Document/Exhibit Description Pages Size
1: 10-Q Applied Industrial Technologies, Inc. 10-Q 22 97K
2: EX-3.A Articles of Incorporation/Organization or By-Laws 10 38K
3: EX-15 Letter re: Unaudited Interim Financial Information 1 8K
4: EX-31 Certification per Sarbanes-Oxley Act (Section 302) 3 16K
5: EX-32 Certification per Sarbanes-Oxley Act (Section 906) 1 7K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2005
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)
[Download Table]
Ohio 34-0117420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
Shares of common stock outstanding on October 17, 2005 29,906,701
(No par value)
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
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Page No.
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Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Statements of Consolidated Income -
Three Months Ended September 30, 2005 and 2004 2
Condensed Consolidated Balance Sheets -
September 30, 2005 and June 30, 2005 3
Condensed Statements of Consolidated Cash Flows -
Three Months Ended September 30, 2005 and 2004 4
Notes to Condensed Consolidated Financial Statements 5 - 8
Review By Independent Registered Public Accounting Firm 9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
Item 4: Controls and Procedures 15
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Unregistered Sales of Equity Securities & Use of Proceeds 16
Item 6: Exhibits 17
Signatures 19
Exhibit Index
Exhibits
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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Three Months Ended
September 30
-------------------
2005 2004
-------- --------
Net Sales $443,205 $413,126
Cost of Sales 320,901 303,604
-------- --------
Gross Profit 122,304 109,522
Selling, Distribution and Administrative Expenses 94,502 88,019
-------- --------
Operating Income 27,802 21,503
Interest Expense, net 772 1,303
Other Expense (Income), net 150 (270)
-------- --------
Income Before Income Taxes 26,880 20,470
Income Taxes 10,030 7,430
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Net Income $ 16,850 $ 13,040
======== ========
Net Income Per Share - Basic $ 0.56 $ 0.45
======== ========
Net Income Per Share - Diluted $ 0.54 $ 0.43
======== ========
Cash dividends per common share $ 0.12 $ 0.09
======== ========
Weighted average common shares outstanding for basic computation 29,975 29,238
Dilutive effect of stock options and awards 1,093 930
-------- --------
Adjusted average common shares outstanding for diluted computation 31,068 30,168
======== ========
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 June 30
2005 2005
------------ --------
ASSETS
Current assets
Cash and temporary investments $ 96,791 $127,136
Accounts receivable, less allowances of $6,300 and $6,500 215,020 202,226
Inventories (at LIFO) 200,935 175,533
Other current assets 23,928 22,606
-------- --------
Total current assets 536,674 527,501
Property, less accumulated depreciation of $109,892 and $106,619 71,219 71,441
Goodwill 51,971 51,083
Other assets 40,810 40,145
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TOTAL ASSETS $700,674 $690,170
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $105,409 $ 99,047
Other accrued liabilities 75,734 82,648
-------- --------
Total current liabilities 181,143 181,695
Long-term debt 76,779 76,977
Other liabilities 40,950 38,211
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TOTAL LIABILITIES 298,872 296,883
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Shareholders' Equity
Preferred stock - no par value; 2,500 shares authorized; none
issued or outstanding
Common stock - no par value; 50,000 shares authorized;
36,143 shares issued 10,000 10,000
Additional paid-in capital 105,971 103,240
Income retained for use in the business 367,758 354,521
Treasury shares - at cost, 6,241 and 6,142 shares (81,847) (72,660)
Unearned restricted common stock compensation (755) (825)
Accumulated other comprehensive income (loss) 675 (989)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 401,802 393,287
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $700,674 $690,170
======== ========
See notes to condensed consolidated financial statements.
