<PAGE> 1
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999 .
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-2299
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APPLIED INDUSTRIAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
--------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Shares of common stock outstanding on April 30, 1999 21,204,704
---------------------------------------
(No par value)
<PAGE> 2
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
-------------------------------------
INDEX
<TABLE>
<CAPTION>
Page No.
Part I: FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Statements of Consolidated Income - 2
Three Months and Nine Months Ended
March 31, 1999 and 1998
Consolidated Balance Sheets - 3
March 31, 1999 and June 30, 1998
Statements of Consolidated Cash Flows - 4
Nine Months Ended March 31, 1999 and 1998
Statements of Consolidated Shareholders' Equity - 5
Nine Months Ended March 31, 1999 and
Year Ended June 30, 1998
Notes to Consolidated Financial Statements 6 - 8
Item 2: Management's Discussion and Analysis of 9 - 15
Financial Condition and Results of Operations
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1999 1998 1999 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 386,616 $ 393,871 $ 1,137,185 $ 1,107,220
----------- ----------- ----------- -----------
Cost and Expenses
Cost of sales 289,162 291,380 852,999 821,379
Selling, distribution and
administrative 84,615 85,088 256,148 244,365
----------- ----------- ----------- -----------
373,777 376,468 1,109,147 1,065,744
----------- ----------- ----------- -----------
Operating Income 12,839 17,403 28,038 41,476
----------- ----------- ----------- -----------
Interest
Interest expense 2,182 2,408 7,920 7,238
Interest income (143) (182) (474) (660)
----------- ----------- ----------- -----------
2,039 2,226 7,446 6,578
----------- ----------- ----------- -----------
Income Before Income Taxes 10,800 15,177 20,592 34,898
----------- ----------- ----------- -----------
Income Taxes
Federal 3,996 5,601 7,620 12,098
State and local 432 461 854 1,474
----------- ----------- ----------- -----------
4,428 6,062 8,474 13,572
----------- ----------- ----------- -----------
Net Income $ 6,372 $ 9,115 $ 12,118 $ 21,326
=========== =========== =========== ===========
Net Income per share - Basic $ 0.30 $ 0.42 $ 0.56 $ 1.00
=========== =========== =========== ===========
Net Income per share - Diluted $ 0.30 $ 0.41 $ 0.56 $ 0.98
=========== =========== =========== ===========
Cash dividends per common
share $ 0.12 $ 0.12 $ 0.36 $ 0.35
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 June 30
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and temporary investments $ 21,145 $ 9,344
Accounts receivable, less allowance
of $4,031 and $3,500 195,530 206,313
Inventories (at LIFO) 192,619 192,042
Other current assets 7,757 7,214
--------- ---------
Total current assets 417,051 414,913
--------- ---------
Property - at cost
Land 12,373 12,363
Buildings 69,496 69,103
Equipment 95,714 94,705
--------- ---------
177,583 176,171
Less accumulated depreciation 68,552 63,102
--------- ---------
Property - net 109,031 113,069
--------- ---------
Goodwill 62,917 53,243
Other assets 14,244 24,866
--------- ---------
TOTAL ASSETS $ 603,243 $ 606,091
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Notes payable $ 42,973
Current portion of long-term debt 19,429
Accounts payable $ 104,906 79,091
Compensation and related benefits 25,525 22,702
Other accrued liabilities 32,455 28,952
--------- ---------
Total current liabilities 162,886 193,147
Long-term debt 126,714 90,000
Other liabilities 24,339 23,442
--------- ---------
TOTAL LIABILITIES 313,939 306,589
--------- ---------
Shareholders' Equity
Preferred stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 24,095 shares issued 10,000 10,000
Additional paid-in capital 82,707 82,865
Income retained for use in the business 240,117 235,957
Less 2,890 and 1,993 treasury shares -
at cost (38,263) (24,391)
Less unearned restricted common
stock compensation (5,257) (4,929)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 289,304 299,502
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 603,243 $ 606,091
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31
---------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 12,118 $ 21,326
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 12,882 11,798
Amortization of goodwill and restricted common
stock compensation 3,828 3,345
Provision for losses on accounts receivable 1,804 1,465
Gain on sale of property (2) (574)
