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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 SEPTEMBER 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Shares of common stock outstanding on October 31, 2003 19,264,043
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(No par value)
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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INDEX
Page No.
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Statements of Consolidated Income - 2
Three Months Ended September 30, 2003 and 2002
Condensed Consolidated Balance Sheets - 3
September 30, 2003 and June 30, 2003
Condensed Statements of Consolidated Cash Flows - 4
Three Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 5 - 8
Review By Independent Public Accountants 9
Item 2: Management's Discussion and Analysis of 10 - 13
Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
Item 4: Controls and Procedures 15
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 20
Exhibit Index
Exhibits
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
Three Months Ended
September 30
2003 2002
-------- --------
Net Sales $361,146 $368,019
Cost of sales 267,669 278,117
-------- --------
Gross Profit 93,477 89,902
Selling, distribution and
administrative expenses 84,481 82,058
-------- --------
Operating Income 8,996 7,844
Interest expense, net 1,318 1,261
Other, net 166 288
-------- --------
Income Before Income Taxes 7,512 6,295
Income Taxes 2,680 2,390
-------- --------
Net Income $ 4,832 $ 3,905
======== ========
Earnings Per Share - Basic $ 0.25 $ 0.21
======== ========
Earnings Per Share - Diluted $ 0.25 $ 0.20
======== ========
Cash dividends per common
share $ 0.12 $ 0.12
======== ========
Weighted average common shares
outstanding for basic computation 19,008 19,016
Dilutive effect of stock options
and awards 405 273
-------- --------
Adjusted average common shares
outstanding for diluted computation 19,413 19,289
======== ========
See notes to condensed consolidated financial statements.
2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
September 30 June 30
2003 2003
------------ ---------
ASSETS
Current assets
Cash and temporary investments $ 37,088 $ 55,079
Accounts receivable, less allowances
of $6,200 and $6,100 173,218 173,915
Inventories (at LIFO) 163,998 159,798
Other current assets 12,643 11,702
--------- ---------
Total current assets 386,947 400,494
Property, less accumulated depreciation
of $88,801 and $85,836 82,953 77,942
Goodwill 49,609 49,687
Other assets 24,963 25,281
--------- ---------
TOTAL ASSETS $ 544,472 $ 553,404
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 2,950
Accounts payable 71,902 $ 75,411
Other accrued liabilities 52,125 65,724
--------- ---------
Total current liabilities 126,977 141,135
Long-term debt 78,360 78,558
Other liabilities 25,563 25,855
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TOTAL LIABILITIES 230,900 245,548
--------- ---------
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 85,890 84,898
Income retained for use in the business 292,262 289,724
Treasury shares - at cost, 4,843 and 5,076 shares (75,631) (78,706)
Unearned restricted common stock compensation (48) (114)
Accumulated other comprehensive income 1,099 2,054
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 313,572 307,856
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 544,472 $ 553,404
========= =========
See notes to condensed consolidated financial statements.
3
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended
September 30
2003 2002
-------- --------
Cash Flows from Operating Activities
Net income $ 4,832 $ 3,905
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 4,085 4,159
Gain on sale of property (37) (1,329)
Changes in operating assets and liabilities, net of
effects from acquisition of business (20,295) 13,587
Treasury shares contributed to employee benefit and deferred
compensation plans 2,979 836
Other - net (198) (242)
-------- --------
Net Cash provided by (used in) Operating Activities (8,634) 20,916
-------- --------
Cash Flows from Investing Activities
Property purchases (8,742) (2,884)
Proceeds from property sales 636 2,931
Deposits and other 215 1,488
-------- --------
Net Cash provided by (used in) Investing Activities (7,891) 1,535
-------- --------
Cash Flows from Financing Activities
Borrowings and (repayments) - net 100
Proceeds from termination of interest rate swap 2,517
Dividends paid (2,294) (2,304)
Purchases of treasury shares (1,982) (1,773)
Exercise of stock options 2,710 93
-------- --------
Net Cash used in Financing Activities (1,466) (1,467)
-------- --------
Increase (decrease) in cash and temporary
investments (17,991) 20,984
Cash and temporary investments
at beginning of period 55,079 23,060
-------- --------
Cash and Temporary Investments
at End of Period $ 37,088 $ 44,044
======== ========
See notes to condensed consolidated financial statements.
4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
However, in the opinion of management, all adjustments (consisting of
only normal recurring adjustments) necessary to a fair statement of
operations of the interim periods have been made. This Quarterly Report
on Form 10-Q should be read in conjunction with the Applied Industrial
Technologies, Inc. (the Company) Annual Report on Form 10-K for the
year ended June 30, 2003.
The results of operations for the three month period ended September
30, 2003 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.
