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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 MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to __________
Commission File Number 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Shares of common stock outstanding on April 15, 2005 30,050,715
--------------
(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 and Nine Months Ended
March 31, 2005 and 2004
Condensed Consolidated Balance Sheets - 3
March 31, 2005 and June 30, 2004
Condensed Statements of Consolidated Cash Flows - 4
Nine Months Ended March 31, 2005 and 2004
Notes to Condensed Consolidated Financial Statements 5 - 9
Review By Independent Public Accountants 10
Item 2: Management's Discussion and Analysis of 11 - 16
Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk 17
Item 4: Controls and Procedures 18
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Unregistered Sales of Equity Securities & Use of Proceeds 19
Item 6: Exhibits 20
Signatures 22
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 Nine Months Ended
March 31 March 31
2005 2004 2005 2004
--------- --------- ----------- -----------
Net Sales $ 446,470 $ 391,053 $ 1,263,735 $ 1,111,910
Cost of sales 327,177 286,630 930,972 818,844
--------- --------- ----------- -----------
Gross Profit 119,293 104,423 332,763 293,066
Selling, distribution and
administrative expenses 95,213 89,543 269,957 259,940
--------- --------- ----------- -----------
Operating Income 24,080 14,880 62,806 33,126
Interest expense, net 1,214 1,397 3,848 4,120
Other income, net (2,640) (458) (2,798) (400)
--------- --------- ----------- -----------
Income Before Income Taxes 25,506 13,941 61,756 29,406
Income Taxes 9,170 3,330 22,400 8,830
--------- --------- ----------- -----------
Net Income $ 16,336 $ 10,611 $ 39,356 $ 20,576
========= ========= =========== ===========
Earnings Per Share - Basic $ 0.55 $ 0.37 $ 1.33 $ 0.72
========= ========= =========== ===========
Earnings Per Share - Diluted $ 0.53 $ 0.36 $ 1.29 $ 0.70
========= ========= =========== ===========
Cash dividends per common
share $ 0.12 $ 0.08 $ 0.31 $ 0.24
========= ========= =========== ===========
Weighted average common shares
outstanding for basic computation 29,857 28,944 29,556 28,765
Dilutive effect of stock options
and awards 1,017 539 1,063 591
--------- --------- ----------- -----------
Adjusted average common shares
outstanding for diluted computation 30,874 29,483 30,619 29,356
========= ========= =========== ===========
See notes to condensed consolidated financial statements.
2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
March 31 June 30
2005 2004
--------- ---------
ASSETS
Current assets
Cash and temporary investments $ 83,374 $ 69,667
Accounts receivable, less allowances
of $6,550 and $6,400 214,867 190,815
Inventories (at LIFO) 186,007 159,594
Other current assets 29,933 22,957
--------- ---------
Total current assets 514,181 443,033
Property, less accumulated depreciation
of $105,165 and $98,121 72,240 77,025
Goodwill 51,044 49,852
Other assets 26,508 26,931
--------- ---------
TOTAL ASSETS $ 663,973 $ 596,841
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 97,314 $ 78,767
Other accrued liabilities 75,158 72,562
--------- ---------
Total current liabilities 172,472 151,329
Long-term debt 77,174 77,767
Other liabilities 32,210 28,210
--------- ---------
TOTAL LIABILITIES 281,856 257,306
--------- ---------
Shareholders' Equity
Preferred stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 36,143 shares issued 10,000 10,000
Additional paid-in capital 96,927 90,520
Income retained for use in the business 342,145 311,922
Treasury shares - at cost, 6,100 and 6,886 shares (68,694) (72,870)
Unearned restricted common stock compensation (905) (1,158)
Accumulated other comprehensive income 2,644 1,121
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 382,117 339,535
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 663,973 $ 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)
Nine Months Ended
March 31
2005 2004
-------- --------
Cash Flows from Operating Activities
Net income $ 39,356 $ 20,576
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 13,101 12,776
Gain on sale of property (1,121) (101)
Changes in operating assets and liabilities, net of
effects from acquisition of business (25,446) (28,184)
Treasury shares contributed to employee benefit and deferred
compensation plans 7,523 4,702
Other - net (593) (593)
-------- --------
Net Cash provided from Operating Activities 32,820 9,176
-------- --------
Cash Flows from Investing Activities
Capital expenditures (6,283) (11,909)
Proceeds from property sales 3,206 1,077
Net cash paid for acquisition of businesses (5,635) (1,285)
Deposits and other (1,093) (1,185)
-------- --------
Net Cash used in Investing Activities (9,805) (13,302)
-------- --------
Cash Flows from Financing Activities
Borrowings (repayments) - net (2,850)
Change in cash overdrafts (1,780) (6,757)
Dividends paid (9,133) (6,945)
Purchases of treasury shares (8,884) (6,258)
Exercise of stock options 9,961 5,135
-------- --------
Net Cash used in Financing Activities (9,836) (17,675)
-------- --------
Effect of exchange rate changes on cash 528 108
-------- --------
Increase (decrease) in cash and temporary investments 13,707 (21,693)
Cash and temporary investments at beginning of period 69,667 55,079
-------- --------
Cash and Temporary Investments at End of Period $ 83,374 $ 33,386
======== ========
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 and nine month periods ended March
31, 2005 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.
