<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Mark One
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended November 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-11288
APPLIED POWER INC.
-----------------
(Exact name of Registrant as specified in its charter)
Wisconsin 39-0168610
--------- ----------
(State of incorporation) (I.R.S. Employer Id. No.)
N22 W23685 Ridgeview Parkway West
Waukesha, Wisconsin 53188-1013
Mailing address: P.O. Box 325, Milwaukee, Wisconsin 53201
---------------------------------------------------------
(Address of principal executive offices)
(262) 523-7600
--------------
(Registrant's telephone number)
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 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 _______
-------
The number of shares outstanding of the Registrant's Class A Common Stock as of
January 12, 2000 was 39,069,021.
<PAGE>
APPLIED POWER INC.
Form 10-Q
For the quarter ended November 30, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statement of Earnings -
Three Months Ended November 30, 1999 and 1998........................ 3
Condensed Consolidated Balance Sheet -
November 30, 1999 and August 31, 1999................................ 4
Condensed Consolidated Statement of Cash Flows -
Three Months Ended November 30, 1999 and 1998........................ 5
Notes to Condensed Consolidated Financial Statements................... 6 - 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 8 - 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk........................ 11
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K.................................................. 12
SIGNATURE.................................................................................. 13
- ---------
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended November 30,
------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net Sales $ 462,167 $ 435,660
Cost of Products Sold 322,637 298,258
--------- ---------
Gross Profit 139,530 137,402
Engineering, Selling and Administrative Expenses 78,894 82,418
Amortization of Intangible Assets 7,795 7,065
Contract Termination (Recovery) Costs (1,446) 7,824
--------- ---------
Operating Earnings 54,287 40,095
Other Expense (Income):
Net financing costs 16,338 13,899
Other - net 137 (7)
--------- ---------
Earnings Before Income Tax Expense 37,812 26,203
Income Tax Expense 14,130 9,802
--------- ---------
Net Earnings $ 23,682 $ 16,401
========= =========
Basic Earnings Per Share:
Earnings Per Share $ 0.61 $ 0.42
========= =========
Weighted Average Common Shares Outstanding (000's) 38,992 38,649
========= =========
Diluted Earnings Per Share:
Earnings Per Share $ 0.59 $ 0.41
========= =========
Weighted Average Common and Equivalent Shares Outstanding (000's) 40,312 40,078
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
APPLIED POWER INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
November 30, August 31,
1999 1999
----------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 16,940 $ 22,258
Net accounts receivable 154,771 149,525
Net inventories 221,496 207,518
Prepaid expenses and deferred income taxes 29,676 29,735
---------------- ---------------
Total Current Assets 422,883 409,036
Net Property, Plant and Equipment 270,676 273,902
Goodwill and Other Intangibles, net 880,037 888,322
Other Assets 53,387 53,586
---------------- ---------------
Total Assets $ 1,626,983 $ 1,624,846
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 12,961 $ 230
Trade accounts payable 155,066 157,515
Accrued compensation and benefits 40,325 47,089
Income taxes payable 44,551 36,491
Other current liabilities 74,321 82,340
--------------- ---------------
Total Current Liabilities 327,224 323,665
Long-Term Debt 778,594 808,438
Deferred Income Taxes 16,416 15,869
Other Deferred Liabilities 61,269 59,045
Shareholders' Equity:
Class A common stock, $0.20 par value, authorized 80,000,000 shares,
Issued and outstanding 39,012,438 and 38,978,340 shares, respectively 7,802 7,796
Additional paid-in capital 12,753 12,388
Accumulated other comprehensive loss (13,035) (15,218)
Retained earnings 435,960 412,863
---------------- ---------------
Total Shareholders' Equity 443,480 417,829
---------------- ---------------
Total Liabilities and Shareholders' Equity $ 1,626,983 $ 1,624,846
================ ===============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended November 30,
