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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
---------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
---------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Shares of common stock outstanding on October 15, 2004 19,727,699
--------------
(No par value)
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Statements of Consolidated Income - 2
Three Months Ended September 30, 2004 and 2003
Condensed Consolidated Balance Sheets - 3
September 30, 2004 and June 30, 2004
Condensed Statements of Consolidated Cash Flows - 4
Three Months Ended September 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 5 - 7
Review By Independent Public Accountants 8
Item 2: Management's Discussion and Analysis of 9 - 12
Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk 13
Item 4: Controls and Procedures 14
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Unregistered Sales of Equity Securities & Use of Proceeds 15
Item 6: Exhibits 16-17
Signatures 18
Exhibit Index
Exhibits
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
Three Months Ended
September 30
2004 2003
--------- --------
Net Sales $ 413,126 $361,146
Cost of Sales 303,604 267,669
--------- --------
Gross Profit 109,522 93,477
Selling, Distribution and
Administrative Expenses 88,019 84,481
--------- --------
Operating Income 21,503 8,996
Interest Expense, net 1,303 1,318
Other (Income) Expense, net (270) 166
--------- --------
Income Before Income Taxes 20,470 7,512
Income Taxes 7,430 2,680
--------- --------
Net Income $ 13,040 $ 4,832
========= ========
Net Income Per Share - Basic $ 0.67 $ 0.25
========= ========
Net Income Per Share - Diluted $ 0.65 $ 0.25
========= ========
Cash dividends per common share $ 0.14 $ 0.12
========= ========
Weighted average common shares
outstanding for basic computation 19,492 19,008
Dilutive effect of stock options
and awards 620 405
--------- --------
Adjusted average common shares
outstanding for diluted computation 20,112 19,413
========= ========
See notes to condensed consolidated financial statements.
2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
September 30 June 30
2004 2004
------------ ---------
ASSETS
Current assets
Cash and temporary investments $ 63,192 $ 69,667
Accounts receivable, less allowances
of $6,500 and $6,400 201,043 190,815
Inventories (at LIFO) 173,367 159,594
Other current assets 23,020 22,957
--------- ---------
Total current assets 460,622 443,033
Property, less accumulated depreciation
of $101,241 and $98,121 75,354 77,025
Goodwill 50,119 49,852
Other assets 26,907 26,931
--------- ---------
TOTAL ASSETS $ 613,002 $ 596,841
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 84,180 $ 78,767
Other accrued liabilities 68,683 72,562
--------- ---------
Total current liabilities 152,863 151,329
Long-term debt 77,570 77,767
Other liabilities 29,759 28,210
--------- ---------
TOTAL LIABILITIES 260,192 257,306
========= =========
Shareholders' Equity
Preferred stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 24,096 shares issued 10,000 10,000
Additional paid-in capital 92,706 90,520
Income retained for use in the business 322,209 311,922
Treasury shares - at cost, 4,408 and 4,591 shares (72,620) (72,870)
Unearned restricted common stock compensation (1,065) (1,158)
Accumulated other comprehensive income 1,580 1,121
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 352,810 339,535
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 613,002 $ 596,841
========= =========
See notes to condensed consolidated financial statements.
3
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended
September 30
2004 2003
-------- --------
Cash Flows from Operating Activities
Net income $ 13,040 $ 4,832
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 4,039 4,049
Gain on sale of property (291) (37)
Changes in operating assets and liabilities, net of
effects from acquisition of business (19,570) (15,488)
Treasury shares contributed to employee benefit and deferred
compensation plans 3,764 2,979
Other - net (197) (198)
-------- --------
Net Cash provided by (used in) Operating Activities 785 (3,863)
-------- --------
Cash Flows from Investing Activities
Property purchases (1,758) (8,742)
Proceeds from property sales 398 559
Deposits and other (877) 330
-------- --------
Net Cash used in Investing Activities (2,237) (7,853)
-------- --------
Cash Flows from Financing Activities
Borrowings - net 100
Change in cash overdrafts (831) (4,783)
Dividends paid (2,753) (2,294)
Purchases of treasury shares (5,987) (1,982)
Exercise of stock options 4,377 2,710
-------- --------
Net Cash used in Financing Activities (5,194) (6,249)
-------- --------
Effect of exchange rate changes on cash 171 (26)
-------- --------
Decrease in cash and temporary
investments (6,475) (17,991)
Cash and temporary investments
at beginning of period 69,667 55,079
-------- --------
Cash and Temporary Investments
at End of Period $ 63,192 $ 37,088
======== ========
See notes to condensed consolidated financial statements.
