UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Mark One
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended February 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-11288
APPLIED POWER INC.
-----------------
(Exact name of Registrant as specified in its charter)
Wisconsin 39-0168610
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(State of incorporation) (I.R.S. Employer Id. No.)
N22 W23685 Ridgeview Parkway West
Waukesha, Wisconsin 53188-1013
Mailing address: P. O. Box 325, Milwaukee, Wisconsin 53201
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(Address of principal executive offices)
(262) 523-7600
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(Registrant's telephone number, including area code)
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 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
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The number of shares outstanding of the Registrant's Class A Common Stock as of
April 12, 2000 was 39,091,740.
APPLIED POWER INC.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
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Item 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statement of Earnings -
Three and Six Months Ended
February 29, 2000 and February 28, 1999.................... 3
Condensed Consolidated Balance Sheet -
February 29, 2000 and August 31, 1999...................... 4
Condensed Consolidated Statement of Cash Flows -
Six Months Ended February 29, 2000 and February 28, 1999... 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk......... 12
PART II - OTHER INFORMATION
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Item 4 - Submission of Matters to a Vote of Security Holders................ 13
Item 6 - Exhibits and Reports on Form 8-K................................... 13
SIGNATURE................................................................... 14
- ---------
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
------------------------------------- -------------------------------------
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
Net Sales $461,177 $421,955 $923,344 $857,615
Cost of Products Sold 323,199 295,445 645,836 593,703
------------------ ------------------ ------------------ ------------------
Gross Profit 137,978 126,510 277,508 263,912
Engineering, Selling and Administrative Expenses 77,847 74,236 156,741 156,654
Amortization of Intangible Assets 8,003 7,088 15,798 14,153
Contract Termination (Recovery) Costs - - (1,446) 7,824
Corporate Reorganization Expenses 3,487 - 3,487 -
------------------ ------------------ ------------------ ------------------
Operating Earnings 48,641 45,186 102,928 85,281
Other Expense (Income):
Net Financing Costs 12,022 15,489 28,360 29,388
Other - Net 564 (965) 701 (972)
------------------ ------------------ ------------------ ------------------
Earnings Before Income Tax Expense 36,055 30,662 73,867 56,865
Income Tax Expense 13,430 11,376 27,560 21,178
------------------ ------------------ ------------------ ------------------
Earnings Before Extraordinary Item 22,625 19,286 46,307 35,687
Extraordinary Loss on Early Retirement of Debt,
Net of Income Tax Benefit of $1,250 (2,083) - (2,083) -
------------------ ------------------ ------------------ ------------------
Net Earnings $ 20,542 $ 19,286 $ 44,224 $ 35,687
================== ================== ================== ==================
Basic Earnings Per Share:
Earnings Per Share Before Extraordinary Item $ 0.58 $0.50 $ 1.18 $0.92
Extraordinary Loss on Early Retirement of Debt,
Net of Income Tax Benefit (0.05) - (0.05) -
------------------ ------------------ ------------------ ------------------
Earnings Per Share $ 0.53 $0.50 $ 1.13 $0.92
================== ================== ================== ==================
Weighted Average Common
Shares Outstanding (000's) 39,052 38,786 39,023 38,724
================== ================== ================== ==================
Diluted Earnings Per Share:
Earnings Per Share Before Extraordinary Item $ 0.56 $0.48 $ 1.15 $0.89
Extraordinary Loss on Early Retirement of Debt,
Net of income tax benefit (0.05) - (0.05) -
------------------ ------------------ ------------------ ------------------
Earnings Per Share $ 0.51 $0.48 $ 1.10 $0.89
================== ================== ================== ==================
Weighted Average Common and Equivalent
Shares Outstanding (000's) 40,374 40,415 40,343 40,251
================== ================== ================== ==================