--------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Operating Activities
- --------------------
Net Earnings $ 23,682 $ 16,401
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
Depreciation and amortization 20,408 18,759
Changes in operating assets and liabilities, excluding
the effects of business acquisitions:
Accounts receivable (19,908) (10,539)
Inventories (17,209) (6,428)
Prepaid expenses and other assets (1,408) 2,665
Trade accounts payable 580 3,918
Other accrued liabilities (10,231) 5,049
Income taxes payable 9,468 10,546
------------- -------------
Net Cash Provided By Operating Activities 5,382 40,371
Investing Activities
- --------------------
Proceeds from sale of property, plant and equipment - 4,484
Purchases of property, plant and equipment (13,511) (16,866)
Cash used for business acquisitions - (365,996)
Proceeds from sale of business unit 2,987 -
Merger related fees and other - (8,036)
------------- -------------
Net Cash Used In Investing Activities (10,524) (386,414)
Financing Activities
- --------------------
Proceeds from issuance of long-term debt - 278,762
Principal payments on long-term debt (15,202) (27,806)
Net borrowings (repayments) on short-term credit facilities 12,884 (2,433)
Net commercial paper (repayments) borrowings (7,342) 100,483
Debt financing costs (88) (1,412)
Additional receivables financed 10,000 -
Dividends paid on common stock (585) (588)
Proceeds from stock option exercises 371 535
------------- -------------
Net Cash Provided By Financing Activities 38 347,541
Effect of Exchange Rate Changes on Cash (214) 315
------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents (5,318) 1,813
Cash and Cash Equivalents - Beginning of Period 22,258 6,349
------------- -------------
Cash and Cash Equivalents - End of Period $ 16,940 $ 8,162
============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
APPLIED POWER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements of
Applied Power Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
with the instructions of Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The condensed consolidated balance sheet data as of August 31, 1999 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. For additional information, refer
to the consolidated financial statements and footnotes thereto in the Company's
fiscal 1999 Annual Report on Form 10-K.
In the opinion of management, all adjustments considered necessary for a fair
presentation of financial results have been made. Such adjustments consist of
only those of a normal recurring nature. Operating results for the three months
ended November 30, 1999 are not necessarily indicative of the results that may
be expected for the entire fiscal year ending August 31, 2000.
Note B - Earnings Per Share
- ---------------------------
The reconciliations between basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended
(in thousands except per share amounts) November 30,
---------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Numerator:
Net earnings for basic and diluted earnings per share $ 23,682 $16,401
=============== ==============
Denominator:
Weighted average common shares outstanding for
basic earnings per share 38,992 38,649
Net effect of dilutive stock options based on the treasury stock
method using average market price 1,320 1,429
--------------- --------------
Weighted average common and equivalent shares outstanding for
diluted earnings per share 40,312 40,078
=============== ==============
Basic Earnings Per Share $ 0.61 $ 0.42
=============== ==============
Diluted Earnings Per Share $ 0.59 $ 0.41
=============== ==============
</TABLE>
Note C - Comprehensive Income
- -----------------------------
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended
November 30,
-------------------------------------
(in thousands) 1999 1998
--------------- ----------------
<S> <C> <C>
Net earnings $ 23,682 $ 16,401
Foreign currency translation adjustments 2,183 4,707
--------------- ---------------
Comprehensive income $ 25,865 $ 21,108
=============== ===============
</TABLE>
6
<PAGE>
Note D - Sale of Business Unit
- ------------------------------
On November 23, 1999, a wholly-owned subsidiary of the Company completed the
sale of the assets of Samuel Groves & Co. Ltd., a business unit of the
Industrial segment. Total consideration from the transaction was approximately
$3.0 million, which approximated book value of the assets.