4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-Q and therefore do not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted
accounting principles. However, in the opinion of management, all
adjustments (consisting of only normal recurring adjustments)
necessary to a fair statement of operations of the interim periods
have been made. This Quarterly Report on Form 10-Q should be read in
conjunction with the Applied Industrial Technologies, Inc. (the
Company) Annual Report on Form 10-K for the year ended June 30,
2004.
The results of operations for the three month period ended September
30, 2004 are not necessarily indicative of the results to be
expected for the fiscal year.
Cost of sales for interim financial statements are computed using
estimated gross profit percentages, which are adjusted throughout
the year based upon available information. Adjustments to actual
cost are made based on periodic physical inventories and the effect
of year-end inventory quantities on LIFO costs.
Certain reclassifications have been made to prior year amounts to be
consistent with the presentation in the current year.
2. STOCK OPTIONS
Effective July 1, 2003, the Company adopted the fair value
recognition provisions of SFAS 123, "Accounting for Stock-Based
Compensation" as amended by SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," using the modified
prospective method for the transition. Under the modified
prospective method, stock-based compensation cost recognized during
the fiscal year is the same as that which would have been recognized
had the fair value recognition provisions been applied to all awards
granted after July 1, 1995. The compensation expense recorded during
the three months ended September 30, 2004 and 2003 was $285, $182
net of tax, or $0.01 per share and $359, $232 net of tax, or $0.01
per share, respectively.
3. SEGMENT INFORMATION
The accounting policies of the Company's reportable segment and its
other businesses are the same as those used to prepare the condensed
consolidated financial statements. Sales between the service center
based distribution segment and the other businesses are not
significant.
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
SEGMENT FINANCIAL INFORMATION:
SERVICE CENTER
BASED
DISTRIBUTION OTHER TOTAL
-------------- ------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2004
Net sales $385,627 $27,499 $413,126
Operating income 19,158 1,916 21,074
Assets used in business 587,483 25,519 613,002
Depreciation 3,332 167 3,499
Capital expenditures 1,730 28 1,758
-------- ------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2003
Net sales $337,903 $23,243 $361,146
Operating income 9,803 712 10,515
Assets used in business 521,839 22,633 544,472
Depreciation 3,301 170 3,471
Capital expenditures 8,702 40 8,742
======== ======= ========
A reconciliation from the segment operating profit to the condensed consolidated
balances is as follows:
THREE MONTHS ENDED
SEPTEMBER 30
------------------------
2004 2003
-------- -------
Operating income for
reportable segment $ 19,158 $ 9,803
Other operating income 1,916 712
Adjustments for:
Other intangible amortization (179) (189)
Corporate and other income (expense),
net of allocations (a) 608 (1,330)
-------- -------
Total operating income 21,503 8,996
Interest expense, net 1,303 1,318
Other (income) expense, net (270) 166
-------- -------
Income before income taxes $ 20,470 $ 7,512
======== =======
(a) The change in corporate and other income (expense), net, is due to
various changes in the levels and amounts of expense being allocated
to the segments. The expenses being allocated include corporate
charges for working capital, logistics support and other items.
The Company has operations in the United States, Canada and Mexico.
Operations in Canada and Mexico represent approximately 10.0% of the
total net sales of Applied for the three months ended September 30,
2004 and therefore are not presented separately.
