UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended AUGUST 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File No. 1 - 11288
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APPLIED POWER INC.
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(Exact name of Registrant as specified in its charter)
WISCONSIN 39-0168610
- - ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13000 WEST SILVER SPRING DRIVE
BUTLER, WISCONSIN 53007
MAILING ADDRESS: P.O. BOX 325, MILWAUKEE, WISCONSIN 53201
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(Address of principal executive offices)
(414) 781-6600
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK, NEW YORK STOCK EXCHANGE
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$.20 PAR VALUE PER SHARE (Name of each exchange on
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(Title of each class) which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
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, and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. /X/
As of October 31, 1996, the aggregate market value of Common Stock held by
non-affiliates was approximately $471.6 million, and there were 13,727,401
shares of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on January 8, 1997 are incorporated by reference into
Part III hereof.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE COMPANY
Applied Power Inc. (the "Company"), a Wisconsin corporation incorporated in
1910, is a diversified global company engaged in the business of providing
tools, equipment, systems and consumable items to a variety of end-users and
original equipment manufacturers in the manufacturing, construction,
transportation, natural resource, aerospace, defense and other industries.
The Company's operations are divided into three business segments:
Distributed Products
Specialized tools and consumables sold primarily through
distribution.
Engineered Solutions
Hydraulic motion and vibration isolation customized products and
systems primarily sold to OEM customers.
Wright Line
Technical environment solutions for offices and laboratories.
During the fiscal year, the Company's Distributed Products segment made several
business acquisitions. Vision Plastics Manufacturing Company, acquired on
September 29, 1995, manufactures plastic cable ties which are sold through
electrical wholesale, retail and OEM channels and is based in San Diego,
California. On October 26, 1995, Designed Fluid-Air Systems, Inc. ("DFAS"),
located in Oswego, Illinois, was acquired. DFAS designs, fabricates and
assembles customized quick die change systems utilizing hydraulic, pneumatic
and electrical components. The remaining 10% minority interest in Applied Power
Korea was acquired on December 8, 1995. On May 15, 1996, CalTerm, Inc., a
supplier of electrical consumables and tools, was merged with a wholly-owned
subsidiary of the Company. CalTerm, Inc. is headquartered in San Diego,
California.
The Company's Wright Line segment acquired the European distribution rights for
its products on February 23, 1996.
On December 13, 1995, the Company's Distributed Products segment sold its HIT
spring steel product line for an amount approximating its book value. In
addition, the Company sold substantially all of the assets and liabilities of
its APITECH mobile equipment product line, which was part of the Engineered
Solutions segment, on January 24, 1996.
Following the end of the fiscal year, the Company, through its Wright Line
subsidiary, completed the acquisition of the net assets of Everest Electronic
Equipment, Inc. ("Everest"). Everest, based in Anaheim, California,
manufactures custom and standard electronic enclosures used primarily by the
computer, telecom, and datacom industries. Everest will be integrated with
Applied Power's Wright Line business segment.
For further information regarding the Company's acquisitions and dispositions,
see Note C - "Acquisitions" and Note D - "Sales of Product Lines" in Notes to
Consolidated Financial Statements.
Financial information by segment and geographic area, as well as information
related to export sales, is included in Note N - "Segment Information" in Notes
to Consolidated Financial Statements, which is included as part of Item 8 of
Part II of this report and is incorporated herein by reference.
All amounts are in thousands of US Dollars unless otherwise indicated.
2
DESCRIPTION OF BUSINESS SEGMENTS
DISTRIBUTED PRODUCTS
Distributed Products is engaged in the design, manufacture and distribution of
tools and consumables to the construction, electrical wholesale, retail DIY,
datacom, retail automotive, industrial and production automation markets. These
products are sold through the Enerpac and GB Electrical businesses.
Distributed Products supplies approximately 13,000 SKU's. The vast majority of
products are manufactured, while select low volume products are sourced.
