<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 DECEMBER 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
-----------
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
--------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Shares of common stock outstanding on January 31, 2000 20,770,912
-----------------------------------------
(No par value)
<PAGE> 2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Page No.
Part I: FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Statements of Consolidated Income - 2
Three Months and Six Months Ended
December 31, 1999 and 1998
Consolidated Balance Sheets - 3
December 31, 1999 and June 30, 1999
Statements of Consolidated Cash Flows - 4
Six Months Ended December 31, 1999 and 1998
Statements of Consolidated Shareholders' Equity - 5
Six Months Ended December 31, 1999 and
Year Ended June 30, 1999
Notes to Consolidated Financial Statements 6 - 8
Item 2: Management's Discussion and Analysis of 9 - 13
Financial Condition and Results of Operations
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 4: Submission of Matters to a Vote of Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31
1999 1998
--------------------------------------------------------
<S> <C> <C>
Net Sales $ 372,626 $ 371,395
------------------------ ------------------------
Cost and Expenses
Cost of sales 279,939 282,652
Selling, distribution and
administrative 80,642 78,316
------------------------ ------------------------
360,581 360,968
------------------------ ------------------------
Operating Income 12,045 10,427
------------------------ ------------------------
Interest
Interest expense 1,890 3,080
Interest income (324) (145)
------------------------ ------------------------
1,566 2,935
------------------------ ------------------------
Income Before Income Taxes 10,479 7,492
------------------------ ------------------------
Income Taxes
Federal 3,922 2,770
State and local 324 334
------------------------ ------------------------
4,246 3,104
------------------------ ------------------------
Net Income $ 6,233 $ 4,388
======================== ========================
Net Income per share - Basic $ 0.30 $ 0.20
======================== ========================
Net Income per share - Diluted $ 0.30 $ 0.20
======================== ========================
Cash dividends per common
share $ 0.12 $ 0.12
======================== ========================
</TABLE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
December 31
1999 1998
--------------------------------------------------------
<S> <C> <C>
Net Sales $ 753,297 $ 750,569
------------------------ ------------------------
Cost and Expenses
Cost of sales 566,845 571,190
Selling, distribution and
administrative 162,322 164,180
------------------------ ------------------------
729,167 735,370
------------------------ ------------------------
Operating Income 24,130 15,199
------------------------ ------------------------
Interest
Interest expense 4,068 5,738
Interest income (267) (331)
------------------------ ------------------------
3,801 5,407
------------------------ ------------------------
Income Before Income Taxes 20,329 9,792
------------------------ ------------------------
Income Taxes
Federal 7,522 3,624
State and local 712 422
------------------------ ------------------------
8,234 4,046
------------------------ ------------------------
Net Income $ 12,095 $ 5,746
======================== ========================
Net Income per share - Basic $ 0.58 $ 0.27
======================== ========================
Net Income per share - Diluted $ 0.58 $ 0.26
======================== ========================
Cash dividends per common
share $ 0.24 $ 0.24
======================== ========================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
December 31 June 30
1999 1999
-------------------- --------------------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash and temporary investments $ 12,972 $ 19,186
Accounts receivable, less allowance
of $3,883 and $3,515 186,416 195,736
Inventories (at LIFO) 168,628 169,689
Other current assets 6,307 6,235
-------------------- --------------------
Total current assets 374,323 390,846
-------------------- --------------------
Property - at cost
Land 12,224 12,316
Buildings 66,741 69,329
Equipment 96,340 96,011
-------------------- --------------------
175,305 177,656
Less accumulated depreciation 75,151 70,417
-------------------- --------------------
Property - net 100,154 107,239
-------------------- --------------------
Goodwill 60,281 62,351
Other assets 17,322 13,913
-------------------- --------------------
TOTAL ASSETS $ 552,080 $ 574,349
==================== ====================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 79,284 $ 78,836
Compensation and related benefits 25,225 19,692
Other accrued liabilities 30,758 33,588
-------------------- --------------------
Total current liabilities 135,267 132,116
Long-term debt 97,586 126,000
Other liabilities 22,915 22,647
-------------------- --------------------
TOTAL LIABILITIES 255,768 280,763
-------------------- --------------------
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 82,963 82,599