6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
In addition, approximately 28.0% 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.
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended
September 30
----------------------
2004 2003
------- -------
Net income $13,040 $ 4,832
Other comprehensive income (loss):
Unrealized gain (loss) on hedge transactions 196 (541)
Foreign currency translation
adjustment 263 (414)
------- -------
Total comprehensive income $13,499 $ 3,877
======= =======
5. BENEFIT PLANS
The following table provides summary disclosures of the net periodic
benefit costs recognized for the Company's Supplemental Executive
Retirement Benefits Plan, qualified retirement plan, salary
continuation benefits and retiree medical benefits:
Pension Benefits Other Benefits
------------------- ----------------
2004 2003 2004 2003
----- ----- ---- ----
THREE MONTHS ENDED SEPTEMBER 30
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 318 $ 263 $ 12 $ 14
Interest cost 377 313 73 76
Expected return on plan assets (88) (79)
Recognized net actuarial loss 120 55 4 5
Amortization of prior service cost 157 147 12 12
----- ----- ---- ----
Net periodic pension cost $ 884 $ 699 $101 $107
===== ===== ==== ====
The company contributed $692 to its pension benefit plan and $4 to
its other benefit plans in the three months ended September 30,
2004. Expected contributions for the full fiscal year remain the
same as previously disclosed at $1,100 for the pension benefit plans
and $300 for its other benefit plans.
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
The accompanying condensed consolidated financial statements of the Company have
been reviewed by the Company's independent registered public accountants,
Deloitte & Touche LLP, whose report covering their review of the financial
statements follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Applied Industrial Technologies,
Inc. Cleveland, Ohio
We have reviewed the accompanying condensed consolidated balance sheet of
Applied Industrial Technologies, Inc. and subsidiaries (the "Company") as of
September 30, 2004, and related condensed statements of consolidated income and
cash flows for the three-month periods ended September 30, 2004 and 2003. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Applied Industrial Technologies, Inc. and subsidiaries as of June 30, 2004, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
August 6, 2004, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of June 30, 2004 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
November 4, 2004
8
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 September
30, 2004 and June 30, 2004, and (2) results of operations and cash flows during
the periods included in the accompanying Condensed Statements of Consolidated
Income and Consolidated Cash Flows.
Overview
Net income for the three months ended September 30, 2004 increased 169.9%
compared to the same quarter in the prior year on a 14.4% increase in sales.
Underlying this improvement in net income were an increase in sales, improvement
in gross margin, limited growth in selling distribution and administrative
(SD&A) expenses and $0.7 million in non-operating income from the settlement of
a life insurance policy.
The balance sheet continues to strengthen as shareholders' equity exceeded
$350.0 million and our current ratio is at 3 to 1. Overall inventory balances
grew during the quarter in line with our expectation of continued strong demand.
Accounts receivable are up $10.0 million due to our sales expansion. Days sales
outstanding remains stable at 43 days.
The Company monitors the Purchasing Managers Index (ISM) as published by the
Institute for Supply Management and the Manufacturers Capacity Utilization (MCU)
index published by the Federal Reserve Board and considers these indexes key
indicators of potential Company business environment changes. During the quarter
these indicators began to show signs of moderating slightly, but still show
growth in the economy. The Company's performance traditionally lags these key
indicators by approximately 6 months.
The Company expects that fiscal 2005 second quarter sales will rise between 8%
and 12% compared to the same quarter last year. Sales for the entire 2005 fiscal
year are expected to be in the range of $1.63 billion and $1.66 billion.
Liquidity and Capital Resources
Cash provided by operating activities for the quarter ended September 30, 2004
was $0.8 million. This compares to $3.9 million used in operating activities in
the same period a year ago. The improvement in cash provided by operating
activities is due to cash generated from our increased sales and operating
income over the prior year's quarter partially offset by our increased
investment in inventory.