See accompanying Notes to Condensed Consolidated Financial Statements
3
APPLIED POWER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
February 29, August 31,
2000 1999
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(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,510 $ 22,258
Accounts receivable, net 168,994 149,525
Inventories, net 230,414 207,518
Prepaid expenses and deferred income taxes 33,972 29,735
----------- -----------
Total Current Assets 440,890 409,036
Property, Plant and Equipment, net 267,491 273,902
Goodwill and Other Intangibles Assets, net 878,872 888,322
Other Assets 51,768 53,586
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Total Assets $1,639,021 $1,624,846
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 2,383 $ 230
Trade accounts payable 155,727 157,515
Accrued compensation and benefits 44,601 47,089
Income taxes payable 39,139 36,491
Other current liabilities 67,594 82,340
----------- -----------
Total Current Liabilities 309,444 323,665
Long-Term Debt 792,953 808,438
Deferred Income Taxes 16,641 15,869
Other Liabilities 60,092 59,045
Shareholders' Equity:
Class A common stock, $0.20 par value, authorized 80,000,000 shares,
issued and outstanding 39,084,661 and 38,978,340 shares, respectively 7,817 7,796
Additional paid-in capital 13,971 12,388
Accumulated other comprehensive income (17,813) (15,218)
Retained earnings 455,916 412,863
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Total Shareholders' Equity 459,891 417,829
----------- -----------
Total Liabilities and Shareholders' Equity $1,639,021 $1,624,846
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
4
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Six Months
Ended Ended
February 29, February 28,
2000 1999
----------------- -----------------
Operating Activities
- --------------------
Net Earnings $ 44,224 $ 35,687
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 41,700 39,625
Extraordinary loss on early retirement of debt 3,333 -
Changes in operating assets and liabilities, excluding
the effects of business acquisitions and divestitures:
Accounts receivable (24,187) 4,560
Inventories (22,750) (17,734)
Prepaid expenses and other assets (3,238) (1,567)
Trade accounts payable 366 (17,637)
Other liabilities (17,649) (7,889)
Income taxes payable 3,619 2,276
------------ --------------
Net Cash Provided by Operating Activities 25,418 37,321
Investing Activities
- --------------------
Proceeds on the sale of property, plant and equipment 914 6,743
Purchases of property, plant and equipment (23,883) (37,006)
Proceeds from sale of subsidiary 2,987 -
Investment in unconsolidated affiliate (1,961) -
Cash used for business acquisitions, net of cash acquired (8,726) (385,689)
------------ --------------
Net Cash Used in Investing Activities (30,669) (415,952)
Financing Activities
- --------------------
Proceeds from issuance of long-term debt 66,845 277,228
Principal payments on long-term debt (68,917) (34,174)
Net borrowings on short-term credit facilities 2,394 666
Net commercial paper (repayments) borrowings (10,066) 109,351
Receivables financed - 25,713
Dividends paid on common stock (1,171) (1,171)
Proceeds from stock option exercises 1,604 2,568
------------ --------------
Net Cash (Used in) Provided by Financing Activities (9,311) 380,181
Effect of Exchange Rate Changes on Cash (186) 198
------------ --------------
Net (Decrease) Increase in Cash and Cash Equivalents (14,748) 1,748
Cash and Cash Equivalents - Beginning of Period 22,258 6,349
------------ --------------
Cash and Cash Equivalents - End of Period $ 7,510 $ 8,097
============ ==============
See accompanying Notes to Condensed Consolidated Financial Statements
5
APPLIED POWER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements of
Applied Power Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
with the instructions of Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The condensed consolidated balance sheet data as of August 31, 1999 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. For additional information, refer
to the consolidated financial statements and footnotes thereto in the Company's
1999 Annual Report on Form 10-K.
In the opinion of management, all adjustments considered necessary for a fair
presentation of financial results have been made. Such adjustments consist of
only those of a normal recurring nature. Operating results for the three and six
months ended February 29, 2000 are not necessarily indicative of the results
that may be expected for the entire fiscal year ending August 31, 2000.