Income retained for use in the business 253,086 246,026
Less 3,298 and 2,994 treasury shares -
at cost (45,434) (40,140)
Less unearned restricted common
stock compensation (4,303) (4,899)
-------------------- --------------------
TOTAL SHAREHOLDERS' EQUITY 296,312 293,586
-------------------- --------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 552,080 $ 574,349
==================== ====================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended
December 31
--------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 12,095 $ 5,746
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 9,017 8,421
Amortization of goodwill and restricted common
stock compensation 2,666 2,432
Provision for losses on accounts receivable 1,194 1,008
Gain on sale of property (497) (126)
Treasury shares contributed to employee
benefit plans 2,109 2,065
Changes in current assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable 8,126 19,587
Inventories 1,061 5,118
Other current assets (72) (1,654)
Accounts payable and accrued expenses 1,565 989
Other - net 189 193
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash provided by Operating Activities 37,453 43,779
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Property purchases (4,351) (7,603)
Proceeds from property sales 2,915 2,405
Net cash paid for acquisition of businesses (686) (10,460)
Deposits and other (849) 7,363
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash used in Investing Activities (2,971) (8,295)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net repayments under line-of-credit agreements (42,973)
Borrowings (repayments) under revolving credit agreements - net (22,700) 42,000
Long-term debt repayments (5,714) (13,714)
Dividends paid (5,035) (5,258)
Purchase of treasury shares (7,331) (11,565)
Exercise of stock options 84 490
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash used in Financing Activities (40,696) (31,020)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease ) in cash and temporary
investments (6,214) 4,464
Cash and temporary investments
at beginning of period 19,186 9,344
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Temporary Investments
at End of Period $ 12,972 $ 13,808
===============================================================================================================================
Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes $ 6,985 $ 1,134
Interest $ 3,799 $ 5,333
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1999 (Unaudited)
and Year Ended June 30, 1999
(Thousands, except per share amounts )
Shares of Additional
Common Stock Common Paid-in
Outstanding Stock Capital
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at July 1, 1998 22,102 $ 10,000 $ 82,713
Net income
Cash dividends - $.48 per share
Purchase of common stock
for treasury (1,450)
Treasury shares issued for:
Retirement Savings Plan contributions 220 337
Exercise of stock options 109 (281)
Deferred compensation plans 24 55
Restricted common stock awards 96 (86)
Amortization of restricted common
stock compensation 28
Other (167)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 21,101 10,000 82,599
Net income
Cash dividends - $.24 per share
Purchase of common stock
for treasury (454)
Treasury shares issued for:
Retirement Savings Plan contributions 132 309
Exercise of stock options 6
Deferred compensation plans 12 36
Amortization of restricted common
stock compensation
Other 19
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 20,797 $ 10,000 $ 82,963
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1999 (Unaudited)
and Year Ended June 30, 1999
(Thousands, except per share amounts )
Income Unearned
Retained Treasury Restricted Total
for Use in Shares Common Stock Shareholders'
the Business - at Cost Compensation Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at July 1, 1998 $ 236,109 $ (24,391) $ (4,929) $ 299,502
Net income 19,933 19,933
Cash dividends - $.48 per share (10,397) (10,397)
Purchase of common stock
for treasury (21,746) (21,746)
Treasury shares issued for:
Retirement Savings Plan contributions 2,980 3,317
Exercise of stock options 1,442 1,161
Deferred compensation plans 309 364
Restricted common stock awards 1,266 (1,180)
Amortization of restricted common
stock compensation 1,210 1,238
Other 381 214
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 246,026 (40,140) (4,899) 293,586
Net income 12,095 12,095
Cash dividends - $.24 per share (5,035) (5,035)
Purchase of common stock
for treasury (7,331) (7,331)
Treasury shares issued for:
Retirement Savings Plan contributions 1,800 2,109
Exercise of stock options 84 84
Deferred compensation plans 153 189
Amortization of restricted common
stock compensation 596 596
Other 19
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 253,086 $ (45,434) $ (4,303) $ 296,312
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (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 December 31, 1999 and June 30, 1999, and the results of
operations for the three months and six months ended December 31, 1999
and 1998 and cash flows for the six months ended December 31, 1999 and
1998.
