APPLIED INDUSTRIAL TECHNOLOGIES, INC. 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SEPTEMBER 30, 2006
OR
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o |
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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)
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Ohio
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34-0117420 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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One Applied Plaza, Cleveland, Ohio
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44115 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. Check One:
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
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Shares of common stock outstanding on October 15, 2006
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43,369,652 |
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(No par value) |
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Dollar amounts in thousands, except per share amounts)
|
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|
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|
|
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Three Months Ended |
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September 30 |
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2006 |
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2005 |
|
|
|
|
Net Sales |
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$ |
492,590 |
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|
$ |
443,205 |
|
Cost of Sales |
|
|
357,456 |
|
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|
320,901 |
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|
|
|
|
|
|
|
|
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135,134 |
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|
122,304 |
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|
|
|
|
|
|
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Selling, Distribution and
Administrative Expenses |
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101,757 |
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|
94,502 |
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|
|
|
|
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Operating Income |
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|
33,377 |
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|
|
27,802 |
|
Interest Expense, net |
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|
647 |
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|
772 |
|
Other (Income) Expense, net |
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|
(69 |
) |
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|
150 |
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|
|
|
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|
Income Before Income Taxes |
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32,799 |
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26,880 |
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Income Taxes |
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11,682 |
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|
10,030 |
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Net Income |
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$ |
21,117 |
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|
$ |
16,850 |
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Net Income Per Share Basic |
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$ |
0.48 |
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$ |
0.37 |
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Net Income Per Share Diluted |
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$ |
0.47 |
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$ |
0.36 |
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Cash dividends per common
share |
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$ |
0.12 |
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$ |
0.08 |
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Weighted average common shares
outstanding for basic computation |
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43,937 |
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44,963 |
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Dilutive effect of stock options
and awards |
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908 |
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1,639 |
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Adjusted average common shares
outstanding for diluted
computation |
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44,845 |
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46,602 |
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|
See notes to condensed consolidated financial statements.
2
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands)
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September 30 |
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June 30 |
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2006 |
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2006 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
102,276 |
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$ |
106,428 |
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Accounts receivable, less allowances
of $6,100 and $6,000 |
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240,647 |
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231,524 |
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Inventories (at LIFO) |
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192,523 |
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190,537 |
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Other current assets |
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19,720 |
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29,955 |
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Total current assets |
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555,166 |
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558,444 |
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Property, less accumulated depreciation
of $118,730 and $115,488 |
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69,755 |
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70,794 |
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Goodwill |
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57,248 |
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57,222 |
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Other assets |
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45,642 |
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44,211 |
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TOTAL ASSETS |
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$ |
727,811 |
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$ |
730,671 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
110,402 |
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$ |
109,440 |
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Other accrued liabilities |
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67,124 |
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78,991 |
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Total current liabilities |
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177,526 |
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188,431 |
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Long-term debt |
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75,988 |
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76,186 |
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Other liabilities |
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53,166 |
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51,232 |
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TOTAL LIABILITIES |
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306,680 |
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315,849 |
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Shareholders Equity |
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Preferred stock no par value; 2,500
shares authorized; none issued or outstanding |
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Common stock no par value; 80,000 and 50,000
shares authorized; 54,213 shares issued |
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10,000 |
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10,000 |
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Additional paid-in capital |
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123,734 |
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122,146 |
|
Income retained for use in the business |
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424,667 |
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|
408,847 |
|
Treasury shares at cost, 10,563 and 10,146 shares |
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|
(142,058 |
) |
|
|
(130,967 |
) |
Accumulated other comprehensive income |
|
|
4,788 |
|
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|
4,796 |
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TOTAL SHAREHOLDERS EQUITY |
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421,131 |
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414,822 |
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TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
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$ |
727,811 |
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$ |
730,671 |
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|
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See notes to condensed consolidated financial statements.