Note B - Earnings Per Share
- ---------------------------
The reconciliations between basic and diluted earnings per share are as follows:
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
(in thousands, except per share amounts) ----------------------------------------------------------
2000 1999 2000 1999
------- ------- ------- -------
Numerator:
Net earnings for basic and diluted
earnings per share $20,542 $19,286 $44,224 $35,687
======= ======= ======= =======
Denominator:
Weighted average common shares outstanding for
basic earnings per share 39,052 38,786 39,023 38,724
Net effect of dilutive stock options based on the
treasury stock method using average market price 1,322 1,629 1,320 1,527
------- ------- ------- -------
Weighted average common and equivalent
shares outstanding for diluted earnings per share 40,374 40,415 40,343 40,251
======= ======= ======= =======
Basic Earnings Per Share:
Basic earnings per share before extraordinary item $ 0.58 $ 0.50 $ 1.18 $ 0.92
Extraordinary loss on early retirement of debt (0.05) - (0.05) -
------- ------- ------- -------
Basic earnings per share $ 0.53 $ 0.50 $ 1.13 $ 0.92
======= ======= ======= =======
Diluted Earnings Per Share:
Diluted earnings per share before extraordinary loss $ 0.56 $ 0.48 $ 1.15 $ 0.89
Extraordinary loss on early retirement of debt (0.05) - (0.05) -
------- ------- ------- -------
Diluted earnings per share $ 0.51 $ 0.48 $ 1.10 $ 0.89
======= ======= ======= =======
6
Note C - Comprehensive Income
- -----------------------------
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
----------------------------- -----------------------------
(in thousands) 2000 1999 2000 1999
------- ------- ------- -------
Net earnings $20,542 $19,286 $44,224 $35,687
Foreign currency translation adjustments (4,778) (2,944) (2,595) 1,763
------- ------- ------- -------
Comprehensive income $15,764 $16,342 $41,629 $37,450
======= ======= ======= =======
Note D - Acquisitions
- ---------------------
On January 28, 2000, the Company, through a wholly-owned subsidiary, acquired
all of the outstanding stock of Metalade of Pennsylvania Inc., ("Metalade").
Metalade specializes in metal fabrication relating to electronics enclosures and
was integrated with the Company's Electronics business unit. The total purchase
price of this acquisition totaled $8.7 million plus future consideration, not to
exceed $5.0 million, based on achieved sales levels, including fees and
expenses. The acquisition was funded by borrowings under the current credit
facilities. The acquisition has been accounted for using the purchase method
and the results of operations of the acquired company are included in the
Condensed Consolidated Statements of Earnings from the acquisition date.
Preliminary allocations of the purchase price resulted in approximately $6.7
million in goodwill.
Note E - Sale of Business Unit
- ------------------------------
On November 23, 1999, a wholly-owned subsidiary of the Company completed the
sale of the assets of Samuel Groves & Co. Ltd., a business unit of the
Industrial segment. Total consideration from the transaction was approximately
$3.0 million, which approximated book value of the assets.
Note F - Net Inventories
- ------------------------
The nature of the Company's products in several significant parts of its
business is such that they have a very short production cycle. Consequently,
the amount of work-in-process at any point in time is minimal. In addition,
many parts or components are ultimately either sold individually or assembled
with other parts making a distinction between raw materials and finished goods
unclear. At these locations, the Company has not deemed it necessary or cost
effective to categorize inventory by state of completion, but rather between
material, labor and overhead. Several other parts of the Company maintain and
manage their inventories using a job cost system where the distinction of
categories of inventory by state of completion is also not available.
As a result of these factors, it is neither practical nor cost effective to
segregate the amounts of raw materials, work-in-process or finished goods
inventories at the respective balance sheet dates as segregation would only be
possible as the result of physical inventories which are taken at dates
different from the balance sheet dates.
Note G - Spin-Off of Electronics Segment
- -----------------------------------------
On January 27, 2000, the Company announced a plan to spin off its Electronics
business segment to create a pure global supplier in the high-growth electronics
manufacturing services (EMS) sector. The new Electronics business will be a
separate publicly traded company incorporated in Bermuda, and will operate under
the name APW Ltd. Following the spin-off, Applied Power Inc. will continue to
operate the businesses making up the Industrial segment. The spin-off is
expected to be completed by fiscal year-end, at which time Applied Power Inc.
shareholders of record would receive a dividend of one newly issued share of APW
Ltd. for each Applied Power Inc. share held.