Enerpac is a specialist in hydraulic high force tools for the construction and
industrial markets, and also supplies quick mold change systems for the plastic
injection molding industry, quick die change systems for the metal stamping
industry and workholding products for the machining industry. GB Electrical is
a large volume manufacturer of wire connectors, conduit benders, plastic cable
ties and fish tapes for the electrical wiring industry.
Distributed Products has engineering, manufacturing and warehousing operations
in various areas of the United States, including Wisconsin, Illinois,
Minnesota, North Carolina, California, Nevada, and Connecticut. Globally, the
segment has operations throughout Europe, Asia and, to a lesser extent, South
America.
The high force tools and other production automation components are primarily
distributed through a worldwide network of over 2,500 independent distributors
as well as directly to certain OEM customers. Wholesale distributors, home
centers, hardware co-ops, mass merchandisers, and automotive parts and
accessory retailers combine to distribute the segment's electrical tools and
accessories product lines. This network includes approximately 4,000 electrical
wholesale accounts as well as retailers including Sears, Ace Hardware, Builders
Square, Payless Cashways, Wal-Mart, The Home Depot, Cotter & Co., Pep Boys,
Western Auto, and other major chains, which in total represent over 23,000
consumer outlets.
ENGINEERED SOLUTIONS
Engineered Solutions focuses on developing and marketing value-added,
customized solutions for OEMs in the automotive, truck, off-highway equipment,
medical, aerospace, semiconductor, defense and industrial markets. Engineered
Solutions is comprised of the Power-Packer, APITECH, and Barry Controls
businesses. Engineered Solutions' expertise is primarily in the areas of
hydraulic motion control and vibration isolation. The business is particularly
skilled in using electronics to create smart or active systems to control
motion.
Primary applications in the automotive industry include convertible top
actuation systems and electric hydraulic valves used to control hydraulic
systems on cars. In the truck industry, the business supplies cab-over-engine
hydraulic tilt systems, cab suspension systems, engine mount systems and other
vibration isolation components. Medical applications include self-contained
hydraulic actuators that are primarily used in conjunction with hospital beds
as well as vibration isolation products for medical instrumentation. In
aerospace, the segment is the leading supplier of engine vibration isolation
systems to aircraft manufacturers as well as directly to airlines to support
maintenance operations. In addition to these major markets, the segment's
products are used in a wide variety of applications in other industries.
The segment maintains engineering, manufacturing and sales organizations in
North America, Europe and Asia. The segment's products are primarily sold
through direct sales people, with sales representatives being used in certain
situations. The segment's success requires close cost control, high quality and
just-in-time delivery. Most of the segment's manufacturing operations are
ISO-9000 certified and the segment continues to make significant investments
directed at upgrading its manufacturing capability on an ongoing basis.
WRIGHT LINE
Wright Line designs, manufactures and sells furnishings and enclosures utilized
in technology intensive business environments. Applications for these products
include local area networks, multimedia production, electrical
3
engineering and testing, telecommunication centers and R&D laboratories. In
addition, Wright Line provides modular workstations used in the computerized
office.
Wright Line sells customized systems primarily using direct sales personnel.
Wright Line employs over 200 direct sales people in the United States. Wright
Line's products are marketed in Asia and Europe through direct salespeople and
dealers, depending on the country. Its products are primarily sold to
commercial and governmental end-users. Sales to the Federal Government, which
now average approximately 25% of total Wright Line net sales, are made pursuant
to a contract between Wright Line and the US Government's General Services
Administration. Product is primarily manufactured in Worcester, Massachusetts.
COMPETITION
The Company competes on the basis of product design, quality, availability,
performance, customer service and price. The Company believes that its
technical skills, global presence, shared technology base, close working
relationships with customers as well as patent protection bolster its
competitive position.
The Company's businesses face competition to varying degrees in each of their
markets. In general, each product line competes with a small group of different
competitors. No one company competes directly with the Company across all of
its businesses. Some competitors are substantially larger than the Company and
have greater financial resources.
RESEARCH AND DEVELOPMENT
The Company maintains engineering staffs at several locations which design new
products and make improvements to existing product lines. Expenditures for
research and development were $9,852, $8,725 and $7,446 in fiscal years 1996,
1995 and 1994, respectively. Substantially all research, development and
product improvement expenditures are Company funded.