3
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
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Three Months Ended |
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September 30 |
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2006 |
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2005 |
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Cash Flows from Operating Activities
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Net income |
|
$ |
21,117 |
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$ |
16,850 |
|
Adjustments to reconcile net income to cash provided by (used in)
operating activities: |
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Depreciation |
|
|
3,350 |
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|
3,198 |
|
Share-based compensation and amortization of intangibles and other assets |
|
|
1,487 |
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|
689 |
|
Gain on sale of property |
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(22 |
) |
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|
(12 |
) |
Treasury shares contributed to employee benefit and deferred
compensation plans |
|
|
1,367 |
|
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|
3,046 |
|
Changes in operating assets and liabilities, net of
effects from acquisition of business |
|
|
(11,104 |
) |
|
|
(26,696 |
) |
Other net |
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|
(75 |
) |
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|
812 |
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|
Net Cash provided by (used in) Operating Activities |
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|
16,120 |
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(2,113 |
) |
|
Cash Flows from Investing Activities |
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|
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Property purchases |
|
|
(2,520 |
) |
|
|
(1,670 |
) |
Proceeds from property sales |
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|
105 |
|
|
|
45 |
|
Net cash paid for acquisition of businesses |
|
|
|
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|
(15,735 |
) |
Deposits and other |
|
|
(652 |
) |
|
|
290 |
|
|
Net Cash used in Investing Activities |
|
|
(3,067 |
) |
|
|
(17,070 |
) |
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Purchases of treasury shares |
|
|
(12,409 |
) |
|
|
(10,178 |
) |
Dividends paid |
|
|
(5,297 |
) |
|
|
(3,613 |
) |
Excess tax benefits from share-based compensation |
|
|
217 |
|
|
|
1,407 |
|
Exercise of stock options |
|
|
330 |
|
|
|
867 |
|
|
Net Cash used in Financing Activities |
|
|
(17,159 |
) |
|
|
(11,517 |
) |
|
Effect of exchange rate changes on cash |
|
|
(46 |
) |
|
|
355 |
|
|
Decrease in cash and cash equivalents |
|
|
(4,152 |
) |
|
|
(30,345 |
) |
Cash and cash equivalents
at beginning of period |
|
|
106,428 |
|
|
|
127,136 |
|
|
Cash and cash equivalents
at End of Period |
|
$ |
102,276 |
|
|
$ |
96,791 |
|
|
See notes to condensed consolidated financial statements.
4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
1. |
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BASIS OF PRESENTATION |
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The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position of Applied Industrial
Technologies, Inc. (the Company) as of September 30, 2006 and the results of operations and
cash flows for the three month periods ended September 30, 2006 and 2005 have been included.
This Quarterly Report on Form 10-Q should be read in conjunction with the Companys Annual
Report on Form 10-K for the year ended June 30, 2006. |
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Operating results for the three month period ended September 30, 2006 are not necessarily
indicative of the results that may be expected for the remainder of the fiscal year ending
June 30, 2007. |
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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. |
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All share and per share data have been restated to reflect a three-for-two stock split
effective June 15, 2006. |
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Subsequent to the issuance of the Companys Form 10-Q for the period ended September 30,
2005, the Company determined, as required by Statement of Financial Accounting Standards No.
123(R), Share-Based Payment, that the excess tax benefits resulting from share based
compensation should have been presented as a financing cash flow instead of as an operating
cash flow. The accompanying condensed statement of consolidated cash flows for the three
months ended September 30, 2005 has been restated to conform to the current period
presentation, resulting in a $1,407 increase in net cash used in operating activities and a
corresponding decrease in net cash used in financing activities from the amounts previously
reported. |
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
2. |
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NEW PRONOUNCEMENTS |
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In June 2006, the Financial Accounting Standards Board issued Financial Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48, which is an
interpretation of Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, provides guidance on the manner in which tax positions taken or to be taken
on tax returns should be reflected in an entitys financial statements prior to their
resolution with taxing authorities. The Company is required to adopt FIN 48 during the
first quarter of fiscal 2008. The Company is currently evaluating the requirements of FIN
48 and has not yet determined the impact, if any, this interpretation may have on its
consolidated financial statements. |
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In September 2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 158 (SFAS 158), Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of SFAS 87, 88, 106, and 132 (R). This
statement requires a company to recognize the over funded or under funded status of a
defined benefit postretirement plan as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income. The Company is required to adopt SFAS 158 in the fourth quarter of