The above contemplated transaction is contingent upon various conditions,
including the effectiveness of a registration statement to be filed with the SEC
in connection with the spin-off, receipt of a favorable tax opinion of counsel
to the effect that the transaction should be tax-free for Federal income tax
purposes, approval from the NYSE of listing on the exchange, obtaining credit
facilities on acceptable terms and conditions, and final approval by the Applied
Power Inc. Board of Directors.
7
Note H - Extraordinary Item
- ---------------------------
In January 2000, the Company retired the $50.0 million senior promissory notes
that were due March 8, 2011. The notes were paid off in anticipation of the
planned spin-off of the Electronics segment. In connection with this early
retirement of debt, the Company paid a $3.3 million make-whole premium, $2.1
million net of the tax benefits. This premium has been recorded in the Company's
Condensed Consolidated Statement of Earnings for the three and six months ended
February 29, 2000, as an extraordinary charge, net of tax.
Note I - Segment Information
- ----------------------------
The Company is organized and managed along the lines of its two product
segments: Electronics and Industrial. Electronics supplies electronic
enclosures, power supplies, thermal management systems, backplanes, and cabling
either as individual products, or as an integrated system incorporating certain
of the Company's product design, supply chain management, assembly and test
capabilities. Industrial provides both standard and customized industrial and
electrical tools and accessories along with components and systems using
hydraulic, actuation and vibration control technologies through a world-wide
distribution system into a variety of niche markets. "General corporate and
other" as indicated below primarily includes general corporate expenses,
interest expense and foreign currency exchange adjustments.
The following table summarizes financial information by reportable segment.
(in thousands) Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
- -----------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Net Sales:
Electronics $277,090 $250,055 $566,216 $513,240
Industrial 184,087 171,900 357,128 344,375
- -----------------------------------------------------------------------------------------------------------------------------
Total $461,177 $421,955 $923,344 $857,615
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Tax Expense:
Electronics $ 23,344 $ 17,150 $ 49,684 $ 42,476
Industrial 31,743 30,987 62,675 48,847
General corporate and other (19,032) (17,475) (38,492) (34,458)
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 36,055 $ 30,662 $ 73,867 $ 56,865
- -----------------------------------------------------------------------------------------------------------------------------
Results for the six months ended February 28, 1999 include a $7.8 million
charge, $4.7 million after-tax, related to a contract termination for the
Industrial segment. Results for the six months ended February 29, 2000 for the
Industrial segment include a $1.4 million recovery settlement, $0.9 million
after-tax, related to the contract termination.
In addition, results for the three and six months ended February 29, 2000
include corporate reorganization expenses of $3.5 million, $2.2 million after-
tax, included in "General corporate and other." These corporate reorganization
expenses relate to costs incurred associated with the planned spin-off of the
Electronics segment.
Note J - Subsequent Event
- -------------------------
On March 9, 2000, Applied Power Inc. announced plans for its Industrial business
to operate under the name of Actuant Corporation. Applied Power Inc. intends to
change its name to Actuant Corporation after the planned spin-off of the
Electronics business.
8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Risk Factors That May Affect Future Results
- -------------------------------------------
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as statements
in other Company communications, which are not historical facts, are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 that involve risks and uncertainties. The terms "anticipate",
"believe", "estimate", "expect", "objective", "plan", "project" and similar
expressions are intended to identify forward-looking statements. Such forward-
looking statements are subject to inherent risks and uncertainties that may
cause actual results or events to differ materially from those contemplated by
such forward-looking statements. In addition to the assumptions and other
factors referred to specifically in connection with such statements, factors
that may cause actual results or events to differ materially from those
contemplated by such forward-looking statements include, without limitation,
general economic conditions and market conditions in the industrial production,
trucking, construction, aerospace, automotive, recreational vehicle, computer,
semiconductor, telecommunication, electronic and defense industries in North
America, Europe and, to a lesser extent, Asia, market acceptance of existing and
new products, successful integration of acquisitions, competitive pricing,
foreign currency risk, interest rate risk, unforeseen costs or consequences of
latent Year 2000 issues during calendar year 2000, the Company's ability to
access capital markets, the spin-off of the Electronics business, and other
factors that may be referred to in the Company's reports filed with the
Securities and Exchange Commission.