Treasury shares contributed to employee
benefit plans 2,725 3,261
Changes in current assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable 10,764 20
Inventories 2,437 (32,686)
Other current assets (444) 4,815
Accounts payable and accrued expenses 28,344 (1,067)
Other - net 266 650
- ------------------------------------------------------------------------------------------------------
Net Cash provided by Operating Activities 74,722 12,353
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Property purchases (9,652) (26,126)
Proceeds from property sales 3,088 6,536
Net cash paid for acquisition of businesses (12,533) (31,328)
Deposits and other 7,920 9,193
- ------------------------------------------------------------------------------------------------------
Net Cash used in Investing Activities (11,177) (41,725)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net repayments under line-of-credit agreements (42,973) (4,283)
Long-term debt borrowings 30,999 50,000
Long-term debt repayments (13,714) (6,361)
Exercise of stock options 752 938
Dividends paid (7,855) (7,628)
Purchase of treasury shares (18,953) (8,001)
- ------------------------------------------------------------------------------------------------------
Net Cash provided by (used in) Financing Activities (51,744) 24,665
- ------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and temporary
investments 11,801 (4,707)
Cash and temporary investments
at beginning of period 9,344 22,405
- ------------------------------------------------------------------------------------------------------
Cash and Temporary Investments
at End of Period $ 21,145 $ 17,698
======================================================================================================
Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes $ 6,771 $ 10,997
Interest $ 7,877 $ 7,171
Significant noncash investing activity:
Issuance of common stock for the acquisition of Invetech Company $ 63,374
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
APPLIED INDUSTIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------------
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Nine Months Ended March 31, 1999 (Unaudited)
and Year Ended June 30, 1998
(Thousands, except per share amounts )
<TABLE>
<CAPTION>
Income Unearned
Shares of Additional Retained Treasury Restricted Total
Common Stock Common Paid-in for Use in Shares Common Stock Shareholders'
Outstanding Stock Capital the Business - at Cost Compensation Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 18,621 $ 10,000 $ 10,311 $ 216,496 $ (22,983) $ (950) $ 212,874
Net income 30,125 30,125
Cash dividends - $.47 per share (10,277) (10,277)
Purchase of common stock
for treasury (291) (8,148) (8,148)
Issuance of common stock for the
acquisition of Invetech Company 3,165 63,374 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 152 2,430 1,777 4,207
Exercise of stock options 103 610 1,179 1,789
Deferred compensation plans 28 450 288 738
Restricted common stock awards 201 3,560 2,005 (5,565)
Acquisition of Associated Bearings 123 1,770 1,491 3,261
Amortization of restricted common
stock compensation 360 1,586 1,946
Other (387) (387)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 22,102 10,000 82,865 235,957 (24,391) (4,929) 299,502
Net income 12,118 12,118
Cash dividends - $.36 per share (7,855) (7,855)
Purchase of common stock
for treasury (1,284) (18,953) (18,953)
Treasury shares issued for:
Retirement Savings Plan contributions 181 373 2,352 2,725
Exercise of stock options 94 (497) 1,249 752
Deferred compensation plans 16 52 214 266
Restricted common stock awards 96 (86) 1,266 (1,180)
Amortization of restricted common
stock compensation 852 852
Other (103) (103)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 21,205 $ 10,000 $ 82,707 $ 240,117 $ (38,263) $ (5,257) $ 289,304
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of March 31, 1999 and June 30, 1998, and the results of
operations for the three months ended and nine months ended March 31,
1999 and 1998, and cash flows for the nine months ended March 31, 1999
and 1998.
The results of operations for the three and nine month periods ended
March 31, 1999 are not necessarily indicative of the results to be
expected for the fiscal year.
Cost of sales for interim financial statements are computed using
estimated gross profit percentages which are adjusted throughout the
year based upon available information. Adjustments to actual cost are
made based on the annual physical inventory and the effect of year-end
inventory quantities on LIFO costs.