Note E - Net Inventories
- ------------------------
The nature of the Company's products in several significant parts of its
business is such that they have a very short production cycle. Consequently, the
amount of work-in-process at any point in time is minimal. In addition, many
parts or components are ultimately either sold individually or assembled with
other parts making a distinction between raw materials and finished goods
unclear. At these locations, the Company has not deemed it necessary or cost
effective to categorize inventory by state of completion, but rather between
material, labor and overhead. Several other parts of the Company maintain and
manage their inventories using a job cost system where the distinction of
categories of inventory by state of completion is also not available.
As a result of these factors, it is neither practical nor cost effective to
segregate the amounts of raw materials, work-in-process or finished goods
inventories at the respective balance sheet dates as segregation would only be
possible as the result of physical inventories which are taken at dates
different from the balance sheet dates.
Note F - Segment Information
- ----------------------------
The Company is organized and managed along the lines of its two product
segments: Electronics and Industrial. Electronics supplies electronic
enclosures, power supplies, thermal management systems, backplanes, and cabling
either as individual products, or as an integrated system incorporating certain
of the Company's product design, supply chain management, assembly and test
capabilities. Industrial provides both standard and customized industrial and
electrical tools and accessories along with components and systems using
hydraulic, actuation and vibration control technologies through a world-wide
distribution system into a variety of niche markets. "General corporate and
other" as indicated below primarily includes general corporate expenses,
interest expense and foreign currency exchange adjustments
The following table summarizes financial information by reportable segment.
Results for the three months ended November 30, 1998 for the Industrial segment
include a $7.8 million pre-tax charge related to a contract termination. Results
for the three months ended November 30, 1999 for the Industrial segment include
a $1.4 million pre-tax recovery settlement related to the contract termination.
<TABLE>
<CAPTION>
Three Months Ended
(in thousands) November 30,
-----------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales:
Electronics $ 289,126 $ 263,185
Industrial 173,041 172,475
- ---------------------------------------------------------------------------------------------------------------------
Total $ 462,167 $ 435,660
- ---------------------------------------------------------------------------------------------------------------------
Earnings Before Income Tax Expense:
Electronics $ 26,340 $ 25,326
Industrial 30,932 17,860
General corporate and other (19,460) (16,983)
- ---------------------------------------------------------------------------------------------------------------------
Total $ 37,812 $ 26,203
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note G - Strategic Alternatives
- -------------------------------
In September 1999, the Company announced that it was exploring strategic
alternatives related to the Industrial segment, which would enable the Company
and its shareholders to focus on the strong potential of the Electronics
segment.
7
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Risk Factors That May Affect Future Results
- -------------------------------------------
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as statements
in other Company communications, which are not historical facts, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. The terms
"anticipate", "believe", "estimate", "expect", "objective", "plan", "project"
and similar expressions are intended to identify forward-looking statements.
Such forward-looking statements are subject to inherent risks and uncertainties
that may cause actual results or events to differ materially from those
contemplated by such forward-looking statements. In addition to the assumptions
and other factors referred to specifically in connection with such statements,
factors that may cause actual results or events to differ materially from those
contemplated by such forward-looking statements include, without limitation,
general economic conditions and market conditions in the industrial production,
trucking, construction, aerospace, automotive, recreational vehicle, computer,
semiconductor, telecommunication, electronic and defense industries in North
America, Europe and, to a lesser extent, Asia, market acceptance of existing and
new products, successful integration of acquisitions, competitive pricing,
foreign currency risk, interest rate risk, unforeseen costs or consequences of
Year 2000 issues during calendar year 2000, the Company's ability to access
capital markets, the disposition of the Industrial businesses, and other factors
that may be referred to in the Company's reports filed with the Securities and
Exchange Commission from time to time.