All share and per share data have been restated to reflect a three-for-two
stock split effective December 17, 2004.
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 quarters ended March 31, 2005 and 2004 was $1,341, $858 net of
tax, or $0.03 per share and $629, $449 net of tax, or $0.02 per share,
respectively. Compensation expense recorded during the nine months ended
March 31, 2005 and 2004 was $1,920, $1,226 net of tax or $0.04 per share
and $1,315, $920 net of tax or $0.03 per share, respectively.
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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.
SEGMENT FINANCIAL INFORMATION:
SERVICE CENTER
BASED
DISTRIBUTION OTHER TOTAL
-------------- ------- --------
THREE MONTHS ENDED MARCH 31, 2005
Net sales $418,019 $28,451 $446,470
Operating income 24,636 1,630 26,266
Depreciation 3,270 173 3,443
Capital expenditures 2,212 98 2,310
-------- ------- --------
THREE MONTHS ENDED MARCH 31, 2004
Net sales $368,130 $22,923 $391,053
Operating income 16,497 832 17,329
Depreciation 3,358 170 3,528
Capital expenditures 1,438 160 1,598
-------- ------- --------
A reconciliation from the segment operating profit to the condensed consolidated
balances is as follows:
THREE MONTHS ENDED
MARCH 31
--------------------
2005 2004
------- -------
Operating income:
Service center based distribution $24,636 $16,497
Other 1,630 832
Adjustments for:
Other intangible amortization (215) (170)
Corporate and other income (expense),
net of allocations (a) (1,971) (2,279)
------- -------
Total operating income 24,080 14,880
Interest expense, net 1,214 1,397
Other income, net (2,640) (458)
------- -------
Income before income taxes $25,506 $13,941
======= =======
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
-------------- ------- ----------
NINE MONTHS ENDED MARCH 31, 2005
Net sales $1,179,915 $83,820 $1,263,735
Operating income 60,544 5,266 65,810
Assets used in business at March 31, 2005 637,540 26,433 663,973
Depreciation 9,886 512 10,398
Capital expenditures 6,051 232 6,283
---------- ------- ----------
NINE MONTHS ENDED MARCH 31, 2004
Net sales $1,041,666 $70,244 $1,111,910
Operating income 37,144 2,843 39,987
Assets used in business at March 31, 2004 553,928 19,432 573,360
Depreciation 10,332 507 10,839
Capital expenditures 11,686 223 11,909
---------- ------- ----------
NINE MONTHS ENDED
MARCH 31
---------------------
2005 2004
------- -------
Operating income:
Service center based distribution $60,544 $37,144
Other 5,266 2,843
Adjustments for:
Other intangible amortization (579) (547)
Corporate and other income (expense),
net of allocations (a) (2,425) (6,314)
------- -------
Total operating income 62,806 33,126
Interest expense, net 3,848 4,120
Other income, net (2,798) (400)
------- -------
Income before income taxes $61,756 $29,406
======= =======
(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 nine months ended March 31, 2005.
Approximately 29% of the net sales relate to the fluid power business and
are included in the "Other" column. The long-lived assets located outside
of the United States are not material.