fiscal 2007 and is currently evaluating the impact on its consolidated financial statements. |
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|
In September 2006, Securities & Exchange Commission released Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108). SAB 108 provides guidance on quantifying
financial statement misstatements. SAB 108 requires a company to quantify misstatements
using both the balance sheet and income statement approaches and to evaluate whether either
approach results in quantifying an error that is material. The Company is required to adopt
SAB 108 at the end of the current fiscal year. The Company has not completed the process
of evaluating the impact, if any, that will result from adopting SAB 108. |
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3. |
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SEGMENT INFORMATION |
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The accounting policies of the Companys reportable segment and its other businesses are
the same as those used to prepare the condensed consolidated financial statements. Sales
between the service center based distribution segment and the other businesses are not
significant. |
6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
Segment Financial Information:
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Service Center |
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Based |
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Distribution |
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Other |
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Total |
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|
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|
Three Months Ended
September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
441,171 |
|
|
$ |
51,419 |
|
|
$ |
492,590 |
|
Operating income |
|
|
30,031 |
|
|
|
3,622 |
|
|
|
33,653 |
|
Assets used in business |
|
|
663,177 |
|
|
|
64,634 |
|
|
|
727,811 |
|
Depreciation |
|
|
3,135 |
|
|
|
215 |
|
|
|
3,350 |
|
Capital expenditures |
|
|
2,411 |
|
|
|
109 |
|
|
|
2,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
412,566 |
|
|
$ |
30,639 |
|
|
$ |
443,205 |
|
Operating income |
|
|
24,234 |
|
|
|
2,116 |
|
|
|
26,350 |
|
Assets used in business |
|
|
649,701 |
|
|
|
50,973 |
|
|
|
700,674 |
|
Depreciation |
|
|
3,016 |
|
|
|
182 |
|
|
|
3,198 |
|
Capital expenditures |
|
|
1,628 |
|
|
|
42 |
|
|
|
1,670 |
|
|
|
|
A reconciliation from the segment operating profit to the condensed consolidated balances is
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
Operating income for
reportable segment |
|
$ |
30,031 |
|
|
$ |
24,234 |
|
Other operating income |
|
|
3,622 |
|
|
|
2,116 |
|
Adjustments for: |
|
|
|
|
|
|
|
|
Other intangible amortization |
|
|
(137 |
) |
|
|
(126 |
) |
Corporate and other income (expense),
net of allocations (a) |
|
|
(139 |
) |
|
|
1,578 |
|
|
|
|
Total operating income |
|
|
33,377 |
|
|
|
27,802 |
|
Interest expense, net |
|
|
647 |
|
|
|
772 |
|
Other (income) expense, net |
|
|
(69 |
) |
|
|
150 |
|
|
|
|
Income before income taxes |
|
$ |
32,799 |
|
|
$ |
26,880 |
|
|
|
|
|
|
|
(a) |
|
The change in corporate and other income (expense), net, is due to various changes in
the levels and amounts of expense being allocated to the segments. The expenses being
allocated include corporate charges for working capital, logistics support and other items. |
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
Sales by geographic location are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
|
|
|
States |
|
|
Canada |
|
|
Other |
|
|
Total |
|
|
|
|
Three Months Ended September 30, 2006 |
|
$ |
432,564 |
|
|
$ |
53,344 |
|
|
$ |
6,682 |
|
|
$ |
492,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
$ |
391,127 |
|
|
$ |
46,554 |
|
|
$ |
5,524 |
|
|
$ |
443,205 |
|
4. |
|
COMPREHENSIVE INCOME |
|
|
|
The components of comprehensive income are as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
21,117 |
|
|
$ |
16,850 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Unrealized loss on hedge transactions, net of
income tax of $(114) and $(118) |
|
|
(179 |
) |
|
|
(183 |
) |
Foreign currency translation
adjustment, net of income tax of $(35) and $570 |
|
|
196 |
|
|
|
1,822 |
|
Unrealized gain (loss) on investment securities
available for sale, net of income tax of $(15)
and $15 |
|
|
(25 |
) |
|
|
25 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
21,109 |
|
|
$ |
18,514 |
|
|
|
|
|
|
|
|
8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
5. |
|
BENEFIT PLANS |
|
|
|
The following table provides summary disclosures of the net periodic benefit costs
recognized for the Companys supplemental executive retirement benefits plan, qualified
retirement plan, salary continuation benefits and retiree medical benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
Three Months Ended September 30 |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Components of net periodic benefit
cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
410 |
|
|
$ |
362 |
|
|
$ |
14 |
|
|
$ |
14 |
|
Interest cost |
|
|
502 |
|
|
|
396 |
|
|
|
55 |
|
|
|
63 |
|
Expected return on plan assets |
|
|
(104 |
) |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
Recognized net actuarial loss (gain) |
|
|
206 |
|
|
|
196 |
|
|
|
(27 |
) |
|
|
7 |
|
Amortization of prior service cost |
|
|
150 |
|
|
|
157 |
|
|
|
12 |
|
|
|
12 |
|
|
|
|
Net periodic pension cost |
|
$ |
1,164 |
|
|
$ |
1,016 |
|
|
$ |
54 |
|
|
$ |
96 |
|
|
|
|
|
|
The Company contributed $168 to its pension benefit plan and $17 to its other benefit
plans in the three months ended September 30, 2006. Expected contributions for the full
fiscal year are $1,200 for the pension benefit plans and $300 for its other benefit plans. |
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The accompanying condensed consolidated financial statements of the Company have been reviewed by
the Companys independent registered public accounting firm, Deloitte & Touche LLP, whose report
covering their review of the financial statements follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Applied Industrial Technologies, Inc.