PATENTS AND TRADEMARKS
The Company has been issued a number of patents that provide protection of
valuable designs and processes in its Distributed Products and Engineered
Solutions businesses. Numerous other United States and foreign patents and
trademarks are owned by the Company, although no such individual patent or
trademark (or group thereof) is believed to be of sufficient importance that
its termination would have a materially adverse effect on the Company's
business.
MANUFACTURING, MATERIALS AND SUPPLIERS
The majority of the Company's manufacturing operations include the assembly of
parts and components which have been purchased by the Company from a number of
suppliers. In the absence of unusual circumstances, substantially all such
products are normally available from a number of local and national suppliers.
ORDER BACKLOGS AND SEASONALITY
At August 31, 1996, the Company had approximately $83,500 in backlog, compared
to approximately $88,200 at August 31, 1995. Substantially all orders are
expected to be completed prior to August 31, 1997. The Company's sales are
subject to minor seasonal fluctuations, with second quarter sales traditionally
being the lowest of the year.
EMPLOYEE RELATIONS
As of August 31, 1996, the Company employed 3,035 people on a full-time basis,
none of which are subject to a collective bargaining agreement. In general, the
Company enjoys good relationships with its employees.
4
ENVIRONMENTAL COMPLIANCE
The Company has facilities in numerous geographic locations which are subject
to a range of environmental laws and regulations. Compliance with these laws
has and will require expenditures on a continuing basis. Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. The Company has been identified by the United States Environmental
Protection Agency as a "Potentially Responsible Party" regarding seven
multi-party Superfund sites. Based on its investigations, the Company believes
it is a de minimis participant in each case, and that any liability which may
be incurred as a result of its involvement with such Superfund sites, taken
together with its expenditures for environmental compliance, will not have a
material adverse effect on its financial position. Liabilities are recorded
when environmental remediation is probable and the costs can be reasonably
estimated. Environmental remediation accruals of $611 and $573 were included in
the Consolidated Balance Sheet at August 31, 1996 and 1995, respectively. For
further information, refer to Note O - "Contingencies and Litigation" in Notes
to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The following table summarizes the principal manufacturing, warehouse and
office facilities owned or leased by the Company:
Location and Business Size (sq. feet) Owned/Leased
- - -----------------------------------------------------------------------------
DISTRIBUTED PRODUCTS
Glendale, Wisconsin 280,000 Leased
Columbus, Wisconsin 130,000 Leased
Veenendaal, Netherlands 97,000 Owned
San Diego, California 69,000 Leased
Pachuca, Mexico 69,000 Leased
Troyes, France 67,000 Leased
Tecate, Mexico 54,000 Leased
Reno, Nevada 50,000 Owned
Tokyo, Japan 45,000 Leased
Matthews, North Carolina 33,000 Owned
Alexandria, Minnesota 25,000 Owned
Seoul, South Korea 22,000 Leased
Singapore, Singapore 15,000 Leased
Milford, Connecticut 11,000 Owned
ENGINEERED SOLUTIONS
Brighton, Massachusetts 227,000 Leased
Burbank, California 126,000 Leased
Oldenzaal, Netherlands 74,000 Owned
Westfield, Wisconsin 48,000 Owned
Hersham, England 39,000 Leased
Butler, Wisconsin 10,000 Leased
WRIGHT LINE
Worcester, Massachusetts 241,000 Owned
In addition to these properties, the Company utilizes a number of smaller
facilities in South Korea, Spain, Italy, Canada, Brazil, France, Germany,
Australia, Russia, Taiwan, India, the Peoples Republic of China, the United
Kingdom and the United States. The Company's headquarters are based in a 68,000
square foot leased office facility in Butler, Wisconsin, which is also utilized
by the Distributed Products and Engineered Solutions segments.
