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, 2001 ------------------------------------------ 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, 2002 19,206,205 ---------------------------------------- (No par value)
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ INDEX - -------------------------------------------------------------------------- <TABLE> <CAPTION> Page No. <S> <C> <C> <C> Part I: FINANCIAL INFORMATION Item 1: Financial Statements Condensed Statements of Consolidated Income - 2 Six Months Ended December 31, 2001 and 2000 Condensed Consolidated Balance Sheets - 3 December 31, 2001 and June 30, 2001 Condensed Statements of Consolidated Cash Flows - 4 Six Months Ended December 31, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 5 - 9 Item 2: Management's Discussion and Analysis of 10 - 13 Financial Condition and Results of Operations Item 3: Quantitative and Qualitative Disclosures About Market Risk 14 Part II: OTHER INFORMATION Item 1: Legal Proceedings 15 Item 4: Submission of Matters to a Vote of Security Holders 15 Item 5: Other Information 15 Item 6: Exhibits and Reports on Form 8-K 15 Signatures 18 </TABLE>
PART I: FINANCIAL INFORMATION ITEM I: Financial Statements <TABLE> <CAPTION> APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ CONDENSED STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (Thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended December 31 December 31 2001 2000 2001 2000 ------------------------------- ------------------------------- <S> <C> <C> <C> <C> Net Sales $ 347,550 $ 405,438 $ 715,540 $ 826,314 Cost of sales 260,537 301,536 536,096 617,958 ------------ ------------ ------------ ------------ Gross Profit 87,013 103,902 179,444 208,356 Selling, distribution and administrative expenses 80,981 88,767 163,300 178,970 ------------ ------------ ------------ ------------ Operating Income 6,032 15,135 16,144 29,386 Interest expense, net 1,754 2,401 3,647 4,500 Other, net (450) 572 (200) 693 ------------ ------------ ------------ ------------ Income Before Income Taxes 4,728 12,162 12,697 24,193 Income Taxes 1,810 4,800 4,890 9,600 ------------ ------------ ------------ ------------ Income before cumulative effective of change in accounting 2,918 7,362 7,807 14,593 Cumulative effect of change in accounting (12,100) ------------ ------------ ------------ ------------ Net Income (Loss) $ 2,918 $ 7,362 $ (4,293) $ 14,593 ============ ============ ============ ============ Earnings Per Share - Basic Before cumulative effect of change in accounting $ 0.15 $ 0.37 $ 0.41 $ 0.74 Cumulative effect of change in accounting (0.63) ------------ ------------ ------------ ------------ Net Income (Loss) $ 0.15 $ 0.37 $ (0.22) $ 0.74 ============ ============ ============ ============ Earnings Per Share - Diluted Before cumulative effect of change in accounting $ 0.15 $ 0.37 $ 0.40 $ 0.73 Cumulative effect of change in accounting (0.63) ------------ ------------ ------------ ------------ Net Income (Loss) $ 0.15 $ 0.37 $ (0.23) $ 0.73 ============ ============ ============ ============ Cash dividends per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24 ============ ============ ============ ============ Weighted average common shares outstanding for basic computation 18,972 19,659 19,163 19,697 Dilutive effect of stock options and awards 313 322 326 311 ------------ ------------ ------------ ------------ Adjusted average common shares outstanding for diluted computation 19,285 19,981 19,489 20,008 ============ ============ ============ ============ </TABLE> See notes to condensed consolidated financial statements. 2
<TABLE> <CAPTION> APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ December 31 June 30 2001 2001 ------------ ------------ (Unaudited) ASSETS <S> <C> <C> Current assets Cash and temporary investments $ 20,993 $ 13,981 Accounts receivable, less allowances of $4,600 and $5,400 160,185 190,935 Inventories (at LIFO) 205,019 191,570 Other current assets 10,692 9,974 ------------ ------------ Total current assets 396,889 406,460 Property, less accumulated depreciation of $78,561 and $75,176 87,439 90,263 Goodwill and other intangible assets - net 48,474 65,113 Other assets 23,048 17,018 ------------ ------------ TOTAL ASSETS $ 555,850 $ 578,854 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 74,639 $ 75,896 Other accrued liabilities 48,578 51,563 ------------ ------------ Total current liabilities 123,217 127,459 Long-term debt 113,536 113,494 Other liabilities 24,409 26,383 ------------ ------------ TOTAL LIABILITIES 261,162 267,336 ------------ ------------ Shareholders' Equity Preferred stock - no par value; 2,500 shares authorized; none issued or outstanding Common stock - no par value; 50,000 shares authorized; 24,096 shares issued 10,000 10,000 Additional paid-in capital 83,920 84,221 Income retained for use in the business 276,703 285,661 Treasury shares - at cost, 4,803 and 4,449 shares (74,379) (66,227) Unearned restricted common stock compensation (1,379) (1,955) Accumulated other comprehensive income (177) (182) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 294,688 311,518 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 555,850 $ 578,854 ============ ============ </TABLE> See notes to condensed consolidated financial statements. 3