3
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
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Three Months Ended
September 30
-------------------
2005 2004
-------- --------
Cash Flows from Operating Activities
Net income $ 16,850 $ 13,040
Adjustments to reconcile net income to cash used in operating activities:
Depreciation 3,198 3,499
Stock based compensation and amortization of other intangible assets 689 540
Gain on sale of property (12) (291)
Changes in operating assets and liabilities, net of effects from
acquisition of business (24,279) (20,401)
Treasury shares contributed to employee benefit and deferred
compensation plans 3,046 3,764
Other - net (198) (197)
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Net Cash used in Operating Activities (706) (46)
-------- --------
Cash Flows from Investing Activities
Property purchases (1,670) (1,758)
Proceeds from property sales 45 398
Net cash paid for acquisition of business (15,735) --
Deposits and other 290 (877)
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Net Cash used in Investing Activities (17,070) (2,237)
-------- --------
Cash Flows from Financing Activities
Dividends paid (3,613) (2,753)
Purchases of treasury shares (10,178) (5,987)
Exercise of stock options 867 4,377
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Net Cash used in Financing Activities (12,924) (4,363)
-------- --------
Effect of exchange rate changes on cash 355 171
-------- --------
Decrease in cash and temporary investments (30,345) (6,475)
Cash and temporary investments at beginning of period 127,136 69,667
-------- --------
Cash and Temporary Investments at End of Period $ 96,791 $ 63,192
======== ========
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. BASIS OF PRESENTATION
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 the Company as of September 30, 2005 and the
results of operations and cash flows for the three month periods ended
September 30, 2005 and 2004 have been included. This Quarterly Report on
Form 10-Q should be read in conjunction with the Applied Industrial
Technologies, Inc. (the Company) Annual Report on Form 10-K for the year
ended June 30, 2005.
Operating results for the three month period ended September 30, 2005 are
not necessarily indicative of the results that may be expected for the
remainder of the fiscal year ending June 30, 2006.
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.
All share and per share data have been restated to reflect a three-for-two
stock split effective December 17, 2004.
Certain reclassifications have been made to prior year amounts to be
consistent with the presentation in the current year.
2. STOCK OPTIONS
Effective July 1, 2005, the Company adopted SFAS 123(R) (revised 2004),
"Share-Based Payments," which is a revision of SFAS 123, "Accounting for
Stock-Based Compensation." Generally, the approach in SFAS 123(R) is
similar to the fair value approach described in SFAS 123 which the Company
adopted effective July 1, 2003. The adoption of SFAS 123(R) did not have a
material impact on the Company's consolidated financial statements.
5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
3. SEGMENT INFORMATION
The accounting policies of the Company's 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.
SEGMENT FINANCIAL INFORMATION:
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SERVICE CENTER
BASED
DISTRIBUTION OTHER TOTAL
-------------- ------- --------
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
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THREE MONTHS ENDED SEPTEMBER 30, 2004
Net sales $385,627 $27,499 $413,126
Operating income 19,158 1,916 21,074
Assets used in business 587,483 25,519 613,002
Depreciation 3,332 167 3,499
Capital expenditures 1,730 28 1,758
-------- ------- --------
A reconciliation from the segment operating profit to the condensed consolidated
balances is as follows:
[Download Table]
THREE MONTHS ENDED
SEPTEMBER 30
------------------
2005 2004
------- -------
Operating income for
reportable segment $24,234 $19,158
Other operating income 2,116 1,916
Adjustments for:
Other intangible amortization (126) (179)
Corporate and other income,
net of allocations (a) 1,578 608
------- -------
Total operating income 27,802 21,503
Interest expense, net 772 1,303
Other expense (income), net 150 (270)
------- -------
Income before income taxes $26,880 $20,470
======= =======
(a) The change in corporate and other income, 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.
6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
The Company has operations in the United States, Canada and Mexico. Net
sales by the Company's Canadian and Mexican operations represented 11.8%
and 10.0% of its total net sales during the three months ended September
30, 2005 and 2004, respectively. The Canadian operations' sales (in U.S.
dollars) were $46,554 and $37,145 during the three months ended September
30, 2005 and 2004, respectively.