The results of operations for the three and six month periods ended
December 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.
Certain reclassifications have been made to the prior year consolidated
financial statements in order to be consistent with the presentation
for the current year.
2. NET INCOME PER SHARE
The following is a computation of the basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1999 1998 1999 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME
Net income as reported in statements of
consolidated income $6,233 $4,388 $12,095 $5,746
=================================================================
AVERAGE SHARES OUTSTANDING
Weighted average common shares outstanding for basic
computation 20,659 21,436 20,729 21,634
Dilutive effect of:
Stock options 151 93 140 112
Performance Accelerated
Restricted Stock (PARS) 74 8 72 9
-----------------------------------------------------------------
Adjusted average common shares outstanding for
diluted computation 20,884 21,537 20,941 21,755
=================================================================
NET INCOME PER SHARE
Net income per common share - basic $0.30 $0.20 $0.58 $0.27
=================================================================
Net income per common share - diluted $0.30 $0.20 $0.58 $0.26
=================================================================
</TABLE>
6
<PAGE> 8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
3. SEGMENT INFORMATION
The Company has identified one reportable segment: Service Center
Based Distribution. The Service Center Based Distribution segment
provides customers with solutions to their immediate maintenance
repairs and original equipment manufacturing needs through the
distribution of bearings, power transmission products and systems,
industrial rubber products, linear motion products, fluid power
components, general maintenance products and related specialty items.
The Company also offers various levels of technical application
support for these products and provides creative solutions to help
customers minimize downtime and reduce overall procurement costs. The
"Other" column consists of the aggregation of all other non-service
center based distribution operations that sell directly to customers,
including fluid power, electrical shop and fabricated rubber
businesses and various electronic commerce businesses.
The segments were established in fiscal 1999 primarily due to
acquisitions outside our core business segment and the related growth
in these areas. The accounting policies of the segments are the same
as those described in Note 1. Segment operating profit has decreased
primarily due to certain logistics costs being allocated to the
service center based distribution segment in the current year.
Previously, they were recorded in corporate/unallocated expenses.
Intersegment sales are not significant. All current segment operations
are in the United States and Puerto Rico. The segment operations in
Puerto Rico are not significant.