Sales are recognized when products are shipped or delivered to a
customer, which is when title is transferred to the customer. Products
are billed at agreed upon prices. The Company's experience is that
collection of receivables recorded for all sales is reasonably assured.
2. 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. Certain reclassifications have been
made to prior year amounts to be consistent with the presentation in
the current year. Sales between the service center based distribution
segment and the other businesses are not significant. Operating results
are in the United States, Canada, Mexico and Puerto Rico. Operations in
Canada, Mexico and Puerto Rico represent approximately 8.8% of the
total net sales of Applied for the three months ended September 30,
2003 and therefore are not presented separately. In addition,
approximately 30.6% of these operations' net sales are included in the
"Other" column relating to the fluid power business. The long-lived
assets located outside of the United States are not material.
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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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 SEPTEMBER 30, 2003
Net sales $337,903 $ 23,243 $361,146
Operating income 9,803 712 10,515
Assets used in the business 521,839 22,633 544,472
Depreciation 3,301 170 3,471
Capital expenditures 8,702 40 8,742
-------- -------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2002
Net sales $344,970 $ 23,049 $368,019
Operating income 9,463 60 9,523
Assets used in the business 513,225 25,563 538,788
Depreciation 3,539 174 3,713
Capital expenditures 2,732 152 2,884
-------- -------- --------
A reconciliation from the segment operating profit to the condensed consolidated
balances is as follows:
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------
2003 2002
------- -------
Operating income for
reportable segment $ 9,803 $ 9,463
Other operating income 712 60
Adjustments for:
Other intangible amortization (189) (243)
Corporate and other income (expense),
net of allocations (a) (1,330) (1,436)
------- -------
Total operating income 8,996 7,844
Interest expense, net 1,318 1,261
Other expense, net 166 288
------- -------
Income before income taxes $ 7,512 $ 6,295
======= =======
(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.
6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
3. GUARANTEES
The Company had a construction and lease facility under which a
distribution center and three service centers were constructed by the
lessor and leased to the Company under operating lease arrangements.
The Company purchased the properties for $7,500 at the end of the lease
term in September 2003. The residual value guarantee provisions of this
lease arrangement expired with the purchase of the properties.
4. STOCK OPTIONS
Effective July 1, 2003, the Company adopted the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation" as
amended by SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", using the modified prospective method for
the transition. Under the modified prospective method, stock-based
compensation cost recognized during this fiscal year is the same as
that which would have been recognized had the fair value recognition
provisions been applied to all awards granted after July 1, 1995.
Results for prior years have not been restated. The compensation
expense recorded during the quarter ended September 30, 2003 was $359,
$232 net of tax, or $0.01 per share. The following table discloses the
compensation expense and net income as if the fair value based method
had been applied in each period:
Three Months Ended
September 30
-----------------------
2003 2002
------ ---------
Net income, as reported $4,832 $ 3,905
Plus: Stock-based employee compensation expense included in
reported net income, net of related tax effects 232
Less: Total stock-based employee compensation expense determined
under fair value based method, net of tax (232) (308)
------ ---------
Pro forma net income $4,832 $ 3,597
====== =========
Earnings per share:
Basic - as reported $ 0.25 $ 0.21
====== =========
Basic - pro forma $ 0.25 $ 0.19
====== =========
Diluted - as reported $ 0.25 $ 0.20
====== =========
Diluted - pro forma $ 0.25 $ 0.19
====== =========
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Compensation expense has been determined using the Black-Scholes option-pricing
model. The assumptions used for grants issued during the quarter ended September
30, 2003 and 2002 are:
THREE MONTHS ENDED
SEPTEMBER 30
--------------------
2003 2002
------- -------
Expected life 7 years 7 years
Risk free interest rate 3.8% 3.9%
Dividend yield 3.0% 3.0%
Volatility 31.7% 30.9%
5. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board issued FIN
46, "Consolidation of Variable Interest Entities." The Company is a
minority owner in iSource Performance Materials L.L.C. (iSource), and
has guaranteed bank debt up to $3,000. iSource has assets of $3,000,
accounts payable of $2,500 and notes payable of $2,950. The Company's
purchases currently account for more than 90% of iSource's sales and
the Company is considered the primary beneficiary of iSource's
operations. In accordance with FIN 46, iSource's financial statements
were consolidated with the Company's beginning in July 2003. The effect
of the consolidation was not material to the Company's consolidated
financial statements.
6. SUBSEQUENT EVENT
In November 2003, the Company acquired the stock of a Mexican
distributor of industrial products for approximately $2,800. The
results of the acquired business operations will be 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. The Company is still in the process of completing
the purchase price allocation of fair values to the assets and
liabilities acquired.
