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