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)
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>
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.
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.
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.
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.
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
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
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
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
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
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
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
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
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
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
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
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>
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 </TABLE>