Cash flow from operations depends primarily upon generating operating income,
controlling the investment in inventories and receivables, and managing the
timing of payments to suppliers During the three month period ended September
30, 2004, inventories increased approximately $13.8 million as the Company added
inventory to meet increased demand for our products. Accounts receivable
increased $10.2 million during the three months ended September 30, 2004 due to
the increase in sales.
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Capital expenditures were $1.8 million for the three months ended September 30,
2004 compared to $8.7 million in the prior year. In September 2003, the Company
purchased, for $7.5 million, four operating facilities which had previously been
leased. For the entire year we expect our total capital expenditures to be in
the range of $10.0 to $11.0 million. Our depreciation for the entire year is
expected to be within the range of $14.5 million to $15.5 million.
The Company has a $100.0 million revolving credit facility with a group of banks
expiring in November 2008. The Company had no borrowings outstanding under this
facility at September 30, 2004. Unused lines under this facility, net of
outstanding letters of credit, total $92.1 million, and are available to fund
future acquisitions or other capital and operating requirements.
The Company has an agreement with Prudential Investment Management, Inc.
expiring in February 2007, for an uncommitted shelf facility that enables the
Company to borrow up to $100.0 million in additional long-term financing at the
Company's discretion with terms of up to twelve years. At September 30, 2004,
there was no borrowing under this agreement.
The Company's long-term debt matures as follows: $50.0 million due in fiscal
2008 and $25.0 million due in fiscal 2011.
The Board of Directors 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 203,000 shares of its common stock for $6.0 million during
the three months ended September 30, 2004 compared to 91,000 shares for $2.0
million during the three months ended September 30, 2003. At September 30, 2004,
the Company had remaining authorization to repurchase approximately 667,000
additional shares.
The Company raised its quarterly dividend in July 2004 approximately 17% to 14
cents per share. Prior to that increase, the Company's dividend was 12 cents per
share per quarter. The amount of the dividend paid is approved by the Company's
Board of Directors based on financial performance, cash flow and payout
guidelines consistent with other industrial companies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Net sales increased 14.4% compared to the prior year due to a $37.1 million or
11.3% increase in US service center same store sales, increases in sales in our
Canadian operations and in our US fluid power subsidiaries. The number of
selling days in each quarter was the same at 64 days.
10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The US service center sales increase was driven by sales mix, volume and the
impact of supplier price increases passed on to customers. The Company estimates
that $17.0 to $21.0 million of the sales increase was a result of the supplier
price increases passed on to customers.
Sales in our Canadian operations improved by $7.4 million due to sales mix,
pricing, volume and $1.1 million related to currency translation from the
strengthening of the Canadian dollar compared to the prior year. Our U.S. fluid
power subsidiaries had a sales increase of $2.5 million over the prior year
first quarter.
Approximately $2.7 million of the sales increase in the current year quarter was
a result of the acquisition of Rybalsa in Mexico during the second quarter of
fiscal 2004.
Gross profit as a percentage of sales increased to 26.5% from 25.9%. The
increase is primarily the result of lower freight costs and a physical inventory
write-up recorded in the quarter. Higher recovery of our shipping expenses and
improved supplier rebates also contributed to the overall increase in gross
profit as a percentage of sales. The inability to pass supplier price increases
to customers currently under contractual agreements has somewhat offset these
improvements and had a negative effect on our margins. This will continue to be
a challenge to us as we anticipate another round of supplier price increases
around calendar year end.
Selling, distribution and administrative expenses increased 4.2% compared to the
prior year, however, as a percentage of sales; they decreased to 21.3% compared
to 23.4% in the prior year. This overall increase in SD&A was primarily driven
by higher employee compensation and benefits related to performance driven
incentives.
Interest expense-net for the quarter was flat as compared to the prior year.
Average outstanding borrowings and rates paid on borrowings were comparable for
the quarters ended September 30, 2004 and 2003.