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The Company's strategy is to lease properties when available and economically
advantageous. Leases for the majority of the Company's facilities include
renewal options. For additional information, see Note I - "Leases" in Notes to
Consolidated Financial Statements. The Company believes its current properties
are well maintained and in general are adequately sized to house existing
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings which have arisen in the
normal course of its business. These legal proceedings typically include
product liability, environmental and patent claims. (For further information
related to environmental claims, refer to "Environmental Compliance" on page
5). The Company has recorded reserves for loss contingencies based on the
specific circumstances of each case. Such reserves are recorded when the loss
is probable and can be reasonably estimated. In the opinion of management, the
resolution of these contingencies will not have a materially adverse effect on
the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of the Company
are listed below.
Name Age Position
- - ---- --- --------
Richard G. Sim 52 Chairman, President and Chief Executive Officer; Director
William J. Albrecht 45 Senior Vice President, Engineered Solutions
Gustav H.P. Boel 52 Vice President, President of Enerpac
Philip T. Burkart 39 Vice President, President of Wright Line Inc.
Theodore M. Lecher 45 Vice President, President GB Electrical, Inc.
Robert C. Arzbaecher 36 Vice President, Chief Financial Officer
Dale A. Knutson 64 Vice President, Technology
Douglas R. Dorszynski 44 Vice President, Tax and Treasurer
Richard D. Carroll 33 Corporate Controller
Anthony W. Asmuth III 54 Secretary
Richard G. Sim was elected President and Chief Operating Officer in 1985, Chief
Executive Officer in 1986 and Chairman of the Board in 1988. From 1982 through
1985, Mr. Sim was a General Manager in the General Electric Medical Systems
Business Group. He is also a director of IPSCO Inc. and Falcon Building
Products, Inc.
William J. Albrecht was named Senior Vice President of Engineered Solutions in
1994. Prior to that, he served as Vice President and President of Power-Packer
and APITECH since 1991. He joined the Company in 1989 as General Manager of the
APITECH Division in the United States. Prior to joining the Company, Mr.
Albrecht was Director of National Accounts and Industrial Power Systems at
Generac Corp. from 1987 to 1989 and Vice President-Sales at NP Marketing from
1985 to 1987.
6
Gustav H.P. Boel was elected Vice President of the Company and named President
of the Company's Enerpac business in 1995. From 1991 until that time, he was
Managing Director of Power-Packer Europe. From 1990 to 1991, Mr. Boel was
Technical Director for Groeneveld, located in Holland. Prior to 1990, he spent
nineteen years with Enerpac in the Netherlands, where he last held the position
of Managing Director.
Philip T. Burkart was elected Vice President of the Company in 1995 and named
the President of Wright Line Inc. in 1994. From 1990 to 1994, Mr. Burkart held
various positions within Wright Line Inc. including: General Manager, Vice
President, Marketing and Operations and Director of Marketing. Prior to joining
the Company, Mr. Burkart was a Marketing Manager for GE Medical Systems.
Theodore M. Lecher has served as President of GB Electrical, Inc. (Gardner
Bender, Inc. prior to its acquisition by the Company in 1988) since 1986, and
as a Company Vice President since 1988. He was Vice President-General Manager
of Gardner Bender, Inc. from 1983 to 1986, and prior to that, Director of Sales
and Marketing since 1980. Mr. Lecher has been associated with GB Electrical,
Inc. since 1977.
Robert C. Arzbaecher was named Vice President and Chief Financial Officer in
1994. He had served as Vice President, Finance of Distributed Products from
1993 to 1994. He joined the Company in 1992 as Controller. From 1988 through
1991, Mr. Arzbaecher was employed by Grabill Aerospace Industries LTD, where he
last held the position of Chief Financial Officer. Prior to 1988, Mr.
Arzbaecher held various financial positions at Farley Industries Inc. and at
Grant Thornton and Company, a public accounting firm.
Dale A. Knutson has served as Vice President, Technology since 1987. From 1982
until 1987, he held the position of Vice President, Product Engineering. Mr.
Knutson has been associated with the Company since 1969.
Douglas R. Dorszynski was appointed Vice President, Tax and Treasurer in 1994.
Mr. Dorszynski joined the Company in 1983 as Corporate Tax Manager and was
subsequently appointed Director, Tax and Special Project Planning in 1985.