2. NET INCOME PER SHARE
The following is a computation of the basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
March 31 March 31
1999 1998 1999 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Net Income
- ----------
Net income as reported in statements of
consolidated income $6,372 $9,115 $12,118 $21,326
===================================================
Average Shares Outstanding
- --------------------------
Weighted average common shares outstanding for basic
computation 21,319 21,776 21,530 21,343
Dilutive effect of:
Stock options 66 297 116 325
Performance Accelerated
Restricted Stock (PARS) 13 41 14 54
---------------------------------------------------
Adjusted average common shares outstanding for
diluted computation 21,398 22,114 21,660 21,722
===================================================
Net Income Per Share
- --------------------
Net income per common share - basic $0.30 $0.42 $0.56 $1.00
===================================================
Net income per common share - diluted $0.30 $0.41 $0.56 $0.98
===================================================
</TABLE>
<PAGE> 8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
3. DEBT
During the quarter ended December 31, 1998, the Company replaced
short-term lines of credit with a five year committed revolving credit
agreement with a group of banks. This agreement provides for unsecured
borrowings of up to $150 million at various interest rate options, none
of which is in excess of the banks' prime rate at interest
determination dates. Borrowings under this agreement totaled $20.0
million at March 31, 1999. Fees on this facility range from .12% to
.40% per year on the average amount of the total revolving credit
commitments during the year. This facility enables the Company to
refinance short-term debt on a long-term basis. Accordingly, the
short-term debt and the current portion of long-term borrowings
intended to be refinanced are classified as long-term debt. Unused
lines under this facility totaling $130.0 million are available to fund
future acquisitions or other capital and operating requirements.
During the quarter ended March 31, 1999, the Company entered into an
agreement with a commercial bank for a $15.0 million short-term
uncommitted line of credit. This agreement provides for payment of
interest at various interest rate options, none of which is in excess
of the banks' prime rate at interest determination rates. At March 31,
1999, borrowing under this line of credit totaled $11.0 million and is
classified as long-term debt in connection with the revolving credit
agreement. The remaining unused line available for borrowings at March
31, 1999 totaled $4.0 million.
4. BUSINESS COMBINATIONS
During the nine months ended March 31, 1999 the Company acquired five
distributors for a total purchase price of $14.8 million. Three of the
companies are distributors of bearings, mechanical and electrical drive
systems and industrial products. Two of the companies are distributors
of fluid power products. The acquisitions were accounted for as
purchases and their results of operations are included in the
accompanying consolidated financial statements from their respective
acquisition dates. Results of operations for these acquisitions are not
material for all periods presented. Goodwill recognized in connection
with these combinations is being amortized over periods of 15 to 20
years.
5. TREASURY SHARES
At March 31, 1999, 0.5 million shares of the Company's common stock
held as treasury shares are restricted as collateral under escrow
arrangements relating to certain change in control and director and
officer indemnification agreements.
<PAGE> 9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of an Enterprise and Related Information". This statement
establishes standards for the reporting of financial information about
reportable segments in annual and interim financial statements. SFAS
No. 131 requires disclosure of certain information about products and
services, geographic areas in which the Company operates and major
customers. This statement is effective for the June 30, 1999 financial
statements. The Company has not completed its evaluation of the impact
SFAS No. 131 will have on its financial statement disclosures.
Effective July 1, 1998, the Company adopted Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Adoption of this SOP did not have a
material impact on the consolidated financial statements.
During the quarter ended September 30, 1998, the Company adopted the
Emerging Issues Task Force (EITF) Issue No. 97-14, "Accounting for
Deferred Compensation Arrangements Where Amounts Earned are Held in a
Rabbi Trust and Invested". All prior periods have been restated to
conform to the new presentation.
<PAGE> 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,
1999 and June 30, 1998, and (2) results of operations and cash flows during the
periods included in the accompanying Statements of Consolidated Income and
Consolidated Cash Flows.