<TABLE> <CAPTION> APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Amounts in thousands) Six Months Ended December 31 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows from Operating Activities Net income (loss) $ (4,293) $ 14,593 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 9,508 11,572 Cumulative effect of accounting change 12,100 Changes in operating assets and liabilities, net of effects from acquisition of businesses 11,174 (16,314) Other - net 1,254 5,565 - -------------------------------------------------------------------------------------------------------------------------- Net Cash provided by Operating Activities 29,743 15,416 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Property purchases (5,872) (4,422) Proceeds from property sales 1,223 2,487 Net cash paid for acquisition of businesses (2,574) (5,491) Deposits and other (520) 229 - -------------------------------------------------------------------------------------------------------------------------- Net Cash used in Investing Activities (7,743) (7,197) - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Borrowings and repayments under revolving credit agreements - net 5,756 (12,534) Long-term debt repayments (5,714) (5,714) Long-term debt borrowings 25,000 Dividends paid (4,665) (4,801) Purchases of treasury shares (11,741) (8,662) Other 1,376 558 - -------------------------------------------------------------------------------------------------------------------------- Net Cash used in Financing Activities (14,988) (6,153) - -------------------------------------------------------------------------------------------------------------------------- Increase in cash and temporary investments 7,012 2,066 Cash and temporary investments at beginning of period 13,981 12,349 - -------------------------------------------------------------------------------------------------------------------------- Cash and Temporary Investments at End of Period $ 20,993 $ 14,415 ========================================================================================================================== </TABLE> See notes to condensed consolidated financial statements. 4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (Unaudited) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary to a fair statement of operations of the interim period have been made. The results of operations for the three and six month periods ended December 31, 2001 are not necessarily indicative of the results to be expected for the fiscal year. Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are made based on periodic physical inventories and the effect of year-end inventory quantities on LIFO costs. 2. SEGMENT INFORMATION The accounting policies of the segments are the same as those used to prepare the condensed consolidated financial statements. Certain reclassifications have been made to prior year amounts to be consistent with the presentation in the current year. Intersegment sales are not significant. All current segment operating results are in the United States, Canada, Mexico and Puerto Rico. The segment operations in Canada, Mexico and Puerto Rico represent approximately 4.1% of the total net sales of Applied and therefore are not presented separately. In addition, over 37% of the Canadian operations' net sales are included in the "Other" segment relating to the fluid power business. The long-lived assets located outside of the United States are not material. 5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- SEGMENT FINANCIAL INFORMATION: SERVICE CENTER BASED DISTRIBUTION OTHER TOTAL -------------------------------------------------------- THREE MONTHS ENDED DECEMBER 31, 2001 <S> <C> <C> <C> Net sales $325,643 $21,907 $347,550 Operating profit (loss) 3,571 (809) 2,762 Depreciation 3,858 142 4,000 Capital expenditures 2,201 88 2,289 -------------------------------------------------------- THREE MONTHS ENDED DECEMBER 31, 2000 Net sales $380,217 $25,221 $405,438 Operating profit (loss) 8,749 (441) 8,308 Depreciation 4,296 145 4,441 Capital expenditures 1,284 856 2,140 -------------------------------------------------------- </TABLE> A reconciliation from the segment operating profit to the condensed consolidated balances is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31 --------------------------------------- 2001 2000 --------------------------------------- <S> <C> <C> Operating profit for reportable segment $3,571 $8,749 Other operating loss (809) (441) Adjustments for: Goodwill amortization -0- (1,316) Corporate and other income, net of allocations (a) 3,270 8,143 --------------------------------------- Total operating profit 6,032 15,135 Interest expense, net 1,754 2,401 Other expense (income) (450) 572 --------------------------------------- Income before income taxes $4,728 $12,162 ======================================= <CAPTION> SERVICE CENTER BASED DISTRIBUTION OTHER TOTAL -------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31, 2001 <S> <C> <C> <C> Net sales $668,420 $47,120 $715,540 Operating profit (loss) 10,228 (1,079) 9,149 Assets used in the business 521,498 34,352 555,850 Depreciation 7,678 293 7,971 Capital expenditures 5,723 149 5,872 -------------------------------------------------------- </TABLE> 6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31, 2000 <S> <C> <C> <C> Net sales $777,065 $49,249 $826,314 Operating profit (loss) 20,879 (668) 20,211 Assets used in the business 558,873 49,688 608,561 Depreciation 8,213 345 8,558 Capital expenditures 3,460 962 4,422 -------------------------------------------------------- </TABLE> A reconciliation from the segment operating profit to the condensed consolidated balances is as follows: <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31 --------------------------------------- 2001 2000 --------------------------------------- <S> <C> <C> Operating profit for reportable segment $10,228 $20,879 Other operating loss (1,079) (668) Adjustments for: Goodwill amortization -0- (2,501) Corporate and other income, net of allocations (a) 6,995 11,676 --------------------------------------- Total operating profit 16,144 29,386 Interest expense, net 3,647 4,500 Other expense (income) (200) 693 --------------------------------------- Income before income taxes $12,697 $24,193 ======================================= </TABLE> (a) The items being allocated include miscellaneous corporate charges for working capital, logistics support and other items. 