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
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Three Months Ended
September 30
------------------
2005 2004
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Net income $16,850 $13,040
Other comprehensive income (loss):
Unrealized loss on hedge transactions, net of
income tax of $(118) and $(163) (183) (269)
Foreign currency translation
adjustment, net of income tax of $570 and $408 1,822 728
Unrealized gain on investment securities available
for sale, net of income tax of $15 25 --
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Total comprehensive income $18,514 $13,499
======= =======
5. BENEFIT PLANS
The following table provides summary disclosures of the net periodic
benefit costs recognized for the Company's Supplemental Executive
Retirement Benefits Plan, qualified retirement plan, salary continuation
benefits and retiree medical benefits:
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Pension Benefits Other Benefits
---------------- --------------
2005 2004 2005 2004
------ ---- ---- ----
THREE MONTHS ENDED SEPTEMBER 30
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 362 $318 $14 $ 12
Interest cost 396 377 63 73
Expected return on plan assets (95) (88) -- --
Recognized net actuarial loss 196 120 7 4
Amortization of prior service cost 157 157 12 12
------ ---- --- ----
Net periodic pension cost $1,016 $884 $96 $101
====== ==== === ====
7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts) (Unaudited)
The company contributed $199 to its pension benefit plan and $7 to its
other benefit plans in the three months ended September 30, 2005. Expected
contributions for the full fiscal year are $740 for the pension benefit
plans and $300 for its other benefit plans.
6. BUSINESS COMBINATION
On September 30, 2005, the Company acquired certain assets and assumed
certain liabilities of Spencer Industries, Inc. ("Spencer Fluid Power"), a
distributor of fluid power products, for $15,735 in cash and have included
them in the September 30, 2005 condensed consolidated balance sheet. The
results of the acquired operations will be included in the condensed
consolidated income statement and in our other segment for segment
reporting beginning October 1, 2005. Results of operations for this
acquisition are not material for all periods presented.
The preliminary fair values of the acquired assets and liabilities assumed
at the date of acquisition are as follows:
[Download Table]
Accounts receivable, net $ 6,345
Inventory, net 9,922
Other current assets 1,017
Property 994
Other assets 82
Goodwill 440
Other intangibles 660
-------
Total assets acquired 19,460
Liabilities assumed 3,725
-------
Net assets acquired $15,735
=======
The preliminary valuation of other intangibles recognized in connection
with this acquisition consists of customer relationships and
non-competition agreements. The amortization period is not expected to
exceed fifteen years.
7. SUBSEQUENT EVENT
On October 12, 2005, the shareholders approved an amendment to the
Company's articles of incorporation to increase the number of authorized
shares of common stock from 50 million shares to 80 million shares.
8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The accompanying condensed consolidated financial statements of the Company have
been reviewed by the Company's independent registered public accountants,
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, 2005, and related condensed statements of consolidated income and
cash flows for the three-month periods ended September 30, 2005 and 2004. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with 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 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, 2005, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
August 19, 2005, 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, 2005 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, Ohio
October 14, 2005
9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of certain significant
factors which have affected the Company's (1) financial condition at September
30, 2005 and June 30, 2005, 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 for the three months ended September 30, 2005 increased 29.2%
compared to the same quarter in the prior year on a 7.3% increase in sales.
Underlying this improvement in net income were the increase in sales and an
improvement in gross margin.
The balance sheet continued to strengthen as shareholders' equity exceeded
$400.0 million and our current ratio was 3 to 1. Overall inventory balances grew
during the quarter due to the acquisition of Spencer Fluid Power, as well as to
take advantage of buying opportunities with certain suppliers and the purchase
of inventories to meet anticipated demand for our products. Days sales
outstanding improved to approximately 40.3 days compared to 43.5 days at
September 30, 2004 due to improved collections.
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
these indicators continued to show relative strength in the economy. This
however may be negatively impacted by the recent Gulf Coast hurricanes and
rising energy prices. The Company's performance traditionally lags these key
indicators by approximately 6 months.
The Company expects that fiscal 2006 second quarter sales will rise between 8.9%
and 11.3% compared to the same quarter last year. Sales for the entire 2006
fiscal year are expected to be in the range of $1.85 billion to $1.89 billion.
Results Of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Net sales increased 7.3% compared to the prior year due to sales increases at
our U.S. service centers, Canadian operations and our U.S. fluid power
subsidiaries. The number of selling days in each quarter was the same at 64
days.
U.S. service center sales increased 5.4%, driven by sales mix, and the impact of
supplier price increases passed on to customers. Approximately half of this
sales increase was a result of the supplier price increases passed on to
customers. We estimate hurricanes Katrina and Rita resulted in a loss of
approximately $1.5 million in sales during the quarter.