8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
The condensed consolidated balance sheet of the Company as of September 30,
2003, and the related condensed statements of consolidated income and cash flows
for the three-month periods ended September 30, 2003 and 2002, 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
September 30, 2003, and the related condensed statements of consolidated income
and cash flows for the three-month periods ended September 30, 2003 and 2002.
These interim financial statements are the responsibility of the Company's
management.
We conducted our reviews 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 and
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 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 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, 2003, 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 8, 2003, 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, 2003 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
As discussed in Note 4 to the condensed consolidated interim financial
statements, effective July 1, 2003, the Company changed its method of accounting
for stock-based compensation and adopted the fair value recognition provisions
of SFAS 123 "Accounting for Stock-Based Compensation," as amended by SFAS 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure."
/s/Deloitte & Touche LLP
Cleveland, Ohio
November 10, 2003
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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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 September
30, 2003 and June 30, 2003, 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 used in operating activities was $8.6 million in the three months ended
September 30, 2003. This compares to $20.9 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 continued to monitor and
control its investments in inventories and receivables by taking advantage of
various vendor purchasing programs and through the use of system enhancements to
improve inventory tracking and collection efforts. During the three month period
ended September 30, 2003, inventories increased approximately $4.2 million,
including $2.8 million resulting from the consolidation of iSource per FIN 46
(see Notes to the condensed consolidated financial statements). Inventory levels
are expected to remain at current levels during the second quarter of the fiscal
year. Accounts payable and other accrued liabilities decreased $17.4 million due
to the payment of fiscal year-end accrued compensation benefits during the
quarter.
Capital expenditures were $8.7 million for the period ended September 30, 2003
compared to $2.9 million in the prior year. In September 2003, the Company
purchased, for $7.5 million, four operating facilities which had previously been
under a lease arrangement (see Notes to the condensed consolidated financial
statements). For the entire year we expect our total capital expenditures to be
about $15.0 million. Our depreciation and amortization for the entire year is
expected to be within the range of $15.0 million to $16.0 million.
The Company had a $150 million committed revolving credit agreement with a
group of banks that expired at the end of October 2003. The Company is currently
in the process of replacing this facility with a new $100 million facility. The
new agreement should be completed by the end of November 2003. Additionally,
the Company is currently negotiating with Prudential Insurance Company for a
$100 million credit facility for long-term private placement borrowing. This
credit agreement will replace a previously unused facility that expired on
October 31, 2003.
10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
At September 30, 2003, the Company had $25.0 million of private placement debt
outstanding that was entered into to refinance a portion of the debt incurred in
connection with its June 2000 Canadian acquisition. The full $25.0 million is
due at maturity in November 2010. The Company has mitigated the foreign currency
exposure though the use of cross currency swaps on the $25 million of debt, and
the associated interest payments.
The aggregate annual maturities of long-term debt over the next five years
include $50.0 million in fiscal 2008 and $25,000 in fiscal 2011.
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 91,000 shares of its common stock for $2.0 million during
the three months ended September 30, 2003 compared to 104,000 shares for $1.8
million during the three months ended September 30, 2002. At September 30, 2003,
the Company had remaining authorization to repurchase up to 1 million additional
shares.
Other Matters
- -------------
In January 2003, the Financial Accounting Standards Board issued FIN 46,
"Consolidation of Variable Interest Entities." The Company is a minority owner
in iSource Performance Materials L.L.C. (iSource), and has guaranteed iSource's
bank debt up to $3.0 million. iSource has assets of $3.0 million, accounts
payable of $2.5 million and notes payable of $2.9 million. The Company's
purchases currently account for more than 90% of iSource's sales and the Company
is considered the primary beneficiary of iSource's operations. In accordance
with FIN 46, iSource's financial statements were consolidated with the Company's
beginning in July 2003. The effect of the consolidation was not material to the
Company's consolidated financial statements.
Effective July 1, 2003, the Company adopted the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation," using the
modified prospective method for the transition. Under the modified prospective
method, stock-based compensation cost recognized during this fiscal year for
stock options is the same as that which would have been recognized had the fair
value recognition provisions been applied to all stock option awards granted
after July 1, 1995. The compensation expense recorded during the quarter ended
September 30, 2003 related to stock options was $.4 million, or $.01 per share
after tax.
11
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
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Net sales decreased 1.9% compared to the prior year due to the continued
weakness in the industrial economy. Industrial product sales for the quarter
decreased by 2.1% and fluid power and other sales decreased by 0.1%. Same store
sales decreased 2.8% compared to those in the same quarter last year.
Gross profit as a percentage of sales increased to 25.9% from 24.4%. This
increase is primarily due to higher recovery of our shipping expenses, lower
freight costs and improvements from product pricing initiatives.