Strategic Developments
- ----------------------
On January 27, 2000, the Company announced a plan to spin off its Electronics
business segment to create a pure global supplier in the high-growth electronics
manufacturing services (EMS) sector. The new Electronics business will be a
separate publicly traded company incorporated in Bermuda, and will operate under
the name APW Ltd. Following the spin-off, Applied Power Inc. will continue to
operate the businesses making up the Industrial segment. The spin-off is
expected to be completed by fiscal year-end, at which time Applied Power Inc.
shareholders of record would receive a dividend of one newly issued share of APW
Ltd. for each Applied Power Inc. share held.
On March 9, 2000, Applied Power Inc. announced plans for its Industrial business
to operate under the name of Actuant Corporation. Applied Power Inc. intends to
change its name to Actuant Corporation after the planned spin-off of the
Electronics business.
Results of Operations
- ---------------------
The Company reported record sales and earnings for the second quarter ended
February 29, 2000. Net earnings for the second quarter of fiscal 2000 were $20.5
million, or $0.51 per share on a diluted basis. Excluding one time items during
the period, net earnings were $24.8 million, or $0.61 per diluted share, an
increase of 27% percent over the $19.3 million, or $0.48 per diluted share, in
the prior year second quarter. Sales for the quarter were $461.2 million, a 9%
increase over the prior year.
The one-time items during the current year quarter relate to (i) a $2.1 million
make-whole premium (net of $1.2 million tax benefit) paid in connection with the
early retirement of debt which is recorded as an extraordinary charge and (ii) a
$3.5 million charge ($2.2 million after-tax) for costs incurred associated with
spinning off the Electronics business and incorporating APW Ltd. in Bermuda.
For the six months ended February 29, 2000, net earnings were $44.2 million, or
$1.10 per diluted share. Excluding one-time items in both periods, net earnings
were $47.6 million or $1.18 per diluted share, a 17% increase over the $40.4
million or $1.01 per diluted share for the first six months of last year. Sales
for the first half of fiscal 2000 were a record $923.3 million, an increase of
8% over the same period last year.
The one-time item recorded during the first six months of Fiscal 1999 relates to
the cancellation of a contract within the Industrial segment in November 1998.
In the first quarter of fiscal 1999, the Company recorded to operating expense a
one-time contract termination charge of $7.8 million pre-tax ($4.7 million
after-tax, or $0.12 per diluted share). One time items recorded during the
current year first half relate to (i) the above mentioned extraordinary charge,
(ii) the above mentioned spin-off transaction costs, and (iii) a recovered
portion of the contract termination charge received during the first quarter of
fiscal 2000 in a settlement of $1.4 million pre-tax ($0.9 million after-tax, or
$0.02 per diluted share).
9
The Company is organized, managed and reported as two segments: Electronics and
Industrial. Electronics supplies electronic enclosures, power supplies, thermal
systems, backplanes, and cabling either as individual products, or as an
integrated system incorporating certain of the Company's product design, supply
chain management, assembly and test capabilities. Industrial provides both
standard and customized industrial and electrical tools and accessories along
with components and systems using hydraulic, actuation and vibration control
technologies through a world-wide distribution system into a variety of niche
markets.
- ---------------------------------------------------------------------------------------------------
NET SALES BY SEGMENT
- ---------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
- ---------------------------------------------------------------------------------------------------
2000 1999 Change 2000 1999 Change
- ---------------------------------------------------------------------------------------------------
Electronics $ 277,090 $ 250,055 11% $ 566,216 $ 513,240 10%
Industrial 184,087 171,900 7% 357,128 344,375 4%
- ---------------------------------------------------------------------------------------------------
Total $ 461,177 $ 421,955 9% $ 923,344 $ 857,615 8%
===================================================================================================
Revenues from the Electronics segment grew 11% and 10% for the quarter and year-
to-date periods ended February 29, 2000, as compared to the prior year periods.
Excluding the effect of foreign currency translations, Electronics' revenue grew
14% and 13% in the respective quarter and year-to-date periods. Internal growth
was the primary reason for the sales increase.
Industrial segment sales increased 7% and 4% for the quarter and year-to-date
periods ended February 29, 2000, as compared to the prior year periods.