SEGMENT FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31
-------------------------------------------------------------------------------------------
Total Service Center Based Distribution Other
------------------------- ------------------------ -----------------------
1999 1998 1999 1998 1999 1998
------------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
Total net sales $372,626 $371,395 $356,618 $356,989 $16,008 $14,406
------------------------- ------------------------ -----------------------
Segment operating profit $13,771 $18,199 $13,020 $17,589 $751 $610
======================== =======================
Goodwill amortization 1,048 961
Corporate/unallocated expense, net 678 6,811
------------------------
Total operating profit 12,045 10,427
Interest expense, net 1,566 2,935
------------------------
Income before taxes $10,479 $7,492
========================
Depreciation $4,455 $4,454 $4,355 $4,329 $100 $125
======================== ======================== =======================
Capital Expenditures $1,550 $3,636 $1,459 $3,298 $91 $338
======================== ======================== =======================
Sales By Product Category: Three Months Ended
December 31
------------------------
1999 1998
------------------------
Industrial Products $261,249 $261,223
Engineered Systems Products 55,204 56,727
Fluid Power Products 39,273 35,383
Fabricated Rubber Products 16,900 18,062
------------------------
$372,626 $371,395
========================
</TABLE>
7
<PAGE> 9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
SEGMENT FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
-------------------------------------------------------------------------------------------
Total Service Center Based Other
Distribution
------------------------- -------------------------------- -----------------------
1999 1998 1999 1998 1999 1998
------------- ----------- ------------ ------------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total net sales $753,297 $750,569 $722,618 $722,112 $30,679 $28,457
------------- ----------- ------------ ------------ ----------- -----------
Segment operating profit $31,137 $34,850 $29,822 $33,768 $1,315 $1,082
============ ============ =========== ===========
Goodwill amortization 2,070 1,916
Corporate/unallocated expense, net 4,937 17,735
------------- -----------
Total operating profit 24,130 15,199
Interest expense, net 3,801 5,407
------------- -----------
Income before taxes $20,329 $9,792
============= ===========
Assets used in the business $552,080 $585,379 $513,340 $551,556 $38,740 $33,823
============= =========== ============ ============ =========== ===========
Depreciation $9,017 $8,421 $8,762 $8,182 $255 $239
============= =========== ============ ============ =========== ===========
Capital Expenditures $4,351 $7,603 $4,230 $7,186 $121 $417
============= =========== ============ ============ =========== ===========
Sales By Product Category: Six Months Ended
December 31
---------------------------
1999 1998
------------- -------------
Industrial Products $529,195 $529,279
Engineered Systems Products 112,334 114,030
Fluid Power Products 77,124 71,026
Fabricated Rubber Products 34,644 36,234
------------- -------------
$753,297 $750,569
============= =============
</TABLE>
4. BUSINESS COMBINATIONS
During the quarter ended December 31, 1999, the Company acquired
certain assets of a distributor of bearings and power transmission
components for a total purchase price of $2,600. The acquisition was
accounted for as a purchase and the results of the business' operations
are included in the accompanying consolidated financial statements from
its acquisition date. Results of operations for this acquisition are
not material for all periods presented. Goodwill, base on preliminary
allocations of fair values to the assets and liabilities acquired, of
$1,009 recognized in connection with this combination is being
amortized over 15 years.
8
<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 December
31, 1999 and June 30, 1999, 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 $37.5 million in the six months ended
December 31, 1999. This compares to $43.8 million provided by operating
activities in the same period a year ago. The decrease in cash provided by
operating activities was due to smaller decreases in accounts receivable and
inventory, partially offset by the increase in net income.
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 six month period ended December 31,
1999, inventories decreased approximately $1.1 million due to Company efforts to
reduce inventory levels, and accounts receivable decreased $8.1 million due to
improved collection experience.
Net cash used in investing activities was $3.0 million in the six months ended
December 31, 1999 primarily from property purchases net of disposals.
Net cash used in financing activities totaled $40.7 million in the six months
ended December 31, 1999 as compared to $31.0 million for the period ended
December 31, 1998. Cash provided from operations was primarily used for
repayments under the Company's debt agreements of $28.4 million.
Working capital at December 31, 1999 was $239.1 million compared to $258.7
million at June 30, 1999. This decrease is primarily due to Company efforts to
control investments in inventory and receivables.
CAPITAL RESOURCES
Capital resources are obtained from income retained in the business, borrowings
under the Company's credit facilities, and operating lease arrangements. Average
combined borrowings were $97.7 million and $150.4 million for the six months
ended December 31, 1999 and 1998, respectively. The weighted average interest
rate on borrowings under revolving credit facilities for the six months ended
December 31, 1999 decreased to 5.8% from an average rate of 5.9% for the six
months ended December 31, 1998. The weighted average interest rate on borrowing
under other long-term debt agreements for the six months ended December 31, 1999
and 1998 was 7.2%.
