosure controls and procedures within 90 days prior to the filing
date of this report. Based upon that evaluation, the CEO and the CFO have
concluded as of the evaluation date, that such disclosure controls and
procedures are effective in timely alerting them to material information about
the Company required to be included in the Company's Exchange Act reports.
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of management's evaluation of those controls.
17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Applied Industrial Technologies, Inc. and/or one of its subsidiaries is a
party to various pending judicial and administrative proceedings. Based on
circumstances currently known, the Company does not believe that any
liabilities that may result from these proceedings are reasonably likely
to have a material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on October 22, 2002,
the Shareholders (i) elected William E. Butler, Russell R. Gifford, L.
Thomas Hiltz, and David L. Pugh as Directors for a term expiring in 2005,
(ii) ratified the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending June 30, 2003, and (iii)
approved the 1997 Long-Term Performance Plan to continue to qualify
certain awards thereunder as "performance-based" compensation under
Section 162(m) of the Internal Revenue Code. Substantially the same
information was previously reported in Part II, Item 5 "Other Information"
of the Company's Form 10-Q for the quarter ended September 30, 2002.
ITEM 5. Other Information.
On January 23, 2003, the Company sent a notice to its directors and
executive officers informing them that the Applied Industrial
Technologies, Inc. Retirement Savings Plan (the Company's Section 401(k)
plan) is changing its trustee and record keeper and that, as a result of
this change, there will be a blackout period from February 21, 2003
through April 1, 2003, during which they will be prohibited from engaging
in any transactions in equity securities of the Company acquired in
connection with service to or employment with the Company. During the
blackout period, plan participants will be unable to enroll in the plan,
make investment changes in their plan accounts, obtain loans from the
plan, receive distributions from the plan, or access plan account
information. The class of equity securities with respect to which the plan
blackout applies is the Company's common stock, without par value.
18
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description
----------- -----------
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on
October 8, 1998 (filed as Exhibit
3(a) to the Company's Form 10-Q for
the quarter ended September 30,
1998, SEC File No. 1-2299, and
incorporated here by reference).
3(b) Code of Regulations of Applied
Industrial Technologies, Inc., as
amended on October 19, 1999 (filed
as Exhibit 3(b) to the Company's
Form 10-Q for the quarter ended
September 30, 1999, SEC File No.
1-2299, and incorporated here by
reference).
4(a) Certificate of Merger of Bearings,
Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio
Secretary of State on October 18,
1988, including an Agreement and
Plan of Reorganization dated
September 6, 1988 (filed as Exhibit
4(a) to the Company's Registration
Statement on Form S-4 filed May 23,
1997, Registration No. 333-27801,
and incorporated here by reference).
4(b) Private Shelf Agreement dated as of
November 27, 1996, as amended on
January 30, 1998, between the
Company and 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
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) $150,000,000 Credit Agreement dated
as of November 5, 1998 among the
Company, KeyBank National
Association as Agent, and various
financial institutions (filed as
Exhibit
19
4(e) to the Company's Form 10-Q for
the quarter ended September 30,
1998, SEC File No. 1-2299, and
incorporated here by reference).
4(e) 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 Letter from independent accountants
regarding unaudited interim
financial information.
(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
December 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date: February 12, 2003 By: /s/ David L. Pugh
--------------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
Date: February 12, 2003 By: /s/ John R. Whitten
--------------------------------------------
John R. Whitten
Vice President-Chief Financial Officer
& Treasurer
20
Certifications of Disclosure in Quarterly Report on Form 10-Q
I, David L. Pugh, Chairman & Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Applied
Industrial Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a. All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
22
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 12, 2003
/s/ David L. Pugh
----------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
I, John R. Whitten, Vice President-Chief Financial Officer & Treasurer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Applied
Industrial Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
22
c. Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a. All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 12, 2003
/s/ John R. Whitten
-----------------------------------------
John R. Whitten
Vice President-Chief Financial Officer &
Treasurer
23
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2002
EXHIBIT NO. DESCRIPTION PAGE
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on October 8,
1998 (filed as Exhibit 3(a) to the Company's
Form 10-Q for the quarter ended September
30, 1998, SEC File No. 1-2299, and
incorporated here by reference).
3(b) Code of Regulations of Applied Industrial
Technologies, Inc., as amended on October
19, 1999 (filed as Exhibit 3(b) to the
Company's Form 10-Q for the quarter ended
September 30, 1999, SEC File No. 1-2299, and
incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc.
(Ohio) and Bearings, Inc. (Delaware) filed
with the Ohio Secretary of State on October
18, 1988, including an Agreement and Plan of
Reorganization dated September 6, 1988
(filed as Exhibit 4(a) to the Company's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) Private Shelf Agreement dated as of November
27, 1996, as amended on January 30, 1998,
between the Company and 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 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) $150,000,000 Credit Agreement dated as of
November 5, 1998 among the Company, KeyBank
National Association as Agent, and various
financial institutions (filed as Exhibit
4(e) to the Company's Form 10-Q for the
quarter ended September 30, 1998, SEC File
No. 1-2299, and incorporated here by
reference).
4(e) 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 Letter from independent accountants regarding Attached
unaudited interim financial information.