Results of Operations
- ---------------------
The Company reported record sales and earnings for the first quarter ended
November 30, 1999. Net earnings for the first quarter of fiscal 2000 were $23.7
million, or $0.59 per share on a diluted basis. Excluding one time items in both
periods, net earnings were $22.8 million, or $0.57 per diluted share, an
increase of 8% percent over the $21.1 million, or $0.53 per diluted share, in
the prior year quarter. The one-time items in both periods relate to the
cancellation of a contract within the Industrial segment in November 1998. In
the first quarter of fiscal 1999, the Company recorded to operating expense a
one-time contract termination charge of $7.8 million pre-tax, $4.7 million
after-tax, or $0.12 per diluted share. In the first quarter of fiscal 2000, the
Company recovered a portion of that contract termination charge in a settlement
and recorded against operating expense, a one-time contract termination recovery
of $1.4 million pre-tax, $0.9 million after-tax, or $0.02 per diluted share.
Sales for the three month period ended November 30, 1999 were $462.2 million, an
increase of 6% percent over the $435.7 million reported in the comparable prior
year period. Foreign currency translation had a 2.5% negative effect on reported
fiscal 2000 first quarter sales.
The Company is organized, managed and reported as two segments: Electronics and
Industrial. Electronics supplies electronic enclosures, power supplies, thermal
systems, backplanes, and cabling either as individual products, or as an
integrated system incorporating certain of the Company's product design, supply
chain management, assembly and test capabilities. Industrial provides both
standard and customized industrial and electrical tools and accessories along
with components and systems using hydraulic, actuation and vibration control
technologies through a world-wide distribution system into a variety of niche
markets.
In September 1999, the Company announced that it was exploring strategic
alternatives related to the Industrial segment, which would enable the Company
and its shareholders to focus on the strong potential of the Electronics
segment.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NET SALES BY SEGMENT Three Months Ended November 30,
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronics $ 289,126 $ 263,185 10%
Industrial 173,041 172,475 0%
- --------------------------------------------------------------------------------------------------------------------
Total $ 462,167 $ 435,660 6%
====================================================================================================================
</TABLE>
Revenues from the Electronics segment grew 10 percent during the first quarter
of fiscal 2000 as compared to the prior year first quarter. Excluding the
negative impact of the stronger dollar, Electronics' sales grew 13% over the
comparable prior year period. Internal growth as well as the impact from
acquisitions completed in the prior year contributed to this growth.
8
<PAGE>
Fiscal 2000 first quarter net sales for the Industrial segment were comparable
to the prior year period. Certain businesses purchased in the Rubicon
acquisition in the prior year combined to contribute approximately $2.0 million
of sales growth to this segment during the current quarter. This acquisition
related growth was offset by a 2% reduction in reported sales as a result of the
negative impact of foreign currency translation. Exclusive of acquisitions and
the adverse impact of the strong dollar on reported sales, Industrial's sales
increased 1% during the current year first quarter compared to the prior year
first quarter. Internal growth was principally generated from recreational
vehicle slide-out and leveling systems, offset by a one-time computer system
conversion inefficiency.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT BY SEGMENT Three Months Ended November 30,
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronics $ 77,412 $ 75,860 2%
Industrial 62,118 61,542 1%
- --------------------------------------------------------------------------------------------------------------------
Total $ 139,530 $ 137,402 2%
====================================================================================================================
</TABLE>
Fiscal 2000 first quarter gross profit dollars increased by 2% over the
comparable prior year period. As a percentage of net sales, gross profit
declined from 31.5% in the prior year first quarter to 30.2% in the current year
quarter. As compared to the prior year period, both the increase in gross profit
dollars and the decline in gross profit as a percent of sales were driven by
continued expansion and growth of relatively lower margin integration businesses
in the Electronics group. As a result of further cost control, restructuring and
manufacturing productivity initiatives in the Industrial segment, gross profit
dollars and gross profit as a percentage of sales increased in the first three
months of fiscal 2000.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ENGINEERING, SELLING AND ADMINISTRATIVE EXPENSES BY SEGMENT
- --------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended November 30,
- --------------------------------------------------------------------------------------------------------------------
1999 1998 Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronics $ 45,256 $ 45,726 (1)%
Industrial 30,652 33,599 (9)%
General Corporate 2,986 3,093 (3)%
- --------------------------------------------------------------------------------------------------------------------
Total $ 78,894 $ 82,418 (4)%
====================================================================================================================
</TABLE>
Fiscal 2000 first quarter engineering, selling and administrative ("ESA")
expenses were 4 percent lower than that reported in the first quarter of fiscal
1999. This reduction in ESA expenses is a result of initiatives in place to
aggressively manage spending levels and to integrate acquired businesses into
the Company, offset by additional ESA expenses of businesses acquired since or
during the first quarter of fiscal 1999. In total, ESA expenses were reduced to
17.1 percent of net sales for the current year quarter compared to 18.9 percent
for the prior year quarter. The reduction was the result of the continued
efforts discussed above to manage spending levels throughout the Company, along
with the incremental sales growth of the Electronics segment, which typically
has a lower percentage of ESA expenses to sales.