Exclusive of the adverse impact of the strong dollar on reported sales,
Industrial's sales increased 10% during the current year second quarter compared
to the prior year second quarter. Internal growth was principally generated from
recreational vehicle systems and shock vibration systems.
- ---------------------------------------------------------------------------------------------------
GROSS PROFIT BY SEGMENT
- ---------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
- ---------------------------------------------------------------------------------------------------
2000 1999 Change 2000 1999 Change
- ---------------------------------------------------------------------------------------------------
Electronics $ 72,287 $ 63,992 13% $ 149,699 $ 139,852 7%
Industrial 65,691 62,518 5% 127,809 124,060 3%
- ---------------------------------------------------------------------------------------------------
Total $ 137,978 $ 126,510 9% $ 277,508 $ 263,912 5%
===================================================================================================
Second quarter and year-to-date gross profit dollars increased by 9% and 5%,
respectively, over the comparable prior year periods. As a percentage of sales,
gross profit was comparable between the prior year second quarter and the
current year second quarter. As compared to the prior year periods, the increase
in gross profit dollars was driven by continued growth and expansion of
electronic enclosure business in the telecom and datacom industries, and
internal growth of the recreational vehicle systems and shock vibration systems.
- ---------------------------------------------------------------------------------------------------
ENGINEERING, SELLING AND ADMINISTRATIVE EXPENSES BY SEGMENT
- ---------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------------
February 29, February 28, February 29, February 28,
- ---------------------------------------------------------------------------------------------------
2000 1999 Change 2000 1999 Change
- ---------------------------------------------------------------------------------------------------
Electronics $ 42,917 $ 41,942 2% $ 88,173 $ 87,668 1%
Industrial 31,971 29,343 9% 62,623 62,942 (1)%
General Corporate 2,959 2,951 0% 5,945 6,044 (2)%
- ---------------------------------------------------------------------------------------------------
Total $ 77,847 $ 74,236 5% $ 156,741 $ 156,654 0%
===================================================================================================
Fiscal 2000 second quarter engineering, selling and administrative ("ESA")
expenses were 5% higher than that reported in the second quarter of fiscal 1999.
The increase in ESA expense during the quarter is a result of (i) additional ESA
expenses incurred by businesses acquired since or during the second quarter of
fiscal 1999, and (ii)
10
additional costs incurred to expand the Company's infrastructure in anticipation
of the spin-off of the Electronics segment. In total, ESA expenses were reduced
to 16.9 percent of net sales for the current year quarter compared to 17.6
percent for the prior year quarter. The reduction was the result of continued
efforts to manage spending levels throughout the Company, along with the
incremental sales growth of the Electronics segment, which typically has a lower
percentage of ESA expenses to sales.
AMORTIZATION EXPENSE. Amortization expense of $8.0 million and $15.8 million for
the respective three and six month periods ended February 29, 2000 was higher
than in the comparable prior year periods due to the acquisitions completed
during and subsequent to the second quarter of fiscal 1999.
CONTRACT TERMINATION (RECOVERY) COSTS. In the first quarter of fiscal 1999, the
Company recorded a $7.8 million contract termination charge, $4.7 million after-
tax, related to the cancellation of a contract in the Industrial segment. In the
first quarter of fiscal 2000, a portion of the contract termination charge was
recovered in a settlement amounting to $1.4 million, $0.9 million after-tax.
CORPORATE REORGANIZATION EXPENSES. In the second quarter of fiscal 2000, the
Company recorded a $3.5 million charge, $2.2 million after-tax, related to fees
and expenses associated with the spin-off transaction and incorporating APW Ltd.
in Bermuda. Those fees and expenses represent legal, accounting, tax and
investment banking fees incurred by the Company through February 29, 2000 for
services related to the spin-off transaction.
OPERATING EARNINGS. Excluding one time items in both periods, operating profit
margin for the three and six months ended February 29, 2000 was 11.3 percent and
11.4 percent, respectively. Operating profit margin, excluding one time items,
for the three and six months ended February 28, 1999 was 10.7 percent and 10.9
percent, respectively. The increase in operating profit margin between periods
is a result of leverage on internal sales growth, efficient integration of
acquired businesses, and continued efforts to manage spending levels throughout
the Company. Inclusive of one time items in both periods, the operating profit
margin increased to 11.1 percent for the first half of fiscal 2000 compared to
9.9 percent for the first half of fiscal 1999.