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended Nine Months Ended
March 31 March 31
--------------------------- --------------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income $ 16,336 $ 10,611 $ 39,356 $ 20,576
Other comprehensive income (loss)
Foreign currency translation
adjustment (1,884) (691) 1,243 (852)
Other 280 280
-------- -------- -------- --------
Total comprehensive income $ 14,732 $ 9,920 $ 40,879 $ 19,724
======== ======== ======== ========
5. BENEFIT PLANS
The following table provides summary disclosures of the net periodic
benefit costs recognized for the Company's Supplemental Executive
Retirement Benefits Plan, qualified retirement plan, salary continuation
benefits and retiree medical benefits:
Pension Benefits Other Benefits
--------------------- --------------------
THREE MONTHS ENDED MARCH 31 2005 2004 2005 2004
- --------------------------- ----- ----- ----- -----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 318 $ 263 $ 12 $ 14
Interest cost 377 314 73 76
Expected return on plan assets (88) (79)
Recognized net actuarial loss 120 55 4 5
Amortization of prior service cost 157 148 12 12
----- ----- ----- -----
Net periodic pension cost $ 884 $ 701 $ 101 $ 107
===== ===== ===== =====
Pension Benefits Other Benefits
------------------------- ------------------------
NINE MONTHS ENDED MARCH 31 2005 2004 2005 2004
- -------------------------- ------- ------- ------- -------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 955 $ 788 $ 36 $ 43
Interest cost 1,132 943 219 228
Expected return on plan assets (265) (236)
Recognized net actuarial loss 360 165 11 14
Amortization of prior service cost 470 442 36 37
------- ------- ------- -------
Net periodic pension cost $ 2,652 $ 2,102 $ 302 $ 322
======= ======= ======= =======
The Company contributed $965 to its pension benefit plans and $17 to its
other benefit plans in the nine months ended March 31, 2005. 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.
8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
6. BUSINESS COMBINATION
Effective January 2005, the Company acquired the stock of a Canadian
distributor of industrial products for approximately $6,630. The results
of the acquired 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.
The preliminary fair values of the acquired assets and liabilities assumed
at the date of acquisition are as follows:
Accounts receivable $3,221
Inventory 3,491
Other current assets 40
Property 910
Goodwill 556
Other intangibles 835
------
Total assets acquired 9,053
Liabilities assumed 2,423
------
Net assets acquired $6,630
======
The final allocation of the purchase price is expected to be completed by
the end of fiscal 2005. Other intangibles of $835, consisting of customer
relationships and non-competition agreements, were recognized in
connection with this combination. The expected amortization period is
between four and fifteen years.
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
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
March 31, 2005, and related condensed statements of consolidated income for the
three-month and nine-month periods ended March 31, 2005 and 2004, and of
consolidated cash flows for the nine-month periods ended March 31, 2005 and
2004. These interim financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Applied Industrial Technologies, Inc. and subsidiaries as of June 30,
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
April 22, 2005
10
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 March 31,
2005 and (2) results of operations and cash flows during the periods included in
the accompanying Condensed Statements of Consolidated Income and Consolidated
Cash Flows.
Overview
Net income for the three months ended March 31, 2005 increased 54.0% compared to
the same quarter in the prior year on a 14.2% increase in sales. This
improvement in net income was primarily the result of an increase in sales while
maintaining limited growth in selling, distribution and administrative (SD&A)
expenses. The gross margin for the quarter was consistent with the prior year.
Also contributing to the net income increase were gains of approximately $2.7
million from a life insurance settlement and from the sale of stock received as
part of a customer bankruptcy settlement.
The balance sheet continues to strengthen as shareholders' equity reached $382.1
million and our current ratio was 3.0 to 1. Overall inventory balances decreased
$6.1 million for the quarter but have increased $26.4 million since June 30,
2004. The decline in inventories experienced during the quarter should continue
through the fourth quarter with inventory levels expected to decline by another
$15 million. Days sales outstanding for accounts receivable remain stable at
approximately 42 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. These indicators
continue to show signs of growth in the economy. The Company believes its sales
trends traditionally lag these key indicators by approximately 6 months.
The Company expects that fiscal 2005 fourth quarter sales will rise between 11%
and 13.5% compared to the same quarter last year. Sales for the entire 2005
fiscal year are expected to be in the range of $1.71 billion to $1.72 billion.