9
<PAGE> 11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company has a committed revolving credit agreement expiring November, 2003
with a group of lending institutions. This agreement provides for unsecured
borrowings of up to $150.0 million. The Company had $13.3 million of borrowings
outstanding under this facility at December 31, 1999. Unused lines under this
facility totaling $132.2 million are available to fund future acquisitions or
other capital and operating requirements. The Company also has a $15.0 million
short-term uncommitted line of credit with a commercial bank. The Company had no
borrowings outstanding under this facility at December 31, 1999. Unused lines
under this facility 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 454,000 shares of its common stock for $7.3
million during the six months ended December 31, 1999. Effective January 20,
2000, the Company's Board of Directors authorized the Company to acquire up to
an additional 1.0 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 Year 2000 readiness efforts, detailed in Company's Form 10-Q for
the quarter ended September 30, 1999, were completed and no business
interruption or other problem is believed to have occurred as a result of the
Year 2000 issue. Based on currently available information, the final cost of the
Company's Year 2000 activities is estimated to be under $4.5 million. The total
amount includes capital expenditures of approximately $1.6 million for the
Company's 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 end of calendar 1999.
10
<PAGE> 12
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 Six Months Ended
December 31 December 31
1999 and 1998 1999 and 1998
AMOUNT CHANGE AMOUNT CHANGE
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $1,231 0.3% $2,728 0.4%
Cost of sales (2,713) (1.0)% (4,345) (0.8)%
Selling, distribution and
administrative expenses 2,326 3.0% (1,858) (1.1)%
Operating income 1,618 15.5% 8,931 58.8%
Interest expense - net (1,369) (46.6)% (1,606) (29.7)%
Income before income taxes 2,987 39.9% 10,537 107.6%
Income taxes 1,142 36.8% 4,188 103.5%
Net income 1,845 42.0% 6,349 110.5%
Net income per share - diluted .10 50.0% .32 123.1%
</TABLE>
11
<PAGE> 13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Three Months Ended December 31, 1999 and 1998
Net sales increased slightly from the prior year primarily due to acquisitions
during fiscal 1999. Gross profit as a percentage of sales increased to 24.9%
from 23.9%. This increase primarily is due to a change in product mix and higher
discounts and allowances from suppliers.
Selling, distribution and administrative expenses as a percent of sales,
increased to 21.6% from 21.1%. The change primarily relates to an increase in
performance-based incentives.
Interest expense-net for the quarter decreased by 46.6% as compared to the prior
year primarily as a result of a decrease in average borrowings.
Income tax expense as a percentage of income before taxes was 40.5% for the
quarter ended December 31, 1999 and 41.4% for the quarter ended December 31,
1998. This decrease is due to lower effective state and local tax rates.
As a result of the above factors, net income increased by 42.0% compared to the
same quarter last year. As a result of the impact of continued stock
repurchases, net income per share increased $.10, or 50%.
Six Months Ended December 31, 1999 and 1998
Net sales increased slightly from the prior year primarily due to acquisitions
during fiscal 1999. Gross profit as a percentage of sales increased to 24.8%
from 23.9%. This increase primarily is due to a change in product mix and higher
discounts and allowances from suppliers.
Selling, distribution and administrative expenses as a percent of sales,
decreased to 21.5% from 21.9%. This change primarily relates to pretax
restructuring and other special charges being recorded in the six months ended
December 31, 1998 of $5.4 million for costs of consolidation and workforce
reductions. This charge decreased net income by $3.2 million, or $.14 per share
for the six months ended December 31, 1998. Partially offsetting this decrease
was an increase in performance-based incentives during the current period.
Interest expense-net for the period decreased by 29.7% as compared to the prior
year primarily as a result of a decrease in average borrowings.
Income tax expense as a percentage of income before taxes was 40.5% for the six
months ended December 31, 1999 and 41.3% for the six months ended December 31,
1998. This decrease is due to lower effective state and local tax rates.
As a result of the above factors, net income increased by 110.5% compared to the
same period of last year. As a result of the impact of continued stock
repurchases, net income per share increased $.32, or 123.1%.