NET FINANCING COSTS. During the second quarter of fiscal 2000, Net Financing
Costs includes a $5.3 million pre-tax recognized gain related to the unwinding
of interest rate swap agreements. The interest rate swap agreements were unwound
in anticipation of the spin-off of the Electronics business segment. Gains
relating to terminations of qualifying hedges are deferred and recognized in
income at the same time as the underlying hedged transactions. In circumstances
where the underlying anticipated transaction is no longer expected to occur, any
remaining deferred amounts are recognized into income. This $5.3 million gain is
expected to be partially offset by increased interest expense in the future.
Excluding the interest rate swap gain, net financing costs for the six months
ended February 29, 2000 increased over the prior year period as a result of
additional borrowings incurred to finance acquisitions completed during and
subsequent to the first half of fiscal 1999, offset by net repayments of debt.
In addition, the increase in net financing costs can be attributable to general
increases in interest rates throughout fiscal 2000.
EXTRAORDINARY ITEM. The fiscal 2000 first half results include a $3.3 million
extraordinary charge ($2.1 million net of $1.2 million tax benefit) related to a
make-whole premium paid in connection with the early retirement of the $50.0
million senior promissory notes due March 8, 2011. This debt was retired early
in anticipation of the planned spin-off of the Company's Electronics segment.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $7.5 million and $22.3 million at February 29,
2000 and August 31, 1999, respectively. In order to minimize net financing
costs, the Company intentionally maintains relatively low cash balances by using
available cash to reduce short-term bank borrowings.
Net cash generated from operations, after considering non-cash items and changes
in operating assets and liabilities, totaled $25.4 million for the six months
ended February 29, 2000.
Net cash used in investing activities totaled $30.7 million for the first six
months of fiscal 2000. $10.7 million was used for acquisitions and investments,
while $23.9 million was used for capital expenditures. Those uses of cash were
offset by $0.9 million in proceeds from the sale of equipment and $3.0 million
in proceeds from the sale of Samuel Groves & Co. Ltd., a business unit of the
Industrial segment.
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- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (in thousands) February 29, 2000 August 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
Total Debt $ 795,336 63% $ 808,668 65%
Shareholders' Equity 459,891 36% 417,829 34%
Deferred Income Taxes 16,641 1% 15,869 1%
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 1,271,868 100% $ 1,242,366 100%
=============================================================================================================================
Financing activities in the first half of fiscal 2000 used $9.3 million of net
cash during the period. Net repayments of debt principal amounted to $6.4
million, and $3.3 million was used to pay a make-whole premium in connection
with early retirement of debt. In addition, the Company paid $1.2 million in
dividend payments to shareholders and received $1.6 million in proceeds from
stock option exercises.
Outstanding debt at February 29, 2000 totaled $795.3 million, a decrease of
approximately $13.3 million since the beginning of the fiscal year. At February
29, 2000, the Company had $368.6 million of funds available under multi-currency
credit agreements, unused non-committed lines of credit and receivable financing
facilities. The Company believes that availability under its credit facilities
or other borrowings, plus funds generated from operations, will be adequate to
meet operating, debt service and capital expenditure requirements for the
foreseeable future.
Year 2000 Considerations
- ------------------------
In prior years, the Company had executed an action plan to ensure that its
computer systems are capable of processing periods for the Year 2000 and beyond.
This action plan was completed in late calendar year 1999. As a result of those
planning and implementation efforts, the Company experienced no significant
disruptions in mission critical information technology and non-information
technology systems and believes those systems successfully responded to the Year
2000 date change. While no such disruption has developed as of the date of this
filing, Year 2000 problems may still surface throughout calendar year 2000. The
Company will continue to monitor its mission critical computer applications and
those of its suppliers and vendors throughout the calendar year 2000 to ensure
that any latent Year 2000 matters that may arise are addressed promptly.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company is exposed to market risk from changes in foreign exchange and
interest rates and, to a lesser extent, commodities. To reduce such risks, the
Company selectively uses financial instruments. All hedging transactions are
authorized and executed pursuant to clearly defined policies and procedures,
which strictly prohibit the use of financial instruments for trading purposes.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1999 within Note A - "Summary of Significant
Accounting Policies" in Notes to Consolidated Financial Statements, and further
disclosure relating to financial instruments is included in Note G - "Debt."