Cleveland, Ohio
We have reviewed the accompanying condensed consolidated balance sheet of Applied Industrial
Technologies, Inc. and subsidiaries (the Company) as of September 30, 2006, and the related
condensed statements of consolidated income and cash flows for the three-month periods ended
September 30, 2006 and 2005. These interim financial statements are the responsibility of the
Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Applied Industrial Technologies,
Inc. and subsidiaries as of June 30, 2006, and the related statements of consolidated income,
shareholders equity, and cash flows for the year then ended (not presented herein); and in our
report dated August 18, 2006, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of June 30, 2006 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Cleveland, OH
October 26, 2006
10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is Managements Discussion and Analysis of certain significant factors which have
affected the Companys (1) financial condition at September 30, 2006 and June 30, 2006, and (2)
results of operations and cash flows during the periods included in the accompanying Condensed
Statements of Consolidated Income and Consolidated Cash Flows.
Overview
Net income and net income per share for the three months ended September 30, 2006 increased over
the prior year period by 25.3% and 30.6%, respectively. These increases were driven in part by an
11.1% increase in sales and a 3.8% reduction in the number of average common shares outstanding.
Working capital increased to $378 million and shareholders equity to $421 million at September 30,
2006. Our current ratio was 3.1 to 1. Cash provided by operations increased to $16 million.
The Company monitors the Purchasing Managers Index (PMI) as published by the Institute for Supply
Management and the Manufacturers Capacity Utilization (MCU) index published by the Federal Reserve
Board and considers these indices key indicators of potential Company business environment changes.
During the quarter both the MCU and the PMI index moderated downward, however they remain at
levels which continue to indicate an expanding economy, albeit at a slower pace. The Companys
performance traditionally lags these key indicators by up to 6 months.
The
Company had 4,598 associates at September 30, 2006 and 4,490 associates at
September 30, 2005. The increase over prior year is primarily
attributable to a business acquired since the prior year period.
The
Company had a total of 451 operating facilities at September 30,
2006 and 443
operating facilities at September 30, 2005. The increase over prior year is primarily
attributable to a business acquired since the prior year period.
Results Of Operations
Three Months Ended September 30, 2006 and 2005
Sales during the three months ended September 30, 2006 increased $49.4 million or 11.1% compared to
the prior year, reflecting increased sales in both our service center based distribution segment
and other businesses. The number of selling days during the three months ended September 30, 2006
was 63 days and was 64 days during the three months ended September 30, 2005.
Sales from our service center based distribution segment increased $28.6 million or 6.9% during the
three months ended September 30, 2006 from the same period in the prior year. The
increase in sales was driven by the impact of supplier price increases, sales generated by acquired
businesses that were not owned in the prior year period, sales mix and the impact of currency
fluctuations.
11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales from our other businesses increased $20.8 million or 67.8% during the three months ended
September 30, 2006 from the same period in the prior year. The majority of the increase between
the two periods was due to sales generated by businesses acquired since the prior year period.
From a geographical perspective, sales from our Canadian operations increased $6.8 million or 14.6%
during the three months ended September 30, 2006 from the same period in the prior year. Favorable
currency translation accounted for approximately two thirds of the increase between the two
periods. The remaining net sales increase was due to a combination of sales mix and pricing.
During the three months ended September 30, 2006, industrial products and fluid power products
accounted for 80.8% and 19.2%, respectively, of sales. In comparison, industrial products and
fluid power products accounted for 83.6% and 16.4%, respectively, of sales for the same period in
the prior year. The increase in the percentage of sales accounted for by fluid power products was
primarily a result of the Companys acquisition of Spencer Fluid Power on September 30, 2005.