12
<PAGE> 14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OTHER MATTERS
On January 6, 2000, the Company signed a letter of intent to acquire certain
distribution businesses of Dynavest Corporation (Dynavest) located in Canada
which would give the Company its first physical presence outside of the United
States. The Company plans on utilizing its currently existing revolving line of
credit to finance this purchase.
Dynavest has operations in five Canadian provinces. The Dynavest companies are
distributors of bearing, power transmission systems and fluid power systems.
Annual sales are approximately $72 million U.S. dollars. The transaction is
expected to be completed by June 30, 2000.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
Management's Discussion and Analysis contains statements that are
forward-looking, based on management's current expectations about the future.
The words "expect", "believe", "plan", and similar expressions identify
forward-looking statements. The Company intends that the forward-looking
statements be subject to the safe harbors established in the Private Securities
Litigation Reform Act of 1995 or by the Securities and Exchange Commission in
its rules, regulations and releases. 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; changes in customer
procurement policies and practices; changes in product manufacturer sales
policies and practices; the availability of product and labor; changes in
operating expenses; the effect of price increases or decreases; the variability
and timing of business opportunities including acquisitions, alliances, customer
agreements and supplier authorizations; the Company's ability to realize the
anticipated benefits of acquisitions and other business strategies, including
electronic commerce initiatives; the incurrence of additional debt and
contingent liabilities in connection with acquisitions; changes in accounting
policies and practices; the effect of organizational changes within the Company;
the emergence of new competitors, including firms with greater financial
resources than the Company; 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).
13
<PAGE> 15
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Applied Industrial Technologies, Inc. and/or one of its subsidiaries is
a defendant in various 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders of the Company on October 19,
1999, the Shareholders (i) elected William E. Butler, Russell R.
Gifford, and L. Thomas Hiltz as Directors of Class III for a term
expiring in 2002, (ii) amended the Company's Code of Regulations to
increase the maximum size of the Board of Directors from 12 to 14, and
(iii) ratified the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending June 30,
2000. Substantially the same information was previously reported in
Part II, Item 5 "Other Information" of the Company's Form 10-Q for the
quarter ended September 30, 1999.
ITEM 5. OTHER INFORMATION.
On January 20, 2000, David L. Pugh was elected the Company's President
& Chief Executive Officer and a member of Class III of the Board of
Directors for a term expiring in 2002. John C. Dannemiller, formerly
the Company's Chairman & Chief Executive Officer, remains in an
executive position as Chairman.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit No. Description
----------- -----------
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on October 8,
1998 (filed as Exhibit 3(a) to the Company's
Form 10-Q for the quarter ended September
30, 1998, SEC File No. 1-2299, and
incorporated here by reference).
3(b) Code of Regulations of Applied Industrial
Technologies, Inc., as amended on October
19, 1999 (filed as Exhibit 3(b) to the
Company's Form 10-Q for the quarter ended
September 30,
14
<PAGE> 16
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) $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
15
<PAGE> 17
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 December 31, 1999.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date: February 10, 2000 By: /s/ John R. Whitten
-----------------------------------------
John R. Whitten
Vice President-Chief Financial Officer
& Treasurer
Date: February 10, 2000 By: /s/ Mark O. Eisele
-----------------------------------------
Mark O. Eisele
Vice President-Controller
16
<PAGE> 18
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
<S> <C> <C>
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) $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).
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C> <C>
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) $50,000,000 Credit Agreement dated as of November 5,
1998 among Applied, 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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,972
<SECURITIES> 0
<RECEIVABLES> 190,299
<ALLOWANCES> 3,883
<INVENTORY> 168,628
<CURRENT-ASSETS> 6,307
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<CURRENT-LIABILITIES> 135,267
<BONDS> 97,586
0
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<TOTAL-LIABILITY-AND-EQUITY> 552,080
<SALES> 753,297
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