Selling, distribution and administrative expenses increased $2.4 million
compared to the prior year. The difference primarily relates to a relatively
high level of gains on the sales of unneeded real estate and other property in
the prior year. The Company also began to expense stock options during the
quarter ended September 30, 2003.
Interest expense-net for the quarter increased by 4.5% as compared to the prior
year as a result of lower interest income.
Income tax expense as a percentage of income before taxes was 35.7% for the
quarter ended September 30, 2003 compared to 38.0% for the quarter ended
September 30, 2002. This decrease is due to lower non-deductible expenses and
lower effective state, local and Canadian tax rates.
As a result of the above factors, net income increased by 23.7% compared to the
same quarter of last year and earnings per share increased 25.0%.
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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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", "anticipate", "should", "project",
"forecast", "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).
13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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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
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 September 30, 2003. iSource has $3.0
million variable rate borrowings outstanding under its line of credit agreement
guaranteed by the Company. The Company has no interest rate swap agreements
outstanding, therefore, all of the Company's outstanding long-term debt is
currently at fixed interest rates at September 30, 2003 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 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.
14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 4: CONTROLS AND PROCEDURES
Management, under the supervision and with the participation of the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), has evaluated the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the CEO and the CFO have concluded
that the disclosure controls and procedures are effective in timely alerting
them to material information about the Company required to be included in the
Company's Exchange Act reports.
Management has not identified any change in internal control over financial
reporting occurring during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
15
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 5. Other Information.
------------------
(a) Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the Company's Annual Meeting of Shareholders held on October 21,
2003, there were 19,137,614 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 I for a term
of three years:
For Withheld
--- --------
Thomas A. Commes 17,664,189 325,488
Peter A. Dorsman 17,683,001 306,676
J. Michael Moore 16,912,999 1,076,678
Jerry Sue Thornton 17,588,974 400,703
The terms of the Class II directors, including William G.
Bares, Roger D. Blackwell, Edith Kelly-Green, and Stephen E.
Yates, and of the Class III directors, including William E.
Butler, Russell R. Gifford, L. Thomas Hiltz, and David L.
Pugh, continued after the meeting.
2. Ratification of the Audit Committee's appointment of Deloitte
& Touche LLP as the Company's independent auditors for the
fiscal year ending June 30, 2004.
For Withheld Abstain
--- -------- -------
17,697,833 175,747 116,097
16
3. Approval of the Deferred Compensation Plan for Non-Employee
Directors.
For Withheld Abstain
--- -------- -------
15,227,162 1,393,574 181,445
There were 1,187,496 broker non-votes on this matter.
4. Approval of the Deferred Compensation Plan.
For Withheld Abstain
--- -------- -------
14,524,774 2,138,115 165,990
There were 1,160,798 broker non-votes on this matter.
(b) Election of Officers.
---------------------
At its organizational meeting held on October 21, 2003, the Board of
Directors elected the following officers of the Company:
David L. Pugh Chairman & Chief Executive Officer
Bill L. Purser President & Chief Operating Officer
Todd A. Barlett Vice President-Global Business Development
Fred D. Bauer Vice President-General Counsel & Secretary
Michael L. Coticchia Vice President-Human Resources and Administration
Mark O. Eisele Vice President & Controller
James T. Hopper Vice President-Chief Information Officer
Jeffrey A. Ramras Vice President-Marketing and Supply Chain
Management
Richard C. Shaw Vice President-Communications and Learning
John R. Whitten Vice President-Chief Financial Officer &
Treasurer
Jody A. Chabowski Assistant Controller
Joseph D. King Assistant Secretary
Alan M. Krupa Assistant Treasurer
The Board also elected Mark O. Eisele to the office of Vice
President-Chief Financial Officer & Treasurer effective January 1, 2004
(succeeding Mr. Whitten, who has announced his retirement) and Maryann
R. Correnti to the new position of Vice President-Strategic Planning
and Development effective December 1, 2003.
17
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
18
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.
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.
(b) Reports on Form 8-K.
--------------------
The Company filed the following Reports on Form 8-K with the Securities
and Exchange Commission during the quarter ended September 30, 2003:
1. Filing on July 3, 2003, Applied attached its press release of that
date regarding fourth quarter earnings.
2. Filing on August 8, 2003, Applied attached its press release of that
date regarding fourth quarter and fiscal 2003 year-end results.
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: November 13, 2003 By: /s/ David L. Pugh
-------------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
Date: November 13, 2003 By: /s/ John R. Whitten
-------------------------------------------
John R. Whitten
Vice President-Chief Financial Officer
& Treasurer
20
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003
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 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.
31 Rule 13a-14(a)/15d-14(a) certifications. Attached
32 Section 1350 certifications. Attached