Liquidity and Capital Resources
Cash provided from operating activities for the nine months ended March 31, 2005
was $32.8 million compared to $9.2 million in the same period a year ago. The
improvement in cash provided by operating activities is due to cash generated
from increased sales and operating income over the prior year partially offset
by increased investment in inventory and the payment of accrued expenses for
employee benefit programs.
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 nine month period ended March 31,
2005, inventories increased approximately $26.4 million as the Company added
inventory to meet anticipated demand for our products and to a
11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
lesser extent from purchases made prior to certain supplier price increases. Our
March 2005 balances, which include $3.5 million of inventory from the
acquisition of a Canadian distributor, are greater than our March 2004 balances
by $7.8 million. Accounts receivable increased $24.1 million primarily due to
increased sales volume. The Company expects cash from operations for the fourth
quarter of fiscal 2005 to exceed the levels reached in fiscal 2004.
Capital expenditures were $6.3 million for the nine months ended March 31, 2005
compared to $11.9 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 $10.0 million range. Our depreciation for the entire year is expected to be
within the range of $13.5 million to $14.5 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 March 31, 2005. Unused lines under this facility, net of outstanding
letters of credit, total $91.5 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 March 31, 2005, 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 authorized a three-for-two stock split effective December
17, 2004. All share and per share data have been restated.
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 414,000 shares of its common stock for $8.9 million during
the nine months ended March 31, 2005 compared to 431,000 shares for $6.3 million
during the nine months ended March 31, 2004. At March 31, 2005, the Company had
remaining authorization to repurchase approximately 1,001,000 additional shares.
The Company raised its quarterly dividend in January 2005 approximately 29% to
12 cents per share. Prior to that increase, the Company's dividend was 9.33
cents per share per quarter. The amount of the dividend is approved by the
Company's Board of Directors, which takes into consideration financial
performance, cash flow and payout guidelines consistent with other industrial
companies.
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other Matters
Effective January 2005, the Company acquired a Canadian distributor of
industrial products for a total purchase price of approximately $6.6 million.
The acquisition was paid for from our cash balances. The acquired operations are
reported in our service center based distribution segment from the acquisition
date (see notes to the condensed consolidated financial statements).
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Net sales increased $55.4 million or 14.2% compared to the prior year due to
increased sales in US service centers, Canadian operations and US fluid power
subsidiaries, as well as the sales from the Canadian distributor acquired in
January 2005. The number of selling days in the quarters ended March 31, 2005
and 2004 were 63.5 days and 64 days, respectively.
The US service center sales increased $41.2 million or 11.9% compared to the
prior year. This increase was driven by sales mix, volume and the impact of
supplier price increases passed on to customers. The Company estimates that 6
percentage points of the sales increase was a result of the supplier price
increases passed on to customers.
Sales in our Canadian operations improved approximately $11.4 million compared
to prior year. Sales mix, pricing and volume contributed $5.7 million which is
an increase of 20% over prior year. Currency translation effect from the
strengthening of the Canadian dollar increased sales $2.4 million, which is an
8% increase over prior year. Additionally, approximately $3.3 million of the
sales increase in the current year quarter was a result of the acquisition of a
Canadian distributor during the quarter.
Our U.S. fluid power subsidiaries had a sales increase of $2.4 million or 20.2%
over the prior year third quarter due to increases in pricing and volume.
Gross profit as a percentage of sales remained constant at 26.7% for the
quarters ended March 31, 2005 and 2004. Margins were positively impacted by
lower freight costs and to a lesser extent a physical inventory write-up
recorded in the current year. Negatively impacting margins were the lower
rebates from supplier purchasing programs. The Company has ongoing pricing
initiatives that are beginning to show positive results, as we have been more
successful in passing on supplier price increases. Expectations for the fourth
quarter are that supplier rebate dollars will remain flat compared to prior
year, but the impact on the gross profit percentage will be somewhat negative as
we expect sales to continue to grow.
Selling, distribution and administrative expenses increased 6.3% compared to the
prior year; however, as a percentage of sales, they decreased to 21.3% compared
to 22.9% in the prior year. This overall increase in SD&A was primarily due to
higher employee compensation and benefits related to performance driven
incentives and the Canadian acquisition.