10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sales in our Canadian operations improved $9.4 million or 25.3% compared to the
prior year. Approximately $5.5 million of the increase was the result of the
acquisition of Groupe GLM effective in January 2005. Currency translation effect
from the strengthening Canadian dollar increased sales $3.4 million. The
remaining sales increase was due to a combination of sales mix, pricing, and
increased volume.
Our U.S. fluid power subsidiaries had a sales increase of $1.1 million or 7.0%
over the prior year first quarter.
Gross profit as a percentage of sales increased to 27.6% from 26.5%. The
increase is primarily the result of improved margin at the U.S. service centers
due to improved customer pricing and, to a lesser extent, increased supplier
rebates. Supplier rebates increased slightly for the quarter over the prior year
as we recorded some rebate benefits in the quarter related to prior fiscal year
activity under inventory purchase programs. The criteria under generally
accepted accounting principles necessary to permit us to record these rebate
benefits were not met until the first quarter.
Selling, distribution and administrative (SD&A) expenses increased 7.4% compared
to the prior year and as a percentage of sales, they remained stable at 21.3%.
This overall increase in SD&A was primarily driven by higher employee
compensation and benefits related to performance driven incentives, higher
medical costs and the acquisition of Groupe GLM effective in January 2005.
Average rates paid on borrowings were 6.6% for the quarter ended September 30,
2005 and 6.3% for the same period last year. The increase is due to the increase
in foreign currency translation rates. Interest expense-net for the quarter
decreased $0.5 million as compared to the prior year due to an increase in
interest income on overnight investments. This is due to increases in both the
rates earned and average balance of these investments.
Other expense (income), net decreased compared to the prior year due to a
non-operating gain of $0.7 million related to the settlement of a life insurance
policy in the quarter ended September 30, 2004.
Income tax expense as a percentage of income before taxes was 37.3% for the
quarter ended September 30, 2005 compared to 36.3% for the quarter ended
September 30, 2004. This increase is due to the beneficial impact of tax-free
life insurance proceeds received in the prior year that did not recur in the
current quarter, as well as increases in state and local taxes. We expect our
full-year fiscal 2006 effective tax rate will be approximately 37.5%.
As a result of the above factors, net income increased by 29.2% compared to the
same quarter of last year and net income per share increased 25.6%.
11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash used by operating activities for the quarter ended September 30, 2005 was
$0.7 million. This compares to approximately $.05 million used in operating
activities in the same period a year ago. Cash flows from operations are
generally lower in our first quarter as we generally increase inventories and
pay out fiscal year-end incentives.
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, 2005, inventories increased approximately $25.4 million including $9.9
million from the Spencer Fluid Power acquisition. The increase was also to take
advantage of buying opportunities with certain suppliers and the purchase of
inventories to meet anticipated demand for our products. Accounts receivable
increased $12.8 million during the three months ended September 30, 2005 due to
the Spencer Fluid Power acquisition and the overall increase in sales.
Capital expenditures were $1.7 million for the three months ended September 30,
2005 compared to $1.8 million in the prior year. For the entire year the Company
expects total capital expenditures to be in the range of $12.0 to $13.0 million.
Depreciation expense for the entire year is expected to be within the range of
$13.0 million to $14.0 million.
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, 2005. Unused lines under this facility, net of
outstanding letters of credit, total $91.0 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
Company's discretion with terms of up to twelve years. At September 30, 2005,
there was no borrowing under this agreement.
The Company's 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 Company's
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 295,900 shares of its common stock for $10.2
million during the three months ended September 30, 2005. At September 30, 2005,
the Company had remaining authorization to repurchase 535,563 additional shares.
12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other Matters
On September 30, 2005, the Company acquired certain assets and assumed certain
liabilities of Spencer Industries, Inc., a distributor of fluid power products
for approximately $15.7 million and have included them in the September 30, 2005
condensed consolidated balance sheet. The acquisition was paid for from our cash
balances. The acquired operations will be reported in the condensed consolidated
income statement beginning October 1, 2005.