Amortization expense for the first quarter of fiscal 2000 was higher than that
reported for the first quarter of fiscal 1999 due to the acquisitions made
during and subsequent to the first quarter of fiscal 1999, which include
Rubicon, Innovative and Ergun.
Excluding one time items in both periods, operating profit margin increased to
11.4 percent for the first quarter of fiscal 2000 compared to 11.0 percent for
the first quarter of fiscal 1999. One time items include the non-recurring
contract termination charge in the first quarter of fiscal 1999, and the partial
recovery of that contract termination charge in the first quarter of fiscal
2000. The increase in operating profit margin between periods is a result of
internal sales growth together with continued efforts to manage spending levels
throughout the Company. Inclusive of one time items in both periods, the
operating profit margin increased to 11.7 percent for the first quarter of
fiscal 2000 compared to 9.2 percent for the first quarter of fiscal 1999.
9
<PAGE>
Net financing costs for the three months ended November 30, 1999 increased over
the comparable prior year period primarily as a result of additional borrowings
incurred to finance fiscal 1999 acquisitions, coupled with the April 1999
issuance of $200.0 million of higher cost subordinated debt.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $16.9 million at November 30, 1999 and $22.3
million at August 31, 1999. In order to minimize net financing costs, the
Company intentionally maintains low cash balances by using available cash to
reduce short-term bank borrowings.
Net cash generated from operations, after considering non-cash items and changes
in operating assets and liabilities, totaled $5.4 million and $40.4 million for
the three month periods ended November 30, 1999 and 1998, respectively. Cash
flow from operations decreased between periods mainly due to a temporary build-
up in working capital.
Net cash used in investing activities totaled $10.5 million for the first
quarter of fiscal 2000. $13.5 million was used for capital expenditures, while
$3.0 million of cash proceeds were received in November 1999 upon sale of the
assets of Samuel Groves & Co. Ltd., a business unit of the Industrial segment.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (in thousands) November 30, 1999 August 31, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholders' Equity $ 443,480 36% $ 417,829 34%
Total Debt 791,555 63% 808,668 65%
Deferred Taxes 16,416 1% 15,869 1%
- --------------------------------------------------------------------------------------------------------------------
Total $1,251,451 100% $1,242,366 100%
====================================================================================================================
</TABLE>
Financing activities in the first three months of fiscal 2000 offset each other,
and therefore, generated minimal net cash during the quarter. Cash proceeds of
$10.0 million from additional receivables financed were offset by net repayments
of debt amounting to $9.7 million. In addition, the Company paid $0.6 million in
dividend payments to shareholders and received $0.4 million in proceeds from
stock option exercises.
Outstanding debt at November 30, 1999 totaled $791.6 million, a decrease of
approximately $17.1 million since the beginning of the fiscal year. Net
repayments of debt along with foreign currency exchange fluctuations contributed
to this decrease. At November 30, 1999, the Company had $435.9 million of funds
available under multi-currency credit agreements, unused non committed lines of
credit and receivable financing facilities. The Company believes that
availability under its credit facilities or other borrowings, plus funds
generated from operations, will be adequate to meet operating, debt service and
capital expenditure requirements for the foreseeable future.
