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 28, 1997 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 --------- ---------- (State of incorporation) (I.R.S. Employer Id. No.) 13000 WEST SILVER SPRING DRIVE BUTLER, WISCONSIN 53007 MAILING ADDRESS: P. O. BOX 325, MILWAUKEE, WISCONSIN 53201 (Address of principal executive offices) (Zip Code) (414) 781-6600 (Registrant's telephone number) 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 ---- ---- Number of outstanding shares of Class A Common Stock: 13,790,256 as of March 31, 1997. The Index to Exhibits appears on Page 11. 1 APPLIED POWER INC. INDEX Page No. --------- PART I - FINANCIAL INFORMATION Item 1 - Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Statement of Earnings - Three and Six Months Ended February 28, 1997 and February 29, 1996 ................... 3 Condensed Consolidated Balance Sheet - February 28, 1997 and August 31, 1996 ..................... 4 Condensed Consolidated Statement of Cash Flows - Six Months Ended February 28, 1997 and February 29, 1996 .. 5 Notes to Condensed Consolidated Financial Statements ....... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .................................. 7 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders ......... 9 Item 6 - Exhibits and Reports on Form 8-K ............................ 10 SIGNATURE ............................................................ 10 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS APPLIED POWER INC. CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Six Months Ended ----------------------------------- ---------------------------- FEBRUARY 28, February 29, FEBRUARY 28, February 29, 1997 1996 1997 1996 ------------ ----------- ----------- ------------ Net Sales $ 157,170 $ 137,080 $ 310,266 $ 276,350 Cost of Products Sold 96,737 85,414 189,195 170,604 ----------- ----------- ----------- ------------ Gross Profit 60,433 51,666 121,071 105,746 Engineering, Selling and Administrative Expenses 41,812 37,802 84,047 77,658 ----------- ----------- ----------- ------------ Operating Earnings 18,621 13,864 37,024 28,088 Other Expense(Income): Net financing costs 3,195 2,047 5,820 4,114 Amortization of intangible assets 1,799 988 3,297 1,707 Other - net (612) (421) (678) (321) ----------- ----------- ----------- ------------ Earnings Before Income Tax Expense 14,239 11,250 28,585 22,588 Income Tax Expense 4,770 3,600 9,576 7,228 ----------- ----------- ----------- ------------ Net Earnings $ 9,469 $ 7,650 $ 19,009 $ 15,360 =========== =========== =========== ============ Primary Earnings Per Share: Earnings Per Share $ 0.66 $ 0.55 $ 1.33 $ 1.10 =========== =========== =========== ============ Weighted Average Common and Equivalent Shares 14,346 13,922 14,263 13,959 =========== =========== =========== ============ Fully Diluted Earnings Per Share: Earnings Per Share $ 0.66 $ 0.55 $ 1.33 $ 1.10 =========== =========== =========== ============ Weighted Average Common and Equivalent Shares 14,346 13,947 14,310 13,959 =========== =========== =========== ============
See accompanying Notes to Condensed Consolidated Financial Statements 3 APPLIED POWER INC. CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FEBRUARY 28, August 31, 1997 1996 ------------ ---------- (UNAUDITED) ASSETS Current Assets Cash and cash equivalents $ 84 $ 1,001 Net accounts receivable 70,328 68,747 Net inventories 124,663 120,648 Prepaid expenses 16,658 16,509 -------- -------- Total Current Assets 211,733 206,905 Other Assets 6,330 6,370 Goodwill 105,941 58,266 Other Intangibles 31,977 33,464 Net Property, Plant and Equipment 84,842 76,236 -------- -------- Total Assets $440,823 $381,241 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $ 24,595 $ 16,068 Trade accounts payable 39,927 41,397 Accrued compensation and benefits 17,683 20,805 Income taxes payable 4,016 7,081 Other current liabilities 21,673 22,378 -------- -------- Total Current Liabilities 107,894 107,729 Long-Term Debt, less current maturities 120,349 76,548 Deferred Income Taxes 13,834 15,395 Other Deferred Liabilities 14,530 13,114 Shareholders' Equity Common stock, $0.20 par value per share, authorized 40,000,000 shares, issued and outstanding 13,789,356 and 13,652,349 shares, respectively 2,758 2,730 Additional paid-in capital 37,754 34,383 Retained earnings 144,575 126,392 Cumulative translation adjustments (871) 4,950 -------- -------- Total Shareholders' Equity 184,216 168,455 -------- -------- Total Liabilities and Shareholders' Equity $440,823 $381,241 ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements 4 APPLIED POWER INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