FINANCIAL CONDITION
Liquidity and Working Capital
- -----------------------------
Cash provided by operating activities was $74.7 million in the nine months ended
March 31, 1999. This compares to $12.4 million provided by operating activities
in the same period a year ago.
Cash flow from operations depends primarily upon generating operating income,
controlling the investment in inventories and receivables, and managing the
timing of payments to suppliers. The Company has continuing programs to monitor
and control these investments. During the nine month period ended March 31, 1999
inventories decreased approximately $2.4 million due to Company efforts to
reduce inventory levels, accounts receivable decreased $10.8 million due to a
slowing of sales and accounts payable and accrued expenses increased $28.3
million due to the timing of payments to suppliers.
Cash used in investing activities was $11.2 million in the nine months ended
March 31, 1999 as compared to $41.7 million for the period ended March 31, 1998.
The primary reason for the decrease was the net cash paid for Invetech Company
and other acquisitions in the prior year. Also contributing to the decrease were
lower property and equipment purchases, which declined by approximately $16.5
million from the prior year.
Cash used in financing activities totaled $51.7 million in the nine months ended
March 31, 1999 as compared to cash provided by financing activities of $24.7
million for the period ended March 31, 1998. The primary reason for the
difference is due to the additional cash provided from operations in fiscal
1999 which was used for the net repayments under the Company's line of credit
agreements of approximately $43.0 million, purchase of Company stock for
approximately $19.0 million and net repayments on long term debt borrowings of
$17.2 million. The amounts provided from financing activities in fiscal 1998
related primarily to borrowings made to fund acquisitions.
The Company built a new 160,000 square foot distribution center in the city of
Fontana, California, in the greater Los Angeles area. This build-to-suit
facility is leased by the Company under a 10 year lease which is accounted for
as an operating lease. The Company relocated its Corona Distribution Center into
the new facility in March 1999.
Working capital at March 31, 1999 was $254.2 million compared to $221.8 million
at June 30, 1998. This increase is primarily due to refinancing of short-term
debt and classification of other current obligations as long-term debt as these
borrowings are intended to be refinanced under the new revolving credit
facility.
<PAGE> 11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Capital Resources
- -----------------
Capital resources are obtained from income retained in the business,
indebtedness under the Company's debt agreements, and operating lease
arrangements. Average combined short-term and long-term borrowing was $143.5
million and $121.2 million for the nine months ended March 31, 1999 and 1998,
respectively. The weighted average interest rate on borrowings under revolving
credit facilities for the nine months ended March 31, 1999 decreased to 5.7%
from an average rate of 6.0% for the nine months ended March 31, 1998. The
weighted average interest on borrowing under other long-term debt agreements for
the nine months ended March 31, 1999 decreased to 7.3% from an average rate of
7.8% for the nine months ended March 31, 1998.
In November 1998, the Company entered into a committed revolving credit
agreement with a five year term with a group of lending institutions. This
agreement provides for unsecured borrowings of up to $150.0 million. This
facility was used to pay down the short term line of credit borrowings. The
Company had $20.0 million of borrowings outstanding under this facility at March
31, 1999. Unused lines under this facility totaling $130.0 million are available
to fund future acquisitions or other capital and operating requirements. In
January 1999, the Company entered into an agreement with a commercial bank for a
$15.0 million short-term uncommitted line of credit. The Company had $11.0
million of borrowings outstanding under this facility at March 31, 1999. Unused
lines under this facility totaling $4.0 million are available to fund future
acquisitions or other capital and operating requirements.
The Board of Directors has authorized an ongoing program to purchase shares of
the Company's common stock to fund employee benefit programs, stock option and
award programs, and future acquisitions. These purchases are made in open market
and negotiated transactions, from time to time, depending upon market
conditions. The Company acquired 1,284,000 shares of its common stock for $19.0
million during the nine months ended March 31, 1999. Effective April 15, 1999
the Company's Board of Directors authorized the Company to acquire up to an
additional one million shares of Company stock.