Other (income) expense, net improved $0.4 million compared to the prior year due
to a non-operating gain of $0.7 million related to the settlement of a life
insurance policy. The gain was partially offset by a mark-to-market loss on a
US/Canadian dollar cross currency swap which does not qualify for hedge
accounting.
Income tax expense as a percentage of income before taxes was 36.3% for the
quarter ended September 30, 2004 compared to 35.7% for the quarter ended
September 30, 2003. This increase is due to higher effective state and local
rates. We expect the effective tax rate to remain at approximately 36.3% for the
remainder of the fiscal year.
As a result of the above factors, net income increased by 169.9% compared to the
same quarter of last year and net income per share increased 160.0%.
11
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," "should,"
"anticipate," and similar expressions. The Company intends that the
forward-looking statements be subject to the safe harbors established in the
Private Securities Litigation Reform Act of 1995 and by the Securities and
Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking
statements. All forward-looking statements are based on current expectations
regarding important risk factors. Accordingly, actual results may differ
materially from those expressed in the forward-looking statements, and the
making of such statements should not be regarded as a representation by the
Company or any other person that the results expressed in the statements will be
achieved. In addition, the Company undertakes no obligation publicly to update
or revise any forward-looking statements, whether because of new information or
events, or otherwise.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industry sectors; reduced demand for our
products in targeted markets including consolidation in customer industries and
the transfer of manufacturing capacity to foreign countries; changes in interest
rates and inflation; changes in customer procurement policies and practices;
changes in product manufacturer sales policies and practices; the availability
of products and labor; changes in operating expenses; price increases or
decreases; the variability and timing of business opportunities including
acquisitions, alliances, customer relationships and supplier authorizations; the
Company's ability to realize the anticipated benefits of acquisitions and other
business strategies; the incurrence of debt and contingent liabilities in
connection with acquisitions; changes in accounting policies and practices;
organizational changes within the Company; the emergence of new competitors,
including firms with greater financial resources than the Company; risks and
uncertainties associated with the Company's foreign operations, including
inflation, recessions, and foreign currency exchange rates; adverse results in
significant litigation matters; adverse regulation and legislation; and the
occurrence of extraordinary events (including prolonged labor disputes, natural
events and acts of God, terrorist acts, fires, floods and accidents).
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has evaluated its exposure to various market risk factors, including
but not limited to, interest rate, foreign currency exchange and commodity price
risks. The Company is primarily affected by market risk exposure through the
effects of changes in interest rates and foreign exchange rates.
The Company manages interest rate risk through the use of a combination of fixed
rate long-term debt and variable rate borrowings under its committed revolving
credit agreement and interest rate swaps. The Company had no variable rate
borrowings outstanding under its committed revolving credit agreement at
September 30, 2004. The Company has no interest rate swap agreements
outstanding. All of the Company's outstanding long-term debt is currently at
fixed interest rates at September 30, 2004 and scheduled for repayment in
December 2007 and beyond.
The Company mitigates its foreign currency exposure from the Canadian dollar
through the use of cross currency swap agreements as well as foreign-currency
denominated debt. Hedging of the U.S. dollar denominated debt, used to fund a
substantial portion of the Company's net investment in its Canadian operations,
is accomplished through the use of cross currency swaps. Any gain or loss on the
hedging instrument offsets the gain or loss on the underlying debt. Translation
exposures with regard to our Mexican business are not hedged because the Mexican
activity is not material. For the three months ended September 30, 2004, a
uniform 10% strengthening of the U.S. dollar relative to foreign currencies that
affect the Company would have resulted in a $0.2 million decrease in net income.
A uniform 10% weakening of the U.S. dollar would have resulted in a $0.2 million
increase in net income.
13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
Management, under the supervision and with the participation of the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), has evaluated the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the CEO and the CFO have concluded
that the disclosure controls and procedures are effective in timely alerting
them to material information about the Company required to be included in the
Company's Exchange Act reports.