Gross profit as a percentage of sales decreased slightly to 27.4% from 27.6%. We experienced
higher than expected supplier purchasing incentives and lower net freight costs during the quarter.
While we continue to focus on customer pricing improvements we did experience some slight downward
pricing pressure during the quarter primarily due to a temporary situation from supplier price
increases. While the businesses acquired since the prior year continue to be accretive and have
solid operating results, their gross margin percentages are lower than the Company average which
also impacted the overall gross profit margin. Overall the gross profit margin for this quarter is
slightly higher than our forecast for the remainder of the year, which remains at approximately
27.0% as our expectations are for supplier purchasing incentives to decline from the levels
experienced in the first quarter.
During the quarter we experienced reductions in certain U.S. inventories that are valued using the
last-in, first-out (LIFO) method. These interim inventory reductions caused a temporary
liquidation of LIFO inventory quantities which are carried at lower costs. As required under
generally accepted accounting principles, we did not give effect to any income statement benefit
from this temporary liquidation of LIFO inventories as we expect to replace the inventory by
year-end.
SD&A increased during the three months ended September 30, 2006 by $7.3 million or 7.7% over
the prior year period, but declined as a percentage of sales to 20.7% from 21.3% in the prior year
period. The increase in SD&A is primarily attributable to businesses acquired since the prior year
period and increases in associate compensation, some of which resulted from improved financial
performance of the company.
Income tax expense as a percentage of income before taxes was 35.6% for the quarter ended September
30, 2006 compared to 37.3% for the quarter ended September 30, 2005. The lower tax rate for the
quarter relates primarily to state and local tax adjustments. We expect our full-year
fiscal 2007 effective tax rate to be in the range of 36.0% to 36.5%.
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As a result of the above factors, net income increased by 25.3% compared to the same quarter of
last year. Net income per share increased at a higher rate of 30.6% due to the lower number of
shares outstanding from the stock buyback program.
Liquidity and Capital Resources
Cash provided by operating activities for the quarter ended September 30, 2006 was $16.1 million.
This compares to approximately $2.1 million used in operating activities in the same period a year
ago. Cash flows from operations depend primarily upon generating operating income, controlling the
investment in inventories and receivables, and managing the timing of payments to suppliers. During
the three month period ended September 30, 2006, inventories were relatively stable and only
increased approximately $2.0 million. Accounts receivable increased $9.1 million during the three
months ended September 30, 2006 due to the overall increase in sales.
Capital expenditures were $2.5 million for the three months ended September 30, 2006 compared to
$1.7 million in the prior year. For the entire year the Company expects total capital expenditures
to be in the range of $10.0 to $12.0 million. Depreciation expense for the entire year is expected
to be within the range of $13.0 million to $14.0 million. Share-based compensation and
amortization of intangibles and other assets as reported on the condensed statements of
consolidated cash flows is expected to be in the range of $5.0 million to $5.5 million for the
entire year.
The Company has a $100.0 million revolving credit facility with a group of banks expiring in June
2010. The Company had no borrowings outstanding under this facility at September 30, 2006. Unused
lines under this facility, net of outstanding letters of credit, total $94.7 million, and are
available to fund future acquisitions or other capital and operating requirements.
The Company has an agreement with Prudential Investment Management, Inc. expiring in February 2007,
for an uncommitted shelf facility that enables the Company to borrow up to $100.0 million in
additional long-term financing at the Companys discretion with terms of up to twelve years. At
September 30, 2006, there was no borrowing under this agreement.
The Companys long-term debt matures as follows: $50.0 million due in fiscal 2008 and $25.0 million
due in fiscal 2011.
The Board of Directors has authorized the purchase of shares of the Companys common stock for the
purpose of funding benefit programs, stock option and award programs, and future business
acquisitions. These purchases may be made in open market and negotiated transactions, from time to
time, depending upon market conditions. The Company acquired 520,900 shares of its common stock
for $12.4 million during the three months ended September 30, 2006. At September 30, 2006, the
Company had remaining authorization to repurchase 979,100 additional shares.