Management expects that capital resources provided from operations, available
lines of credit, unused amounts under the committed revolving credit facility
and operating leases will be sufficient to finance normal working capital needs,
business acquisitions, enhancement of facilities and equipment, and the purchase
of additional Company common stock. Management also believes that additional
long-term debt and line of credit financing could be obtained if desired.
Year 2000 Readiness Disclosure
- ------------------------------
The Company's progress in completing its Year 2000 activities is overseen by an
executive task force made up of representatives from all key management areas.
The task force in turn reports to the audit committee of the Board of Directors.
Additionally, the Company has retained an outside Year 2000 consultant to
provide an independent assessment of the Company's Year 2000 compliance efforts.
<PAGE> 12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company's plan for assessment, remediation, replacement and testing of those
of its internal computer systems affected by the Year 2000 issue is proceeding
on schedule. For business reasons, the Company's financial information systems
have been replaced with a new Year 2000-compliant system. The new system is now
fully operational. In addition, all of the Company's critical computer systems,
including the OMNEX(R) inventory and sales information system, customer billing
system, and corporate information system, have been remediated and tested, and
are now Year 2000-compliant.
The Year 2000 issue also affects certain of the Company's non-critical computer
systems and equipment containing embedded technology. The Company has largely
completed its assessment of these non-critical systems, and remediation and
testing are scheduled to be completed by various dates before the end of
calendar year 1999.
Nearly all of the products sold by the Company do not contain date logic. The
Company is attempting, through contacts with its product suppliers, to identify
any products sold by the Company that are susceptible to the Year 2000 issue.
The Company has sought written assurances from key product and service suppliers
as to their Year 2000 compliance plans. Follow-up interviews are being conducted
with those suppliers with whom the Company has the most significant
relationships. The Company will consider appropriate measures, including
substitution of suppliers, in the event that a supplier provides an inadequate
response.
If the Company's suppliers or customers fail to achieve Year 2000 compliance in
a timely manner, then the Year 2000 issue could have a material adverse effect
on the Company. For example, suppliers' failures to deliver products to the
Company due to the Year 2000 issue could render the Company unable to fulfill
commitments to customers unless those products or adequate substitutes can be
secured elsewhere. Customers affected by the Year 2000 issue could reduce their
volume of purchases from the Company or slow their payments for products already
delivered.
To reduce the risk of business interruption due to the Year 2000 issue, the
Company is preparing contingency plans to address situations that may result
from the failure of the Company or certain third parties (including utilities)
to complete efforts necessary to achieve Year 2000 compliance on a timely basis.
These plans are scheduled to be completed by various dates before the end of
calendar year 1999.
Despite its efforts, the Company will not be able to analyze fully the scope or
nature of the risk represented by the failure of third parties, including
suppliers and customers, to attain Year 2000 compliance. The Company expects,
however, that the actions described in this section will significantly reduce
the likelihood that the Year 2000 issue would have a material adverse effect on
the Company's business, financial condition, results of operations, or cash
flows.
<PAGE> 13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Based on currently available information, the total cost of the Company's Year
2000 activities is expected to be under $5 million, with approximately
two-thirds of the total cost already incurred through March 31, 1999. The total
amount spent to date includes a capital expenditure of approximately $1.4
million for the new Year 2000-compliant financial information system, which
would have been acquired in the ordinary course but whose acquisition was
accelerated to ensure compliance by the Year 2000. The effort to bring the
Company's internal computer systems into compliance has largely been
accomplished by redirecting internal programming resources, with costs expensed
as incurred. These costs, too, are included in the total cost estimate.
Estimates of Year 2000-related costs are based on numerous assumptions and there
is no certainty that actual costs will not be significantly different from the
estimates.
To date, the costs of addressing the Year 2000 issue are not considered material
to the Company's financial condition, results of operations or cash flows, and
future costs are not expected to be material in such respects. The Company
further anticipates that its current resources and sources of liquidity will be
adequate to address the capital needs arising from its specific Year 2000
issues.