Cautionary Statement Under Private Securities Litigation Reform Act
Management's Discussion and Analysis and other sections of this Form 10-Q
contain statements that are forward-looking, based on management's current
expectations about the future. Forward-looking statements are often identified
by qualifiers such as "expect," "believe," "intend," "will" and similar
expressions. The Company intends that the forward-looking statements be subject
to the safe harbors established in the Private Securities Litigation Reform Act
of 1995 and by the Securities and Exchange Commission in its rules, regulations
and releases.
Readers are cautioned not to place undue reliance on any forward-looking
statements. All forward-looking statements are based on current expectations
regarding important risk factors. Accordingly, actual results may differ
materially from those expressed in the forward-looking statements, and the
making of such statements should not be regarded as a representation by the
Company or any other person that the results expressed in the statements will be
achieved. In addition, the Company undertakes no obligation publicly to update
or revise any forward-looking statements, whether because of new information or
events, or otherwise.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industry sectors; reduced demand for our
products in targeted markets including consolidation in customer industries and
the transfer of manufacturing capacity to foreign countries; changes in interest
rates and inflation; changes in customer procurement policies and practices;
changes in product manufacturer sales policies and practices; the availability
of products and labor; changes in operating expenses; price increases or
decreases; the variability and timing of business opportunities including
acquisitions, alliances, customer relationships and supplier authorizations; the
Company's ability to realize the anticipated benefits of acquisitions and other
business strategies; the incurrence of debt and contingent liabilities in
connection with acquisitions; changes in accounting policies and practices;
organizational changes within the Company; the emergence of new competitors,
including firms with greater financial resources than the Company; risks and
uncertainties associated with the Company's foreign operations, including
inflation, recessions, and foreign currency exchange rates; adverse results in
significant litigation matters; adverse regulation and legislation; and the
occurrence of extraordinary events (including prolonged labor disputes, natural
events and acts of God, terrorist acts, fires, floods and accidents).
13
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, 2005. The Company has no interest rate swap agreements
outstanding. All of the Company's outstanding long-term debt is currently at
fixed interest rates at September 30, 2005 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 Company's net investment in its Canadian operations,
is accomplished through the use of cross currency swaps. Any gain or loss on the
hedging instrument offsets the gain or loss on the underlying debt. 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, 2005, 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.
14
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 Company's
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the Company's 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 Company's disclosure controls
and procedures are effective.
During the first quarter of Fiscal 2006, there were no material changes in the
Company's internal controls or in other factors that materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
15
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 Company's 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, 2005 were as follows:
[Enlarge/Download Table]
(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 Announced Plans the Plans or
Period Shares per Share or Programs Programs
------ --------- ----------- ----------------- ----------------
July 1, 2005 to July 31, 2005 -0- -0- 831,463
August 1, 2005 to August 31, 2005 50,900 34.19 50,900 780,563
September 1, 2005 to September 30, 2005 245,000 34.44 245,000 535,563
------- ----- ------- -------
Total 295,900 34.40 295,900 535,563
======= ===== ======= =======
(1) On July 16, 2003, the Board of Directors authorized the purchase of up to
1.5 million shares of the Company's common stock. The Company announced the
authorization on July 16, 2003. 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 60,982 shares in connection with
the exercise of stock options and other employee benefit programs. These
purchases are not counted within the aforementioned Board authorization.
16
ITEM 6. Exhibits.
[Download Table]
Exhibit No. Description
----------- -----------
3(a) Amended and Restated Articles of Incorporation of Applied
Industrial Technologies, Inc., as amended on October 25, 2005.
3(b) Code of Regulations of Applied Industrial Technologies, Inc., as
amended on October 19, 1999 (filed as Exhibit 3(b) to the
Company's Form 10-Q for the quarter ended September 30, 1999, SEC
File No. 1-2299, and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio Secretary of State on October 18,
1988, including an Agreement and Plan of Reorganization dated
September 6, 1988 (filed as Exhibit 4(a) to the Company's
Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by reference).
4(b) 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 Company's 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 Company's Form 10-Q for the quarter ended
September 30, 2000, SEC File No. 1-2299, and incorporated here by
reference).