13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Interest expense-net for the quarter decreased 13.1% as compared to the prior
year due to an increase in income earned on overnight investments in money
market funds and certain tax-free investments. Average interest rates paid on
borrowings were 6.5% for the quarter ended March 31, 2005 and 6.3% for the same
period last year.
Other income, net increased $2.2 million compared to the prior year. This
increase in income is due to a gain of $2.5 million from the life insurance
settlement and a $0.2 million gain on the sale of stock received as part of
a customer's bankruptcy settlement. These were partially offset by the
mark-to-market loss on a US/Canadian cross currency swap which was not
designated as a hedge.
Income tax expense as a percentage of income before taxes was 36.0% for the
quarter ended March 31, 2005 compared to 23.9% for the quarter ended March 31,
2004. We expect the effective tax rate to be approximately 36.5% for the entire
fiscal year. The 36.0% quarterly rate is lower than the expected annual rate due
in part to the non-taxable nature of the proceeds from the life insurance
settlement. During the quarter ended March 31, 2004, the Company recorded
unusual tax benefits primarily from a settlement with the Internal Revenue
Service related to audits of our 1997 and 1998 tax returns and the acceptance by
the IRS of tax refund claims for 1999, 2000 and 2001. These items added
approximately $1.6 million or $0.05 per share to net income for the March 31,
2004 quarter.
As a result of the above factors, net income increased by 54.0% compared to the
same quarter of last year and net income per share increased 47.2%.
NINE MONTHS ENDED MARCH 31, 2005 AND 2004
Net sales increased $151.8 million or 13.7% compared to the prior year due to
increased sales in US service centers, Canadian operations and US fluid power
subsidiaries, as well as the impact of four additional months of sales from a
prior year acquisition and the previously described January 2005 acquisition.
The number of selling days in the periods ended March 31, 2005 and 2004 were
188.5 days and 190 days, respectively.
The US service center sales increased $112.0 million or 11.5% compared to the
prior year. This increase was driven by sales mix, volume and the impact of
supplier price increases passed on to customers.
Sales in our Canadian operations improved approximately $27.4 million compared
to prior year. Sales mix, pricing and volume contributed $18.1 million which is
an increase of 20.9% over prior year. Currency translation effects from the
strengthening of the Canadian dollar increased sales $6.0 million or 6.9%
compared to the prior year. Additionally, approximately $3.3 million of the
sales increase in this period was a result of the acquisition of a Canadian
distributor.
Our U.S. fluid power subsidiaries had a sales increase of $7.0 million over the
same period in the prior year due to increases in pricing and volume.
14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales also increased $4.7 million related to four additional months of operating
results from our acquisition of Rybalsa in Mexico during the second quarter of
fiscal 2004.
Gross profit as a percentage of sales decreased slightly to 26.3% from 26.4% for
the same period last year. The decrease is primarily the result of difficulties
in passing along supplier price increases; our inability in certain instances to
immediately increase prices to customers due to contractual agreements and an
increase in sales of products for use in customers' large capital projects,
which sales traditionally are at lower margins. The Company has ongoing pricing
initiatives that are beginning to show positive results as we have been more
successful during the current quarter in passing on supplier price increases. We
have also experienced a positive impact on margins from lower freight costs. The
year over year impact from rebates from supplier purchasing programs on the
gross profit percentage has been slightly negative for the year and more so in
the March 2005 quarter. Our expectations for the fourth quarter are that rebate
dollars will remain flat compared to prior year, but the impact on the gross
profit percentage will be somewhat negative as we expect sales to continue to
grow.
Selling, distribution and administrative expenses increased 3.9% compared to the
prior year; however, as a percentage of sales they decreased to 21.4% compared
to 23.4% in the prior year. The overall increase in SD&A was primarily driven by
higher employee compensation and benefits related to performance driven
incentives.
Interest expense-net for the nine months ended March 31, 2005 decreased 6.6% as
compared to the prior year due to an increase in interest income earned on
overnight investments in money market funds and certain other tax-free
investments. Average interest rates paid on borrowings increased slightly for
the period ended March 31, 2005 due to an increase in foreign currency
translation rates.