<PAGE> 14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
A summary of the period-to-period changes in principal items included in the
statements of consolidated income follows:
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended Nine Months Ended
March 31 March 31
1999 and 1998 1999 and 1998
------------- -------------
Amount Change Amount Change
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales ($7,255) (1.8%) $ 29,965 2.7%
Cost of sales (2,218) (0.8%) 31,620 3.8%
Selling,distribution and
administrative expenses (473) (0.6%) 11,783 4.8%
Operating income (4,564) (26.2%) (13,438) (32.4%)
Interest expense - net (187) (8.4%) 868 13.2%
Income before income taxes (4,377) (28.8%) (14,306) (41.0%)
Income taxes (1,634) (27.0%) (5,098) (37.6%)
Net income (2,743) (30.1%) (9,208) (43.2%)
Net income per share - diluted (.11) (26.8%) (.42) (42.9%)
</TABLE>
<PAGE> 15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three Months Ended March 31, 1999 and 1998
- ------------------------------------------
The decrease in net sales from the prior year was due to an overall slowing in
the industrial markets served by the Company. Gross profit as a percentage of
sales decreased to 25.2% from 26.0%. This decrease primarily is due to lower
discounts and allowances from suppliers and favorable cost adjustments in the
prior year.
Selling, distribution and administrative expenses as a percent of sales,
increased to 21.9% from 21.6%. This was primarily due to an increase in salary
and benefits expense associated with companies acquired since March 1998.
Interest expense-net for the quarter decreased by 8.4% as compared to the prior
year primarily as a result of lower interest rates and a decrease in average
borrowings for the quarter.
Income tax expense as a percentage of income before taxes was 41.0% in the
quarter ended March 31, 1999 and 39.9% in the quarter ended March 31, 1998. The
increase is the higher effect of nondeductible expenses.
As a result of the above factors, net income decreased by 30.1% compared to the
same quarter of last year.
Nine Months Ended March 31, 1999 and 1998
- -----------------------------------------
The increase in net sales from the prior year related primarily to the
acquisition of Invetech effective August 1, 1997 and other companies during
fiscal 1998 and 1999. Gross profit as a percentage of sales decreased to 25.0%
from 25.8%. This decrease primarily is due to lower discounts and allowances
from suppliers and favorable cost adjustments in the prior year.
Selling, distribution and administrative expenses as a percent of sales,
increased to 22.5% from 22.0%. This was primarily due to the acquisition of
Invetech and other companies during fiscal 1998. Also contributing to the
increase were higher goodwill amortization, salary and benefits and a lower
amount of selling, distribution & administrative expenditures capitalized into
inventory. Additional increases during the period related to a pretax
restructuring and other special charges of $5.4 million for costs of branch
consolidation, downsizing and workforce reductions. This charge decreased net
income by $3.2 million, or $.14 per share. The prior year results also included
a $4.0 million pretax restructuring charge that decreased net income by $2.4
million or $.11 per share associated with the acquisition of Invetech.
Interest expense-net for the year increased by 13.2% as compared to the prior
year primarily as a result of an increase in the year-to-date average
borrowings.
Income tax expense as a percentage of income before taxes was 41.2% in the nine
months ended March 31, 1999 and 38.9% in the nine months ended March 31, 1998.
The increase is primarily
<PAGE> 16
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
due to an adjustment of tax liability amounts related to the resolution of
certain tax contingencies in the prior year and the effect of higher
nondeductible goodwill.
As a result of the above factors, net income decreased by 43.2% compared to the
same quarter of last year.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
- -------------------------------------------------------------------
Management's Discussion and Analysis contains statements that are
forward-looking, as that term is defined by the Private Securities Litigation
Reform Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. All forward-looking
statements are based on current expectations regarding important risk factors.