Management has not identified any change in internal control over financial
reporting occurring during the quarter ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Applied Industrial Technologies, Inc. and/or one of its subsidiaries is a
party to various pending judicial and administrative proceedings. Based on
circumstances currently known, the Company does not believe that any
liabilities that may result from these proceedings are reasonably likely
to have a material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Repurchases in the quarter ended September 30, 2004 were as follows:
(c) Total Number (d) Maximum
of Shares Number of Shares
Purchased as Part that May Yet Be
(a) Total (b) Average of Publicly Purchased Under
Number of Price Paid per Announced Plans the Plans or
Period Shares Share or Programs Programs
- -------------------- --------- -------------- ----------------- ----------------
July 1, 2004 to
July 31, 2004 -0- -0- 841,375
August 1, 2004 to
August 31, 2004
169,700 29.43 169,700 671,675
September 1, 2004 to
September 30, 2004 4,100 29.99 4,100 667,575
Total 173,800 29.44 173,800 667,575
(1) On July 16, 2003, the Board of Directors authorized the purchase of
up to one million shares of the Company's common stock. The Company
announced the authorization on July 16, 2003. These purchases may be
made in the open market or in privately negotiated transactions.
This authorization is in effect until all shares are purchased or
the authorization is revoked or amended by the Board of Directors.
(2) During the quarter the Company also purchased 29,299 shares in
connection with the exercise of stock options and other employee
benefit programs. These purchases are not counted within the
aforementioned Board authorization.
15
ITEM 6. Exhibits.
Exhibit No. Description
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on October 8,
1998 (filed as Exhibit 3(a) to the Company's
Form 10-Q for the quarter ended September
30, 1998, SEC File No. 1-2299, and
incorporated here by reference).
3(b) Code of Regulations of Applied Industrial
Technologies, Inc., as amended on October
19, 1999 (filed as Exhibit 3(b) to the
Company's Form 10-Q for the quarter ended
September 30, 1999, SEC File No. 1-2299, and
incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc.
(Ohio) and Bearings, Inc. (Delaware) filed
with the Ohio Secretary of State on October
18, 1988, including an Agreement and Plan of
Reorganization dated September 6, 1988
(filed as Exhibit 4(a) to the Company's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) Private Shelf Agreement dated as of November
27, 1996, as amended on January 30, 1998,
between the Company and Prudential
Investment Management, Inc. (assignee of The
Prudential Insurance Company of America)
(filed as Exhibit 4(f) to the Company's Form
10-Q for the quarter ended March 31, 1998,
SEC File No. 1-2299, and incorporated here
by reference).
4(c) Amendment dated October 24, 2000 to 1996
Private Shelf Agreement between the Company
and Prudential Investment Management, Inc.
(assignee of The Prudential Insurance
Company of America) (filed as Exhibit 4(e)
to the Company's Form 10-Q for the quarter
ended September 30, 2000, SEC File No.
1-2299, and incorporated here by reference).
16
4(d) Amendment dated November 14, 2003 to 1996
Private Shelf Agreement between the Company
and Prudential Investment Management, Inc.
(assignee of The Prudential Insurance
Company of America) (filed as Exhibit 4(d)
to the Company's Form 10-Q for the quarter
ended December 31, 2003, SEC File No.
1-2299, and incorporated here by reference).
4(e) Amendment dated February 25, 2004 to 1996
Private Shelf Agreement between the Company
and Prudential Investment Management, Inc.
(assignee of The Prudential Insurance
Company of America) (filed as Exhibit 4(e)
to the Company's Form 10-Q for the quarter
ended March 31, 2004, SEC File No. 1-2299,
and incorporated here by reference).
4(f) $100,000,000 Credit Agreement dated as of
October 31, 2003 among the Company, KeyBank
National Association as Agent, and various
financial institutions (filed as Exhibit
4(e) to the Company's Form 10-Q for the
quarter ended December 31, 2003, SEC File
No. 1-2299, and incorporated here by
reference).