7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (Unaudited) - -------------------------------------------------------------------------------- 3. DERIVATIVE INSTRUMENTS In November 2001, the Company entered into an interest rate swap agreement with a domestic bank. This agreement effectively converts the fixed interest rate on a $50,000, 6.6% senior unsecured term note to a floating variable rate based on LIBOR. Terms and settlement dates mirror terms of the 6.6% senior unsecured term note and the swap has been designated as a fair value hedge. The fair value of the interest rate swap at December 31, 2001 was a liability of $536 which is recorded in the balance sheet and the related change in the fair value of the loan is recorded as a reduction in long-term debt. In July 2001, the Company entered into an interest rate swap agreement with a domestic bank. This agreement effectively converted the fixed interest rate on $47,000 of the $50,000, 6.6% senior unsecured term note to a floating variable rate based on LIBOR. Terms and settlement dates mirrored terms of the 6.6% senior unsecured term note and the swap was designated as a fair value hedge. On October 1, 2001, the Company terminated the swap agreement with the domestic bank for a favorable settlement of $2,100. This gain is being amortized over the remaining life of the note which matures on December 8, 2007, as a reduction of interest expense. 4. GOODWILL AND OTHER INTANGIBLE ASSETS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets." Effective July 1, 2001, the Company adopted this standard. Under SFAS 142, goodwill is no longer amortized, but is tested for impairment upon adoption and annually thereafter. The Company's other intangible assets relate to non-competition agreements and continue to be amortized over the lives of the agreements which primarily are five years. In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective July 1, 2001. Had goodwill amortization not been recorded in the quarter ended December 31, 2000 operating income would have been increased to $16,032; net income to $8,102; and net income per share to $.41. For the six-month period ended December 31, 2000 operating income would have been increased to $31,093; net income to $15,987; and net income per share to $.80. 8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (Unaudited) - -------------------------------------------------------------------------------- For purposes of completing impairment testing upon adoption of SFAS 142, the Company determined the fair value of its reporting units utilizing discounted cash flows models and relative market multiples for comparable businesses. The Company compared the fair value of each of its reporting units to its carrying value. This evaluation indicated that goodwill associated with its fluid power business was impaired. This impairment is primarily attributed to a down turn in the industrial economy in the years following the Company's fluid power business acquisitions. A non-cash charge totaling $17,600, $12,100 after tax, has been recorded as a change in accounting principle effective July 1, 2001 to write-off the remaining goodwill relating to the fluid power business. 5. BUSINESS COMBINATIONS During the quarter ended December 31, 2001, the Company acquired the stock of a Mexican distributor of bearings and power transmission products for $3,200. The acquisition was accounted for as a purchase in accordance with SFAS 141. Results of the business' operations are included in the accompanying condensed consolidated financial statements from its acquisition date and are immaterial for all periods presented. Goodwill and intangibles, based on allocations of fair values to assets and liabilities acquired, of $1,900 were recognized in connection with this combination. 6. NEW ACCOUNTING PRONOUNCEMENT In August 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for Impairment or Disposals of Long-Lived Assets". This statement is effective for the June 30, 2003 financial statements, but earlier adoption is permitted. The Company has not completed its evaluation of the anticipated impact of SFAS 144 on its financial statements. 9
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, 2001 and June 30, 2001, and (2) results of operations and cash flows during the periods included in the accompanying Condensed Statements of Consolidated Income and Consolidated Cash Flows. LIQUIDITY AND WORKING CAPITAL Cash provided by operating activities was $29.7 million in the six months ended December 31, 2001. This compares to $15.4 million provided by operating activities in the same period a year ago. Cash flow from operations depends primarily upon generating operating income, controlling the investment in inventories and receivables, and managing the timing of payments to suppliers. The Company has continuing programs to monitor and control these investments. During the six month period ended December 31, 2001, inventories increased approximately $11.5 million from buying in advance of supplier price increases, and accounts receivable decreased $29.8 million due to lower sales volume. CAPITAL RESOURCES The Company has a committed revolving credit agreement expiring November 2003 with a group of banks. This agreement provides for unsecured borrowings of up to $150.0 million. The Company had $25.7 million of borrowings outstanding under this facility at December 31, 2001. 