Six Months Ended FEBRUARY 28, February 29, 1997 1996 ------------- ------------ Operating Activities - -------------------- Net Earnings $ 19,009 $ 15,360 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 11,989 10,405 Provision for deferred taxes - (1,285) Changes in operating assets and liabilities, excluding the effects of business acquisitions and disposals: Accounts receivable 276 2,912 Inventories (4,999) (6,363) Prepaid expenses and other assets (2,495) 693 Trade accounts payable (3,182) 56 Other liabilities (2,894) (6,298) Income taxes payable (3,589) 2,418 ---------- ----------- Net Cash Provided By Operating Activities 14,115 17,898 Investing Activities - -------------------- Proceeds on the sale of property, plant and equipment 2,969 7 Additions to property, plant and equipment (10,862) (11,457) Cash used for business acquisitions (63,312) (23,481) Proceeds from sale of product lines - 5,181 Other (15) (21) ---------- ----------- Net Cash Used In Investing Activities (71,220) (29,771) Financing Activities - -------------------- Net borrowings under long-term credit agreements 45,351 7,619 Net borrowings on short-term credit facilities 9,421 3,151 Net commercial paper repayments - (3,276) Additional receivables financed 525 7,500 Dividends paid on common stock (826) (804) Stock options exercised 2,346 267 Other - (47) ---------- ----------- Net Cash Provided By Financing Activities 56,817 14,410 Effect of Exchange Rate Changes on Cash (629) (77) ---------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents (917) 2,460 Cash and Cash Equivalents - Beginning of Period 1,001 911 ---------- ----------- Cash and Cash Equivalents - End of Period $ 84 $ 3,371 ========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements 5 APPLIED POWER INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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. For additional information, refer to the consolidated financial statements and footnotes thereto in the Company's 1996 Annual Report on Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation have been made. Such adjustments consist of only those of a recurring nature. Operating results for the three and six months ended February 28, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 1997. NOTE B - ACQUISITIONS On January 13, 1997, the Company, through its Wright Line subsidiary, acquired C Fab Group Limited ("C Fab") for approximately $11,300 in net cash plus future consideration based on financial performance. The transaction generated goodwill of approximately $5,600, and was funded through borrowings under existing credit facilities. C Fab, headquartered in Dublin, Ireland, manufactures electronic enclosures used by the computer, telecom, datacom and other industries. The results of operations for C Fab subsequent to the acquisition date are included in the Condensed Consolidated Statement of Earnings. The Company, through its Wright Line subsidiary, purchased the net assets of Everest Electronic Equipment, Inc. ("Everest") on September 26, 1996 for cash consideration of $52,000, which was funded through borrowings under existing credit facilities. Approximately $43,000 of the purchase price was assigned to goodwill. Everest is a manufacturer of custom and standard electronic enclosures used by the computer, telecom, datacom and other industries and is headquartered in Anaheim, California. The results of Everest subsequent to September 26, 1996 are included in the Condensed Consolidated Statement of Earnings. On May 15, 1996, CalTerm, Inc. ("CalTerm") was merged with a wholly-owned subsidiary of the Company. Consideration included 122,810 shares of Applied Power Inc. Class A common stock (valued at approximately $3,930) and approximately $1,038 in cash. In addition, the Company assumed approximately $6,000 of outstanding debt which was extinguished by the Company shortly after the merger. In conjunction with the acquisition, a warehouse operated by CalTerm in Reno, Nevada was purchased for approximately $2,300 and there were payments of $1,000 for non-compete agreements. Three individuals received employment agreements and related stock options. Cash payments required were funded through borrowings under existing credit facilities. Goodwill of approximately $2,000 was recorded as a result of this transaction. Headquartered in San Diego, California, CalTerm is a supplier of electrical consumables and tools primarily to the retail automotive aftermarket. The results of operations of CalTerm subsequent to the acquisition date are included in the Condensed Consolidated Statement of Earnings. On February 23, 1996, the Company's Wright Line subsidiary acquired the European distribution rights for its products for cash of $1,250 plus forgiveness of accounts receivable outstanding of $723 from its European distributor. Goodwill of approximately $1,900 was generated in conjunction with the transaction. On December 8, 1995, the Company acquired the remaining 10% minority interest in Applied Power Korea. Cash of $388 was used in the acquisition, which generated goodwill of approximately $340. The results of operations of this subsidiary have historically been included in the Condensed Consolidated Statement of Earnings. The Company acquired the assets of Designed Fluid-Air Systems, Inc. ("DFAS") on October 26, 1995 for $298 in cash plus future royalties. The royalties are to be paid over the next five years and are not to exceed $500 in the aggregate. Approximately $100 of the purchase price was assigned to goodwill. DFAS, located in Oswego, Illinois, 6 designs, fabricates and assembles customized quick die change systems utilizing hydraulic, pneumatic and electrical components. The results of operations of DFAS after October 26, 1995 are included in the Condensed Consolidated Statement of Earnings. On September 29, 1995, the Company completed the acquisition of substantially all of the assets and certain liabilities of Vision Plastics Manufacturing Company ("Vision") for $3,557 in cash. Included in the liabilities assumed was $1,357 of outstanding mortgage debt, which was subsequently extinguished by the Company during the first quarter of 1996. Certain proprietary technology rights