4(g) Rights Agreement, dated as of February 2,
1998, between the Company and Computershare
Investor Services LLP (successor to Harris
Trust and Savings Bank), as Rights Agent,
which includes as Exhibit B thereto the Form
of Rights Certificate (filed as Exhibit No.
1 to the Company's Registration Statement on
Form 8-A filed July 20, 1998, SEC File No.
1-2299, and incorporated here by reference).
10 First Amendment to Supplemental Executive
Retirement Benefits Plan (January 1, 2002
Restatement).
15 Letter from independent accountants
regarding unaudited interim financial
information.
31 Rule 13a-14(a)/15d-14(a) certifications.
32 Section 1350 certifications.
17
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.
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 5, 2004 By: /s/ David L. Pugh
----------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
Date: November 5, 2004 By: /s/ Mark O. Eisele
----------------------------------------
Mark O. Eisele
Vice President-Chief Financial Officer
& Treasurer
18
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004
EXHIBIT NO. DESCRIPTION
3(a) Amended and Restated Articles of Incorporation of Applied
Industrial Technologies, Inc., as amended on October 8,
1998 (filed as Exhibit 3(a) to the Company's Form 10-Q for
the quarter ended September 30, 1998, SEC File No. 1-2299,
and incorporated here by reference).
3(b) Code of Regulations of Applied Industrial Technologies,
Inc., as amended on October 19, 1999 (filed as Exhibit
3(b) to the Company's Form 10-Q for the quarter ended
September 30, 1999, SEC File No. 1-2299, and incorporated
here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and
Bearings, Inc. (Delaware) filed with the Ohio Secretary of
State on October 18, 1988, including an Agreement and Plan
of Reorganization dated September 6, 1988 (filed as
Exhibit 4(a) to the Company's Registration Statement on
Form S-4 filed May 23, 1997, Registration No. 333-27801,
and incorporated here by reference).
4(b) Private Shelf Agreement dated as of November 27, 1996, as
amended on January 30, 1998, between the Company and
Prudential Investment Management, Inc. (assignee of The
Prudential Insurance Company of America) (filed as Exhibit
4(f) to the Company's Form 10-Q for the quarter ended
March 31, 1998, SEC File No. 1-2299, and incorporated here
by reference).
4(c) Amendment dated October 24, 2000 to November 27, 1996
Private Shelf Agreement between the Company and Prudential
Investment Management, Inc. (assignee of The Prudential
Insurance Company of America) (filed as Exhibit 4(e) to
the Company's Form 10-Q for the quarter ended September
30,
2000, SEC File No. 1-2299, and incorporated here by
reference).
4(d) Amendment dated November 14, 2003 to 1996 Private Shelf
Agreement between the Company and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance
Company of America) (filed as Exhibit 4(d) to the
Company's Form 10-Q for the quarter ended December 31,
2003, SEC File No. 1-2299, and incorporated here by
reference).
4(e) Amendment dated February 25, 2004 to 1996 Private Shelf
Agreement between the Company and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance
Company of America) (filed as Exhibit 4(e) to the
Company's Form 10-Q for the quarter ended March 31, 2004,
SEC File No. 1-2299, and incorporated here by reference).
4(f) $100,000,000 Credit Agreement dated as of October 31, 2003
among the Company, KeyBank National Association as Agent,
and various financial institutions (filed as Exhibit 4(e)
to the Company's Form 10-Q for the quarter ended December
31, 2003, SEC File No. 1-2299, and incorporated here by
reference).
4(g) Rights Agreement, dated as of February 2, 1998, between
the Company and Computershare Investor Services LLP
(successor to Harris Trust and Savings Bank), as Rights
Agent, which includes as Exhibit B thereto the Form of
Rights Certificate (filed as Exhibit No. 1 to the
Company's Registration Statement on Form 8-A filed July
20, 1998, SEC File No. 1-2299, and incorporated here by
reference).
10 First Amendment to Supplemental Executive Attached
Retirement Benefits Plan (January 1, 2002
Restatement)
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