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, 2001. Unused lines under these facilities totaling $133.3 million are available to fund future acquisitions or other capital and operating requirements. In November 2001, the Company entered into an interest rate swap agreement with a domestic bank. This agreement effectively converts the fixed interest rate on a $50.0 million 6.6% senior unsecured term note to a floating variable rate based on LIBOR. Terms and settlement dates mirror terms of the 6.6% senior unsecured term note and the swap has been designated as a fair value hedge. The fair value of the interest rate swap at December 31, 2001 was a liability of $.5 million which is recorded in the balance sheet and the related change in the fair value of the loan is recorded as a reduction in long-term debt. In July 2001, the Company entered into an interest rate swap agreement with a domestic bank. This agreement effectively converted the fixed interest rate on $47.0 million of the $50.0 million, 6.6% senior unsecured term note to a floating variable rate based on LIBOR. On October 1, 2001, the Company terminated this swap agreement for a favorable settlement of $2.1 million. This gain will be amortized over the remaining life of the note which matures on December 8, 2007 as a reduction of interest expense. 10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The Board of Directors has authorized the purchase of shares of the Company's common stock to fund employee benefit programs, stock option and award programs, and future acquisitions. These purchases are made in open market and negotiated transactions, from time to time, depending upon market conditions. The Company acquired 675,000 shares of its common stock for $11.7 million during the six months ended December 31, 2001. Effective September 21, 2001, the Company's Board of Directors authorized the Company to acquire up to an additional 1.0 million shares of Company stock. At December 31, 2001, the Company had remaining authorization to repurchase up to 681,000 additional shares. RESULTS OF OPERATIONS - --------------------- THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 Net sales decreased 14.3% from the prior year primarily due to the slowdown in U.S. industrial activity. Gross profit as a percentage of sales decreased to 25.0% from 25.6%. This decrease primarily is due to lower discounts and allowances from suppliers. Selling, distribution and administrative expenses as a percent of sales increased to 23.3% from 21.9%. Expenses decreased 8.8% as compared to the same quarter last year due to Company initiatives to control expenses. The adoption of SFAS 142 also eliminated $.9 million of goodwill amortization expense in the quarter ended December 31, 2001. Interest expense-net for the quarter decreased by 26.9% as compared to the prior year primarily due to a decrease in average borrowings and lower average interest rates. Income tax expense as a percentage of income before taxes was 38.3% for the quarter ended December 31, 2001 and 39.5% for the quarter ended December 31, 2000. This decrease is due to lower effective state, local and Canadian tax rates. As a result of the above factors, net income decreased by 60.4% compared to the same quarter of last year. Net income per share - diluted decreased $.22, or 59.5%, which reflects the impact of continued stock repurchases. SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 Net sales decreased 13.4% from the prior year primarily due to the slowdown in U.S. industrial activity. Gross profit as a percentage of sales decreased to 25.1% from 25.2%. This decrease primarily is due to lower discounts and allowances from suppliers. 11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Selling, distribution and administrative expenses as a percent of sales increased to 22.8% from 21.7%. Expenses decreased 8.8% as compared to the same period last year primarily due to Company initiatives to control expenses. The adoption of SFAS 142 also eliminated $1.7 million of goodwill amortization expense in the six months ended December 31, 2001. Interest expense-net for the six months ended December 31, 2001 decreased by 19.0% as compared to the prior year primarily due to a decrease in average borrowings and lower average interest rates. Income tax expense as a percentage of income before taxes was 38.5% for the six months ended December 31, 2001 and 39.7% for the six months ended December 31, 2000. This decrease is due to lower effective state, local and Canadian tax rates. As a result of the above factors, net income before cumulative effect of change in accounting decreased by 46.5% compared to the same period last year. Net income per share - diluted before cumulative effect of change in accounting decreased $.33, or 45.0%, which reflects the impact of continued stock repurchases. In connection with the adoption of SFAS 142, the Company recorded a non-cash impairment charge totaling $12.1 million, after tax, or $.63 per share as a change in accounting principle effective July 1, 2001. This charge wrote off the remaining goodwill relating to the Company's fluid power business. 12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT - ------------------------------------------------------------------- Management's Discussion and Analysis and other sections of this Form 10-Q contain statements that are forward-looking, based on management's current expectations about the future. Forward-looking statements are often identified by qualifiers such as "expect", "believe", "intend", "will", and similar expressions. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases. Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company's control. 