and patents related to the business were acquired in a separate transaction in January, 1996. Total consideration for the two transactions was approximately $21,500, and was funded by proceeds from borrowings under existing credit facilities. Vision, based in San Diego, California, manufactures plastic cable ties which are sold through electrical wholesale, retail and OEM channels. The results of operations for Vision subsequent to the acquisition date are included in the Condensed Consolidated Statement of Earnings. All acquisitions were accounted for using the purchase method. NOTE C - SALES OF PRODUCT LINES On January 24, 1996, the Company sold substantially all of the assets and liabilities of its APITECH mobile equipment product line. Total consideration from the transaction, which included future collection of retained accounts receivable, is approximately $5,200, which approximated the book value of the product line. On December 13, 1995, the Company's GB Electrical subsidiary sold its HIT spring steel product line for approximately $2,400 in cash. Proceeds from the sale approximated the book value of the product line. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS The Company reported record sales and earnings for the second quarter ended February 28, 1997. Net earnings for the quarter were $9,469, or $0.66 per share, compared to $7,650, or $0.55 per share, for the second quarter of the prior year. For the first six months of fiscal 1997, earnings were $19,009, or $1.33 per share, a 21 percent improvement over the earnings from the comparable period last year of $15,360, or $1.10 per share. Increased sales resulted in greater leverage on manufacturing and operating costs and generated the improved earnings. Foreign currency translation negatively impacted sales by approximately 2 percent for the quarter and on a year-to-date basis.
- ------------------------------------------------------------------------------------------------------ SALES BY SEGMENT - ------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended - ------------------------------------------------------------------------------------------------------ FEBRUARY 28, February 29, FEBRUARY 28, February 29, 1997 1996 Change 1997 1996 Change - ------------------------------------------------------------------------------------------------------ Distributed Products $ 70,845 $ 69,644 2% $ 143,702 $ 136,670 5% Engineered Solutions 45,351 46,364 (2)% 89,979 94,288 (5)% Technical Environments and Enclosures 40,974 21,071 94% 76,585 45,392 69% - ------------------------------------------------------------------------------------------------------ Total $ 157,170 $ 137,080 15% $ 310,266 $ 276,350 12% ======================================================================================================
Sales from Distributed Products grew by 2 percent and 5 percent for the three and six month periods ended February 28, 1997, respectively. Ignoring the impact of the strengthening US Dollar, the segment's sales increased 5 percent and 7 percent, respectively. Approximately $10,100 of the sales growth was generated through business acquisitions net of product line dispositions on a year-to-date basis. Engineered Solutions reported decreases in sales of 2 percent for the quarter and 5 percent year-to-date. Foreign 7 currency translation had the effect of reducing reported sales 3 percent and 2 percent in the three and six month periods ended February 28, 1997, respectively. Excluding the disposition of the mobile equipment product line and the effect of the Cadillac valve contract which ended last fiscal year, sales in Engineered Solutions grew 6 percent for the quarter. Technical Environments and Enclosures continued its impressive growth in sales with increases of 94 percent and 69 percent for the quarter and year-to-date periods ended February 28, 1997, respectively. Approximately $18,600 of the sales growth for the year has come from the acquisitions of Everest and C Fab. Another factor driving the sales increases is the continued expansion of the direct sales force nationally and internationally.
- -------------------------------------------------------------------------------------------------------------- GROSS PROFIT BY SEGMENT - -------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended - -------------------------------------------------------------------------------------------------------------- FEBRUARY 28, February 29, FEBRUARY 28, February 29, 1997 1996 Change 1997 1996 Change - -------------------------------------------------------------------------------------------------------------- Distributed Products $ 27,816 $ 28,141 (1)% $ 57,398 $ 56,704 1% Engineered Solutions 15,167 13,873 9 % 29,558 27,698 7% Technical Environments and Enclosures 17,450 9,652 81 % 34,115 21,344 60% - -------------------------------------------------------------------------------------------------------------- Total $ 60,433 $ 51,666 17 % $ 121,071 $ 105,746 14% ==============================================================================================================
The Company's second quarter and year-to-date gross profit increased 17 percent and 14 percent, respectively, over the comparable prior year periods. The improvement is primarily due to favorable product mix, specifically the increase of Technical Environments and Enclosures as a greater portion of the total Company's business.