13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Under Private Securities Litigation Reform Act
Managements Discussion and Analysis and other sections of this report, including documents
incorporated by reference, contain statements that are forward-looking, based on managements
current expectations about the future. Forward-looking statements are often identified by
qualifiers such as expect, expectation, forecast, believe, intend, and similar
expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also
forward-looking statements. These statements may discuss, among other things, expected growth,
future sales, future cash flows, future capital expenditures, future performance, and the
anticipation and expectations of the Company and its management as to future occurrences and
trends. 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 Companys control. Accordingly, actual results may differ materially from
those expressed in the forward-looking statements, and the making of those 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 assumes no obligation publicly to update or
revise any forward-looking statements, whether because of new information or events, or otherwise,
except as may be required by law.
Important risk factors include, but are not limited to, the following: risks relating to the
operations levels of customers and the economic factors that affect them; reduced demand for the
Companys products in targeted markets due to reasons including consolidation in customer
industries and the transfer of manufacturing capacity to foreign countries; changes in customer
preferences for products and services of the nature and brands sold by the Company; changes in
customer procurement policies and practices; changes in the price for products and services
relative to the cost of providing them; loss of key supplier authorizations, lack of product
availability, or changes in supplier distribution programs; competitive pressures; the cost of
products and energy and other operating costs; disruption of the Companys information systems; the
Companys ability to retain and attract qualified sales and customer service personnel; the
Companys ability to identify and complete future acquisitions, integrate them effectively, and
realize their anticipated benefits; disruption of operations at the Companys headquarters or
distribution centers; risks and uncertainties associated with the Companys foreign operations,
including more volatile economic conditions, political instability, cultural and legal differences,
and currency exchange fluctuations; risks related to legal proceedings to which we are a party; the
variability and timing of new business opportunities including acquisitions, alliances, customer
relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in
connection with acquisitions; our ability to access capital markets as needed; changes in
accounting policies and practices; organizational changes within the Company; the volatility of the
Companys stock price and the resulting impact on our financial statements;
14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
adverse regulation and
legislation; and the occurrence of extraordinary events (including
prolonged labor disputes, natural events and acts of god, terrorist acts, fires, floods, and
accidents). Other factors and unanticipated events could also adversely affect the Companys
business, financial condition, or results of operations. We discussed certain of these matters more
fully in our Annual Report on Form 10-K for the year ended June 30, 2006.
15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has evaluated its 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 effects of changes in interest rates and foreign
exchange 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. The Company had no variable rate borrowings outstanding under its committed revolving
credit agreement at September 30, 2006. The Company has no interest rate swap agreements
outstanding. All of the Companys outstanding long-term debt is currently at fixed interest rates
at September 30, 2006 and scheduled for repayment in December 2007 and beyond.
The Company mitigates its foreign currency exposure from the Canadian dollar through the use of
cross currency swap agreements as well as foreign-currency denominated debt. Hedging of the U.S.
dollar denominated debt, used to fund a substantial portion of the Companys 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. Translation exposures with
regard to our Mexican business are not hedged because the Mexican activity is not material. For
the three months ended September 30, 2006, a uniform 10% strengthening of the U.S. dollar relative
to foreign currencies that affect the Company would have resulted in a $0.3 million decrease in net
income. A uniform 10% weakening of the U.S. dollar would have resulted in a $0.3 million increase
in net income.
16
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 4: CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. An evaluation was carried
out under the supervision and with the participation of the Companys management, including the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
Companys disclosure controls and procedures as of the end of the period covered by this report.
Based on that evaluation, these officers have concluded that the Companys disclosure controls and
procedures are effective.
During the first quarter of fiscal 2007, there were no material changes in the Companys internal
controls or in other factors that materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial reporting.