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 interest rates; 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 marketing 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; risks and uncertainties associated with the Company's expansion into foreign markets, including inflation rates, recessions, and foreign currency exchange rates; adverse results in significant litigation matters; adverse regulation and legislation; and the occurrence of extraordinary events (including prolonged labor disputes, war, natural events and acts of God, fires, floods and accidents). 13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- We have evaluated the Company's exposure to various market risk factors, including but not limited to, interest rate, foreign currency exchange and commodity price risks. The Company is primarily affected by market risk exposure through the effect of changes in interest rates. The Company manages interest rate risk through the use of a combination of fixed rate long-term debt and variable rate borrowings under its committed revolving credit agreement and interest rate swaps. Variable rate borrowings under its committed revolving credit agreement totaled $25.7 million at December 31, 2001. A 1% increase or decrease in interest rates under this agreement would not have a material impact on our operations, financial position, or cash flows. The Company protects its foreign currency exposure from the Canadian dollar through the use of cross currency swap agreements as well as of foreign-currency denominated debt. Hedging of the US dollar denominated debt used to fund a substantial portion of Company's net investment in its Canadian operations is accomplished through the use of cross currency swaps. Any gain or loss on the hedging instrument offsets the gain or loss on the underlying debt. The impact on the Company's future earnings from exposure to changes in foreign currency exchange rates is expected to be immaterial. 14
PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. ------------------ Applied Industrial Technologies, Inc. and/or one of its subsidiaries is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company does not believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on the Company's financial position or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- At the Company's Annual Meeting of Shareholders held on October 16, 2001, the Shareholders (i) elected William G. Bares, Dr. Roger D. Blackwell, and Stephen E. Yates as Directors of Class II for a term expiring in 2004, and (ii) ratified the appointment of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending June 30, 2002. 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, 2001. ITEM 5. Other Information. ------------------ Donald L. Chargin, Vice President-Unit President, Industrial Products, resigned on January 28, 2002. On January 11, 2002, Joseph D. King was elected the Corporation's Assistant Secretary, succeeding Michael L. Coticchia, who remains Vice President-Human Resources and Risk Management. ITEM 6. Exhibits and Reports On Form 8-K. --------------------------------- (a) Exhibits. --------- Exhibit No. Description ----------- ----------- 3(a) Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc. (filed as Exhibit 3(a) to the Company's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 15
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). 4(d) 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) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf Agreement between the Company and The Prudential Insurance Company of America (filed as Exhibit 4(e) to the Company's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). 16
4(f) $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(g) Rights Agreement, dated as of February 2, 1998, between the Company and Computershare Investor Services LLP (successor to Harris Trust and Savings Bank), as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to the Company's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated here by reference). 10 Change in Control Agreement (amended and restated as of August 8, 2001) between Applied and each of its executive officers. Certain instruments with respect to long-term debt have not been filed as exhibits as the total amount of securities authorized under any one of such instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Commission a copy of each such instrument upon request. (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, 2001.
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 12, 2002 By: /s/ Bill L. Purser ----------------------------------------- Bill L. Purser President & Chief Operating Officer Date: February 12, 2002 By: /s/ John R. Whitten ------------------------------------------ John R. Whitten Vice President-Chief Financial Officer & Treasurer 18
APPLIED INDUSTRIAL TECHNOLOGIES, INC. EXHIBIT INDEX TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2001 EXHIBIT NO. DESCRIPTION PAGE 3(a) Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc. (filed as Exhibit 3(a) to the Company's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 3(b) Code of Regulations of Applied Industrial Technologies, Inc., 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). 4(d) 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) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf Agreement between the Company and The Prudential Insurance Company of America (filed as Exhibit 4(e) to the Company's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). 4(f) $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(g) Rights Agreement, dated as of February 2, 1998, between the Company and Computershare Investor Services LLP (successor to Harris Trust and Savings Bank), as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to the Company's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated here by reference). 10 Change in Control Agreement (amended and restated Attached as of August 8, 2001) between Applied and each of its executive officers.