Year 2000 Considerations
- ------------------------
As of the date of this filing, January 14, 2000, the Company has not incurred
any significant business disruptions as a result of Year 2000 issues. However,
while no such occurrence has developed as of the date of this filing, Year 2000
problems may still surface throughout calendar year 2000. Therefore, there is
still no assurance that the Company will not be affected by year 2000 issues in
the future. The Company will continue to monitor Year 2000 considerations and
work diligently to remediate any issues that may arise.
If the Company's systems, including both information technology ("IT") and other
systems which may include embedded technology and micro-controllers, do not
correctly recognize date information throughout calendar year 2000, there could
be a material adverse impact on the Company's operations.
Based on the Company's readiness efforts, the costs associated with potential
Year 2000 issues that may arise during calendar year 2000 are not expected to
have a material effect on the results of operations or financial condition of
the Company. The Company historically has not quantified the costs of Year 2000
readiness and remediation, but believes costs incurred to date were not material
to the Company's financial position.
10
<PAGE>
At this time, the Company does not expect the reasonably foreseeable
consequences of any Year 2000 problem to have material adverse effects on the
Company's business, operations or financial condition throughout calendar year
2000. However, the Company cannot be certain that it will not suffer business
interruptions, either due to its own Year 2000 problems or those of its
customers or suppliers whose Year 2000 problems may make it difficult or
impossible to fulfill their commitments to the Company. Furthermore, Year 2000
problems have many elements and potential consequences, some of which may not be
reasonably foreseeable. As such, there can be no assurances that every material
Year 2000 problem will be identified and addressed or that unforeseen
consequences will not arise and possibly have a material adverse effect on the
Company.
See Item 7. "Year 2000 Considerations" in the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1999 for further discussion of
the Company's action plans to address Year 2000 issues.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company is exposed to market risk from changes in foreign exchange and
interest rates and, to a lesser extent, commodities. To reduce such risks, the
Company selectively uses financial instruments. All hedging transactions are
authorized and executed pursuant to clearly defined policies and procedures,
which strictly prohibit the use of financial instruments for trading purposes.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1999 within Note A - "Summary of Significant
Accounting Policies" in Notes to Consolidated Financial Statements, and further
disclosure relating to financial instruments is included in Note G - "Debt."
Currency Risk - The Company has significant international operations. In most
- -------------
instances, the Company's products are produced at manufacturing facilities
located near the customer. As a result, significant volumes of finished goods
are manufactured in countries for sale into those markets. For goods purchased
from other Company affiliates, the Company denominates the transaction in the
functional currency of the producing operation.
The Company has adopted the following guidelines to manage its foreign exchange
exposures:
(i) increase the predictability of costs associated with goods whose purchase
price is not denominated in the functional currency of the buyer;
(ii) minimize the cost of hedging through the use of naturally offsetting
positions (borrowing in local currency), netting, pooling; and
(iii) where possible, sell product in the functional currency of the producing
operation.
The Company's identifiable foreign exchange exposures result primarily from the
anticipated purchase of product from affiliates and third-party suppliers along
with the repayment of intercompany loans with foreign subsidiaries denominated
in foreign currencies. The Company periodically identifies naturally occurring
offsetting positions and then purchases hedging instruments to protect against
anticipated exposures. The Company's financial position is not materially
sensitive to fluctuations in exchange rates as any gains or losses on foreign
currency exposures are generally offset by gains and losses on underlying
payables, receivables and net investments in foreign subsidiaries.