- ------------------------------------------------------------------------------------------------------- OPERATING EXPENSES - ------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended - ------------------------------------------------------------------------------------------------------- FEBRUARY 28, February 29, FEBRUARY 28, February 29, 1997 1996 Change 1997 1996 Change - ------------------------------------------------------------------------------------------------------- Distributed Products $ 18,253 $ 19,537 (7)% $ 38,151 $ 38,963 (2)% Engineered Solutions 10,136 9,791 4 % 20,453 20,281 1 % Technical Environments and Enclosures 11,839 7,097 67 % 22,640 15,485 46 % General Corporate 1,584 1,377 15 % 2,803 2,929 (4)% - ------------------------------------------------------------------------------------------------------- Total $ 41,812 $ 37,802 11 % $ 84,047 $ 77,658 8 % =======================================================================================================
Operating expenses increased 11 percent for the quarter and 8 percent on a year-to-date basis, reflecting the impact of acquisitions, which contributed approximately $1,500 and $3,000, respectively, and higher sales levels. The majority of the Company's growth and current year acquisitions are within Technical Environments and Enclosures, which explains the large operating expense increases noted within this segment. Overall, the Company continues to reduce operating expenses as a percent of net sales by aggressively managing spending levels. On a year-to-date basis, operating expenses were 27 percent of sales, down from 28 percent over the same period last year. The increase in gross profits and the reduction of operating expenses as a percentage of sales combined to substantially improve operating profit margins to 11.9 percent from 10.2 percent over the comparable six month period. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." The Company is currently in the process of evaluating the accounting and disclosure effects of the Statement, which is required to be adopted in the second quarter of fiscal 1998. 8 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $84 and $1,001 at February 28, 1997 and August 31, 1996, respectively. In order to minimize net financing costs, the Company intentionally maintains 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 $14,115 for the six months ended February 28, 1997, compared to $17,898 for the comparable prior year period. The decrease is the result of increased working capital coupled with increased tax payments. Net cash used in investing activities totaled $71,220 for the first six months of fiscal 1997, of which $63,312 was used for the acquisitions of Everest and C-Fab. In addition, $10,862 was used for capital expenditures, which was offset by approximately $3,000 in proceeds from sales of property, plant and equipment. Proceeds included approximately $1,050 related to a sale and leaseback transaction completed on certain machinery during the first quarter of fiscal 1997.
- ---------------------------------------------------------------------------- TOTAL CAPITALIZATION FEBRUARY 28, 1997 August 31, 1996 - ---------------------------------------------------------------------------- Shareholders' Equity $ 184,216 54% $ 168,455 61% Total Debt 144,944 42% 92,616 33% Deferred Taxes 13,834 4% 15,395 6% - ---------------------------------------------------------------------------- Total $ 342,994 100% $ 276,466 100% ============================================================================
Outstanding debt at February 28, 1997 totaled $144,944, an increase of approximately $52,300 since the beginning of the year. The increase reflects additional borrowings for acquisitions. Despite the additional acquisition of C Fab completed during the second quarter of the current year, the Company was able to maintain the debt to total capitalization ratio of 42%, consistent with that reported at November 30, 1996. This is up from 33 percent at the beginning of the year. Dividends of $826 were paid, while the exercise of stock options generated an additional $2,346 of cash in the six month period ended February 28, 1997. The Company anticipates that the funds generated from operations and available under credit facilities will be adequate to meet operating, debt service and capital expenditure requirements for the foreseeable future. PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held on January 8, 1997. Two matters were voted on by shareholders at the meeting. 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 10,471,766 162,386 Jack L. Heckel 10,471,595 162,557 Richard A. Kashnow 10,471,491 162,661 L. Dennis Kozlowski 10,471,933 162,219 John J. McDonough 10,471,768 162,384 Richard G. Sim 10,468,290 165,862
In addition, shareholders voted to approve the Applied Power Inc. 1996 Stock Plan (the "1996 Plan"). Shares voted for approval of the 1996 Plan totaled 6,877,825; the holders of 2,771,262 shares voted against such approval, the holders of 72,473 shares abstained, and the broker non vote was 912,592. 9 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) See Index to Exhibits on page 11, which is incorporated herein by reference. (b) A Form 8-K/A was filed on December 10, 1996 to provide the required financial statements and pro forma disclosures related to the acquisition of the net assets of Everest Electronic Equipment, Inc. 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 11, 1997 By: /s/Robert C. Arzbaecher ----------------------- Robert C. Arzbaecher Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized to sign on behalf of the registrant) 10 APPLIED POWER INC. INDEX TO EXHIBITS FISCAL 1997 SECOND QUARTER 10-Q Exhibit Number Description Page No. - ------- --------------------------------- -------- 11 Computation of Earnings Per Share 12 27 Financial Data Schedule 13 11