17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
|
|
The Company has been named a defendant in pending legal proceedings with respect to
various product liability, commercial, and other matters. Although it is not possible to
predict the outcome of these unresolved actions or the range of possible loss, the
Company does not believe, based on circumstances currently known, that any liabilities
that may result from these proceedings are reasonably likely to have a material adverse
effect on the Companys consolidated financial position, results of operations, or cash
flows. |
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
|
|
Repurchases in the quarter ended September 30, 2006 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number |
|
(d) Maximum |
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
that May Yet Be |
|
|
(a) Total |
|
(b) Average |
|
of Publicly |
|
Purchased Under |
|
|
Number of |
|
Price Paid per |
|
Announced Plans |
|
the Plans or |
Period |
|
Shares |
|
Share ($) |
|
or Programs |
|
Programs |
July 1, 2006 to
July 31, 2006 |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
1,500,000 |
|
August 1, 2006 to
August 31, 2006 |
|
|
40,000 |
|
|
|
22.52 |
|
|
|
40,000 |
|
|
|
1,460,000 |
|
September 1, 2006
to September 30,
2006 |
|
|
480,900 |
|
|
|
23.93 |
|
|
|
480,900 |
|
|
|
979,100 |
|
Total |
|
|
520,900 |
|
|
|
23.82 |
|
|
|
520,900 |
|
|
|
979,100 |
|
|
|
|
(1) |
|
On July 18, 2006, the Board of Directors authorized the purchase of up to 1.5
million shares of the Companys common stock. The Company publicly announced the
authorization that day. These purchases may be made in the open market or in privately
negotiated transactions. This authorization is in effect until all shares are purchased
or the authorization is revoked or amended by the Board of Directors. |
|
(2) |
|
During the quarter the Company purchased 43 shares in connection with the
exercise of stock options and other employee benefit programs. These purchases are not
counted within the aforementioned Board authorization. |
18
ITEM 6. Exhibits.
|
|
|
Exhibit No. |
|
Description |
3(a)
|
|
Amended and Restated Articles of Incorporation of Applied
Industrial Technologies, Inc., as amended on October 25, 2005 (filed as
Exhibit 3(a) to the Companys Form 10-Q for the quarter ended December 31,
2005, 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 Companys
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 Companys Registration Statement on
Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated
here by reference). |
|
|
|
4(b)
|
|
Private Shelf Agreement dated as of November 27, 1996, as
amended on January 30, 1998, between the Company and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance Company of America)
(filed as Exhibit 4(f) to the Companys Form 10-Q for the quarter ended March
31, 1998, SEC File No. 1-2299, and incorporated here by reference). |
|
|
|
4(c)
|
|
Amendment dated October 24, 2000 to 1996 Private Shelf
Agreement between the Company and Prudential
Investment Management, Inc. (assignee of The Prudential
Insurance Company of America) (filed as Exhibit 4(e) to the
Companys Form 10-Q for the quarter ended September 30, 2000,
SEC File No. 1-2299, and incorporated here by reference). |
19
|
|
|
Exhibit No. |
|
Description |
4(d)
|
|
Amendment dated November 14, 2003 to 1996 Private Shelf
Agreement between the Company and Prudential
Investment Management, Inc. (assignee of The
Prudential Insurance Company of America) (filed as Exhibit
4(d) to the Companys Form 10-Q for the quarter ended
December 31, 2003, SEC File No. 1-2299, and incorporated here
by reference). |
|
|
|
4(e)
|
|
Amendment dated February 25, 2004 to 1996 Private Shelf
Agreement between the Company and Prudential Investment Management, Inc. (assignee of The Prudential
Insurance Company of America) (filed as Exhibit 4(e) to the
Companys Form 10-Q for the quarter ended March 31, 2004, SEC
File No. 1-2299, and incorporated here by reference). |
|
|
|
4(f)
|
|
$100,000,000 Credit Agreement dated as of June 3, 2005
among the Company, KeyBank National Association as Agent, and various
financial institutions (filed as Exhibit 4 to the Companys Form 8-K dated
June 9, 2005, 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 Companys
Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299,
and incorporated here by reference). |
|
|
|
10(a)
|
|
1997 Long-Term Performance Plan re-adopted by shareholders
on October 22, 2002 (as amended on July 17, 2006 to reflect stock
split-related adjustments). |
|
|
|
10(b)
|
|
2007 Management Incentive Plan General Terms (filed as
Exhibit 10(a) to the Companys Form 8-K dated August 8, 2006, SEC File No.
1-2299, and incorporated here by reference). |
|
|
|
10(c)
|
|
Performance Grant Terms and Conditions (filed as Exhibit
10(b) to the Companys Form 8-K dated August 8, 2006, SEC File No. 1-2299, and
incorporated here by reference). |
20
|
|
|
Exhibit No. |
|
Description |
15
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
31
|
|
Rule 13a-14(a)/15d-14(a) certifications. |
|
|
|
32
|
|
Section 1350 certifications. |
Applied will furnish a copy of any exhibit described above and not contained herein upon
payment of a specified reasonable fee which shall be limited to Applieds reasonable expenses in
furnishing the exhibit.