Interest Rate Risk - The Company periodically enters into interest rate swaps to
- ------------------
stabilize financing costs by minimizing the effect of potential interest rate
increases on floating-rate debt in a rising interest rate environment. Under
these agreements, the Company contracts with a counter party to exchange the
difference between a fixed rate and a floating rate applied to the notional
amount of the swap. The differential to be paid or received on interest rate
swap agreements is accrued as interest rates change and is recognized in net
income as an adjustment to interest expense.
Commodity Prices - The Company is exposed to fluctuation in market prices for
- ----------------
steel. Therefore, the Company has established a program for centralized
negotiation of steel prices. This program allows the Company to take advantage
of economies of scale as well as to cap pricing. All business units are able to
purchase steel under this arrangement. In general, the contracts lock steel
pricing for 18 months and enable the Company to pay less if market prices fall.
11
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See "Index to Exhibits" on page 14, which is incorporated herein by
reference.
(b) Reports on Form 8-K
On October 1, 1999, the Company filed a Current Report on Form 8-K dated
September 24, 1999 reporting under Item 5 that the Company has retained
Credit Suisse First Boston as its financial advisor to explore strategic
alternatives relating to the Company's Industrial business segment.
12
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED POWER INC.
------------------
(Registrant)
Date: January 14, 2000 By: /s/ Richard D. Carroll
-----------------------
Richard D. Carroll
Vice President - Finance and Controller
(Acting Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the registrant)
13
<PAGE>
APPLIED POWER INC.
(the "Registrant")
(Commission File No. 1-11288)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 1999
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
- ------------ ---------------------------------------- ------------------------------------- --------------
<S> <C> <C>
10.1 Description of Fiscal 2000 Management X
Bonus Arrangement
27.1 Financial Data Schedule X
</TABLE>
14
<PAGE>
Exhibit 10.1
APPLIED POWER INC.
FISCAL 2000 MANAGEMENT BONUS ARRANGEMENT
For the first six months of fiscal year 2000, Mr. Richard G. Sim's bonus will be
100% based on the Company's year-over-year EVA performance. Mr. William J.
Albrecht's and Mr. Gustav H.P. Boel's bonuses will be based 50% on the Company's
year-over-year EVA performance and 50% on the year-over-year improvement in CMM
of their respective businesses.
Actual Six-Month Bonus Paid = Annual Bonus Award x 0.5 x Multiplier (see below)
<TABLE>
<CAPTION>
Multiplier
- ----------------------------------------------------------------------------------------------------
Year-Over-Year Ratio Converts to Multiplier as Detailed Below
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year-Over-Year Ratio 0.80 1.00 1.15 1.30 1.45 1.60
Multiplier 0.0 0.5 1.0 1.5 2.0 2.5
Multiplier Capped at 2.5
</TABLE>
CMM = Earnings Before Interest, Taxes and Amortization (EBITA) - 20% Net
Assets
EVA = Adjusted Net Operating Profit After Taxes minus a Capital Charge
Previous period measures are restated to include all acquisitions and
divestitures and to exclude one-time, non-operating items for comparative
purposes.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF APPLIED POWER INC. FOR THE THREE MONTH PERIOD
ENDED NOVEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 16,940
<SECURITIES> 0
<RECEIVABLES> 162,068
<ALLOWANCES> 7,297
<INVENTORY> 221,496
<CURRENT-ASSETS> 422,883
<PP&E> 545,699
<DEPRECIATION> (275,023)
<TOTAL-ASSETS> 1,626,983
<CURRENT-LIABILITIES> 327,224
<BONDS> 778,594
0
0
<COMMON> 7,802
<OTHER-SE> 435,678
<TOTAL-LIABILITY-AND-EQUITY> 1,626,983
<SALES> 462,167
<TOTAL-REVENUES> 462,167
<CGS> 322,637
<TOTAL-COSTS> 322,637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,338
<INCOME-PRETAX> 37,812
<INCOME-TAX> 14,130
<INCOME-CONTINUING> 23,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,682
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.59
</TABLE>