Accordingly, actual results may differ materially from those expressed in the
forward-looking statements, and the making of such statements should not be
regarded as a representation by the Company or any other person that the results
expressed therein will be achieved.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industry sectors; changes in customer
procurement policies and practices; changes in product manufacturer sales
policies and practices; the availability of product; changes in operating
expenses; the effect of price increases; the variability and timing of business
opportunities including acquisitions, customer agreements, supplier
authorizations and other business strategies; the Company's ability to realize
the anticipated benefits of acquisitions and other business opportunities; the
Company's ability to complete, in a timely manner and within cost estimates, its
Year 2000 project; the ability of suppliers and customers to achieve year 2000
compliance in a timely manner; changes in accounting policies and practices;
the effect of organizational changes within the Company; adverse results in
significant litigation matters; adverse state and federal regulation and
legislation; and the occurrence of extraordinary events (including prolonged
labor disputes, natural events and acts of God, fires, floods and accidents).
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
------------------
Applied Industrial Technologies, Inc. and/or one of its subsidiaries is
a defendant in several product and employment-related lawsuits. Based
on circumstances presently known, the Company believes that these cases
are not material to its business or financial condition.
ITEM 5. Other Information.
------------------
Thomas A. Commes, the retired President and Chief Operating Officer of
The Sherwin-Williams Company, was elected to the Company's Board of
Directors on April 15, 1999. He is a member of Class I of the Board,
with a term expiring in 2000.
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. (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.
adopted September 6, 1988 (filed as
Exhibit 3(b) to the Company's
Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
4(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).
16
<PAGE> 18
4(b) $80,000,000 Maximum Aggregate
Principal Amount Note Purchase and
Private Shelf Facility dated October
31, 1992 between the Company and The
Prudential Insurance Company of
America (filed as Exhibit 4(b) to
the Company's Registration Statement
on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and
incorporated here by reference).
4(c) Amendment to $80,000,000 Maximum
Aggregate Principal Amount Note
Purchase and Private Shelf Facility
dated October 31, 1992 between the
Company and The Prudential Insurance
Company of America (filed as Exhibit
4(g) to the Company's Form 10-Q for
the quarter ended March 31, 1996,
SEC File No. 1-2299, and
incorporated here by reference).
4(d) $50,000,000 Private Shelf Agreement
dated as of November 27, 1996, as
amended on January 30, 1998, between
the Company and The Prudential
Insurance Company of America (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(e) $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(f) Rights Agreement, dated as of
February 2, 1998, between the
Company and 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).
27 Financial Data Schedule.
(b) The Company did not file, nor was it required to file, a Report on Form
8-K with the Securities and Exchange Commission during the quarter
ended March 31, 1999.
17
<PAGE> 19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date: May 14, 1999 By: /s/ John R. Whitten
-------------------------
John R. Whitten
Vice President-Chief Financial Officer &
Treasurer
Date: May 14, 1999 By: /s/ Mark O. Eisele
------------------------
Mark O. Eisele
Vice President-Controller
18
<PAGE> 20
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
EXHIBIT NO. DESCRIPTION PAGE
3(a) Amended and Restated Articles of Incorporation of
Applied Industrial Technologies, Inc. (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., adopted September 6, 1988 (filed
as Exhibit 3(b) to the Company's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by
reference).
4(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) $80,000,000 Maximum Aggregate Principal Amount Note
Purchase and Private Shelf Facility dated October
31, 1992 between the Company and The Prudential
Insurance Company of America (filed as Exhibit 4(b)
to the Company's Registration Statement on Form S-4
filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(c) Amendment to $80,000,000 Maximum Aggregate Principal
Amount Note Purchase and Private Shelf Facility
dated October 31, 1992 between the Company and The
Prudential Insurance Company of America (filed as
Exhibit 4(g) to the Company's Form 10-Q for the
quarter ended March 31, 1996,
<PAGE> 21
SEC File No. 1-2299, and incorporated here by reference).
4(d) $50,000,000 Private Shelf Agreement dated as of
November 27, 1996, as amended on January 30, 1998,
between the Company and The Prudential Insurance
Company of America (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(e) $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(f) Rights Agreement, dated as of February 2, 1998,
between the Company and 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).
27 Financial Data Schedule. Attached
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<FISCAL-YEAR-END> JUN-30-1999
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<PERIOD-END> MAR-31-1999
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