Currency Risk - The Company has significant international operations. In most
instances, the Company's products are produced at manufacturing facilities
located near the customer. As a result, significant volumes of finished goods
are manufactured in countries for sale into those markets. For goods purchased
from other Company affiliates, the Company denominates the transaction in the
functional currency of the producing operation.
The Company has adopted the following guidelines to manage its foreign exchange
exposures:
(i) increase the predictability of costs associated with goods whose purchase
price is not denominated in the functional currency of the buyer;
(ii) minimize the cost of hedging through the use of naturally offsetting
positions (borrowing in local currency), netting, pooling; and
(iii) where possible, sell product in the functional currency of the
producing operation.
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The Company's identifiable foreign exchange exposures result primarily from the
anticipated purchase of product from affiliates and third-party suppliers along
with the repayment of intercompany loans with foreign subsidiaries denominated
in foreign currencies. The Company periodically identifies naturally occurring
offsetting positions and then purchases hedging instruments to protect against
anticipated exposures. The Company's financial position is not materially
sensitive to fluctuations in exchange rates as any gains or losses on foreign
currency exposures are generally offset by gains and losses on underlying
payables, receivables and net investments in foreign subsidiaries.
Interest Rate Risk - The Company periodically enters into interest rate swaps to
stabilize financing costs by minimizing the effect of potential interest rate
increases on floating-rate debt in a rising interest rate environment. Under
these agreements, the Company contracts with a counter party to exchange the
difference between a fixed rate and a floating rate applied to the notional
amount of the swap. The differential to be paid or received on interest rate
swap agreements is accrued as interest rates change and is recognized in net
income as an adjustment to interest expense. Gains relating to terminations of
qualifying hedges are deferred and recognized in income at the same time as the
underlying hedged transactions.
Commodity Prices - The Company is exposed to fluctuation in market prices for
steel. Therefore, the Company has established a program for centralized
negotiation of steel prices. This program allows the Company to take advantage
of economies of scale as well as to cap pricing. All business units are able to
purchase steel under this arrangement. In general, the contracts lock steel
pricing for 18 months and enable the Company to pay less if market prices fall.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders was held on January 12, 2000 to elect a Board
of six directors. Each director nominee was elected. The number of votes for
each nominee is set forth below:
Share Votes For Share Votes Withheld
--------------- --------------------
H. Richard Crowther 33,576,340 88,767
Jack L. Heckel 33,576,241 88,866
Richard A. Kashnow 33,568,402 96,705
L. Dennis Kozlowski 33,496,941 168,166
John J. McDonough 33,576,321 88,786
Richard G. Sim 33,561,099 104,008
A shareholder proposal requesting the Board of Directors to take the steps
necessary to adopt cumulative voting in the election of directors was present
from the floor of the meeting. The vote on the proposal was 85 votes for and
33,665,022 against; there were no abstentions or broker non-votes.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) See Index to Exhibits on page 15, which is incorporated herein by
reference.
(b) On February 9, 2000, the Company filed a Current Report on Form 8-K dated
January 27, 2000 reporting under Item 5 the Company's announcement of its
plans to spin off its Electronics business.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED POWER INC.
------------------
(Registrant)
Date: April 14, 2000 By: /s/ Richard D. Carroll
-----------------------
Richard D. Carroll
Vice President - Finance and Controller
(Acting Principal Financial and
Accounting Officer and duly
authorized to sign on behalf of
the registrant)
14
APPLIED POWER INC.
(the "Registrant")
(Commission File No. 1-11288)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 2000
INDEX TO EXHIBITS
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
- ------- ----------------------- ------------------- --------
27.1 Financial Data Schedule X
15