4(d) Amendment dated November 14, 2003 to 1996 Private Shelf Agreement
between the Company and Prudential
17
[Download Table]
Investment Management, Inc. (assignee of The Prudential Insurance
Company of America) (filed as Exhibit 4(d) to the Company's 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 Company's 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 Company's 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 Company's Registration Statement on Form 8-A filed
July 20, 1998, SEC File No. 1-2299, and incorporated here by
reference).
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 Applied's 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.
18
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 28, 2005 By: /s/ David L. Pugh
------------------------------------
David L. Pugh
Chairman & Chief Executive Officer
Date: October 28, 2005 By: /s/ Mark O. Eisele
------------------------------------
Mark O. Eisele
Vice President-Chief Financial
Officer & Treasurer
19
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2005
[Enlarge/Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
3(a) Amended and Restated Articles of Incorporation of Applied Attached
Industrial Technologies, Inc., as amended on October 25, 2005.
3(b) Code of Regulations of Applied Industrial Technologies, Inc., as
amended on October 19, 1999 (filed as Exhibit 3(b) to the
Company's Form 10-Q for the quarter ended September 30, 1999, SEC
File No. 1-2299, and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio Secretary of State on October 18,
1988, including an Agreement and Plan of Reorganization dated
September 6, 1988 (filed as Exhibit 4(a) to the Company's
Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by reference).
4(b) 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 Company's 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 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 Company's Form 10-Q for the
quarter ended September 30, 2000, SEC File No. 1-2299, and
incorporated here by reference).
[Download Table]
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 Company's 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 Company's 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 Company's 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 Company's Registration Statement on Form 8-A filed
July 20, 1998, SEC File No. 1-2299, and incorporated here by
reference).
15 Consent of Independent Registered Public Accounting Firm. Attached
31 Rule 13a-14(a)/15d-14(a) certifications. Attached
32 Section 1350 certifications. Attached
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-Q’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 6/30/06 | | 6 | | | | | 10-K |
| Filed on: | | 10/28/05 | | 20 | | | | | 4, 8-K |
| | 10/25/05 | | 18 | | 21 |
| | 10/14/05 | | 10 | | | | | 3 |
| | 10/12/05 | | 9 | | | | | 3, 3/A, 8-K, DEF 14A, PRE 14A |
| | 10/1/05 | | 9 | | 14 |
| For Period End: | | 9/30/05 | | 1 | | 21 | | | 4 |
| | 9/1/05 | | 17 | | | | | 4 |
| | 8/19/05 | | 10 |
| | 8/1/05 | | 17 |
| | 7/31/05 | | 17 |
| | 7/1/05 | | 6 | | 17 |
| | 6/30/05 | | 6 | | 11 | | | 10-K, 5, 5/A |
| | 6/9/05 | | 19 | | 22 | | | 8-K |
| | 6/3/05 | | 19 | | 22 | | | 4, 8-K |
| | 12/17/04 | | 6 |
| | 9/30/04 | | 2 | | 12 | | | 10-Q, 4 |
| | 3/31/04 | | 19 | | 22 | | | 10-Q, 4 |
| | 2/25/04 | | 19 | | 22 |
| | 12/31/03 | | 19 | | 22 | | | 10-Q, 11-K |
| | 11/14/03 | | 18 | | 22 | | | 4 |
| | 7/16/03 | | 17 | | | | | 4 |
| | 7/1/03 | | 6 | | | | | 4 |
| | 10/24/00 | | 18 | | 21 |
| | 9/30/00 | | 18 | | 21 | | | 10-Q |
| | 10/19/99 | | 18 | | 21 | | | DEF 14A, PRE 14A |
| | 9/30/99 | | 18 | | 21 | | | 10-Q |
| | 7/20/98 | | 19 | | 22 | | | 8-A12B |
| | 3/31/98 | | 18 | | 21 | | | 10-Q |
| | 2/2/98 | | 19 | | 22 |
| | 1/30/98 | | 18 | | 21 |
| | 5/23/97 | | 18 | | 21 | | | S-4 |
| | 11/27/96 | | 18 | | 21 |
| List all Filings |
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