Certain instruments with respect to long-term debt have not been filed as exhibits because the
total amount of securities authorized under any one of the instruments does not exceed 10 percent
of the total assets of Applied and its subsidiaries on a consolidated basis. Applied agrees to
furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument.
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: October 30, 2006
|
|
By:
|
|
/s/ David L. Pugh |
|
|
|
|
|
|
|
|
|
|
|
|
|
David L. Pugh |
|
|
|
|
|
|
Chairman & Chief Executive Officer |
|
|
|
|
|
|
|
|
|
Date: October 30, 2006
|
|
By:
|
|
/s/ Mark O. Eisele |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark O. Eisele |
|
|
|
|
|
|
Vice President-Chief Financial Officer |
|
|
|
|
|
|
& Treasurer |
|
|
21
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2006
|
|
|
|
|
EXHIBIT NO. |
|
DESCRIPTION |
|
|
3(a)
|
|
Amended and Restated Articles of Incorporation of
Applied Industrial Technologies, Inc., as amended on
October 25, 2005 (filed as Exhibit 3(a) to the Companys
Form 10-Q for the quarter ended December 31, 2005,
SEC File No. 1-2299, and incorporated here by reference). |
|
|
|
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3(b)
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Code of Regulations of Applied Industrial Technologies, Inc.,
as amended on October 19, 1999 (filed as Exhibit 3(b) to the Companys
Form 10-Q for the quarter ended September 30, 1999, SEC File No.
1-2299, and incorporated here by reference). |
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4(a)
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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 Companys Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference). |
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4(b)
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Private Shelf Agreement dated as of November 27, 1996, as
amended on January 30, 1998, between the Company and Prudential
Investment Management, Inc. (assignee of The Prudential Insurance
Company of America) (filed as Exhibit 4(f) to the Companys Form 10-Q
for the quarter ended March 31, 1998, SEC File No. 1-2299, and
incorporated here by reference). |
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4(c)
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Amendment dated October 24, 2000 to November 27, 1996 Private
Shelf Agreement between the Company and Prudential Investment
Management, Inc. (assignee of The Prudential Insurance Company of
America) (filed as Exhibit 4(e) to the Companys Form 10-Q for the
quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated
here by reference). |
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EXHIBIT NO. |
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DESCRIPTION |
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4(d)
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Amendment dated November 14, 2003 to 1996
Private Shelf Agreement between the Company and
Prudential Investment Management, Inc. (assignee of
The Prudential Insurance Company of America)
(filed as Exhibit 4(d) to the Companys Form 10-Q
for the quarter ended December 31, 2003, SEC File
No. 1-2299, and incorporated here by reference). |
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4(e)
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Amendment dated February 25, 2004 to 1996 Private
Shelf Agreement between the Company and Prudential
Investment Management, Inc. (assignee of The
Prudential Insurance Company of America) (filed as
Exhibit 4(e) to the Companys Form 10-Q for the
quarter ended March 31, 2004, SEC File No.
1-2299, and incorporated here by reference). |
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4(f)
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$100,000,000 Credit Agreement dated as of June
3, 2005 among the Company, KeyBank National
Association as Agent, and various financial
institutions (filed as Exhibit 4 to the Companys
Form 8-K dated June 9, 2005, SEC File No.
1-2299, and incorporated here by reference). |
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4(g)
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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
Companys Registration Statement on Form 8-A filed July 20, 1998, SEC
File No. 1-2299, and incorporated here by reference). |
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10(a)
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1997 Long-Term Performance Plan re-adopted by
shareholders on October 22, 2002 (as amended on
July 17, 2006 to reflect stock split-related
adjustments).
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Attached |
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10(b)
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2007 Management Incentive Plan General Terms
(filed as Exhibit 10(a) to the Companys Form 8-K
dated August 8, 2006, SEC File No. 1-2299, and
incorporated here by reference). |
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10(c)
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Performance Grant Terms and Conditions (filed
as Exhibit 10(b) to the Companys Form 8-K |
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EXHIBIT NO. |
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DESCRIPTION |
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dated August 8, 2006, SEC File No. 1-2299, and
incorporated here by reference). |
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15
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Consent of Independent Registered Public
Accounting Firm.
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Attached |
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31
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Rule 13a-14(a)/15d-14(a) certifications.
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Attached |
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32
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Section 1350 certifications.
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Attached |