Other income, net improved $2.4 million compared to the prior year due to
non-operating gains of $3.2 million primarily related to the proceeds received
under life insurance settlements. These gains were partially offset by a
mark-to-market loss on a US/Canadian dollar cross currency swap which was not
designated as a hedge.
Income tax expense as a percentage of income before taxes was 36.3% for the
period ended March 31, 2005 compared to 30.0% for the period ended March 31,
2004. This increase is primarily due to the March 31, 2004 period having unusual
tax benefits primarily from a settlement with the Internal Revenue Service
related to audits of our 1997 and 1998 tax returns and the acceptance by the IRS
of tax refund claims for 1999, 2000 and 2001. These items added approximately
$1.6 million or $0.05 per share to net income. The higher tax rate for the March
31, 2005 period is also due to higher effective foreign, state and local rates
partially offset by the non-taxable proceeds from life insurance settlements. We
expect the effective tax rate to be approximately 36.5% for the entire fiscal
year.
15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of the above factors, net income increased by 91.3% compared to the
same period last year and net income per share increased 84.3%.
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 due to reasons 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; product cost and price changes, and our ability to pass supplier price
increases on to customers; 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).
16
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 March
31, 2005. The Company has no interest rate swap agreements outstanding. All of
the Company's outstanding long-term debt is currently at fixed interest rates at
March 31, 2005 and scheduled for repayment in December 2007 and beyond.
The Company mitigates its foreign currency exposure from the Canadian dollar
through the use of cross currency swap agreements as well as foreign-currency
denominated debt. Hedging of the U.S. dollar denominated debt, used to fund a
substantial portion of the Company's net investment in its Canadian operations,
is accomplished through the use of cross currency swaps. Any gain or loss on the
hedging instrument offsets the gain or loss on the underlying debt. Translation
exposures with regard to our Mexican business are not hedged because the Mexican
activity is not material. For the nine months ended March 31, 2005, a uniform
10% strengthening of the U.S. dollar relative to foreign currencies that affect
the Company would have resulted in a $0.6 million decrease in net income. A
uniform 10% weakening of the U.S. dollar would have resulted in a $0.6 million
increase in net income.
17
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 March 31, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
We are currently conducting a detailed assessment of our internal controls as
required by Section 404 of the Sarbanes-Oxley Act of 2002. We have evaluated the
design of most of our internal controls over financial reporting and have
completed a significant portion of the testing thereof. The assessment to date
has not identified any material weaknesses that would require disclosure under
the act, but the ultimate management determination cannot be completed prior to
year-end.
18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company has been named a defendant in pending legal proceedings with
respect to various product liability, commercial, and other matters.
Although it is not possible to predict the outcome of these unresolved
actions or the range of possible loss, the Company does not believe, based
on circumstances currently known, that any liabilities that may result
from these proceedings are reasonably likely to have a material adverse
effect on the Company's consolidated financial position, results of
operations, or cash flows.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Repurchases in the quarter ended March 31, 2005 were as follows:
(c) Total Number (d) Maximum
of Shares Number of Shares
Purchased as Part that May Yet Be
(a) Total (b) Average of Publicly Purchased Under
Number of Price Paid per Announced Plans the Plans or
Period Shares Share or Programs Programs
- ------------------- --------- -------------- ----------------- ----------------
January 1, 2005 to
January 31, 2005 -0- -0- 1,001,363
February 1, 2005 to
February 28, 2005 -0- -0- 1,001,363
March 1, 2005 to
March 31, 2005 -0- -0- 1,001,363
--- --- ---------
Total -0- -0- 1,001,363
--- --- ---------
(1) On July 16, 2003, the Board of Directors authorized the purchase of
up to 1.5 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 purchased 57,951 shares in connection
with the exercise of stock options and other employee benefit
programs. These purchases are not counted within the aforementioned
Board authorization.
19
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).
20
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).
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.
21
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: May 3, 2005 By: /s/ David L. Pugh
----------------------------------
David L. Pugh
Chairman & Chief Executive Officer
Date: May 3, 2005 By: /s/ Mark O. Eisele
---------------------------------
Mark O. Eisele
Vice President-Chief Financial Officer
& Treasurer
22
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005
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).
15 Letter from independent accountants regarding unaudited Attached
interim financial information.
31 Rule 13a-14(a)/15d-14(a) certifications. Attached
32 Section 1350 certifications. Attached