Prior to joining the Company, Mr. Dorszynski was employed by Arthur Young &
Co., a public accounting firm, from 1978 to 1983.
Richard D. Carroll joined the Company as Corporate Controller in 1996. Mr.
Carroll was previously employed with the Northwest Indiana Water Company as its
Vice President/Controller during 1995. Prior to that, he was Controller for
Nypro Chicago from 1993 to 1995. For 1990 through 1993, Mr. Carroll was
Controller at Roquette America, Inc. Prior to that, he was employed at Grabill
Aerospace Industries LTD and at Grant Thornton, a public accounting firm.
Anthony W. Asmuth III is a partner in the law firm of Quarles & Brady,
Milwaukee, Wisconsin, having joined that firm in 1989. Quarles & Brady performs
legal services for the Company and certain of its subsidiaries. Prior to
joining Quarles & Brady, he was a partner with the law firm of Whyte
Hirschboeck Dudek S.C. Mr. Asmuth had previously served as Secretary of the
Company from 1986 to 1993. He was re-elected Secretary in 1994.
Each officer is appointed by the Board of Directors and holds office until he
resigns, dies, is removed or a different person is appointed to the office. The
Board of Directors generally appoints officers at its meeting following the
Annual Meeting of Shareholders.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol APW. At October 31, 1996, the approximate number of record shareholders
of common stock was 493. The high and low sales prices of the common stock by
quarter for each of the past two years are as follows:
FISCAL YEAR PERIOD HIGH LOW
- - ----------- -------------------------- ---------- ---------
1996 June 1 to August 31 $30 3/8 $27 1/8
March 1 to May 31 33 28 7/8
December 1 to February 29 32 3/8 26 3/4
September 1 to November 30 35 1/8 28 3/4
1995 June 1 to August 31 $33 3/8 $24 1/2
March 1 to May 31 27 23 1/4
December 1 to February 28 25 3/4 20 3/4
September 1 to November 30 25 1/8 21 5/8
Quarterly dividends of $0.03 per share were declared and paid for each of the
quarters above.
ITEM 6. SELECTED FINANCIAL DATA
(In Millions, except per share amounts)
For the years ended August 31,
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1996 1995 1994 1993 1992
------- -------- -------- -------- --------
Net Sales $571.2 $527.1 $433.6 $398.7 $404.3
Gross Profit 219.9 201.4 163.5 151.0 154.9
Earnings(Loss)
Continuing Operations 33.7 25.0 16.9 7.1 (1) 8.5 (1)
Discontinued Operations - - (0.4) (3.8) (32.9)
Extraordinary Loss - (4.9) - - -
Cumulative Effect of
Accounting Change - - - (4.4) -
------ ------- ------- ------- -------
Net Earnings(Loss) $ 33.7 $ 20.1 $ 16.5 $ (1.1) $(24.4)
Earnings (Loss) Per Share
Continuing Operations $ 2.41 $ 1.82 $ 1.27 $ 0.54 (1) $ 0.65 (1)
Discontinued Operations - - (0.03) (0.29) (2.51)
Extraordinary Loss - (0.36) - - -
Cumulative Effect of
Accounting Change - - - (0.33) -
------ ------- ------- ------- -------
Net Earnings(Loss) Per Share $ 2.41 $ 1.46 $ 1.25 $(0.08) $(1.87)
Dividends Per Common Share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12
August 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
------ -------- -------- -------- --------
Total Assets $381.2 $332.9 $317.4 $306.3 $301.5
Long-term Obligations $ 76.5 $ 74.3 $ 88.7 $ 97.5 $108.0
Shareholders' Equity $168.5 $131.7 $107.3 $ 88.0 $ 96.6
Actual Shares Outstanding 13.7 13.4 13.2 13.0 13.0
8
(1) Earnings from Continuing Operations for 1993 and 1992 reflect after-tax
restructuring charges of $5.0 ($0.38 per share) and $3.1 ($0.24 per share),
respectively. In addition, 1992 includes a liquidation of LIFO inventory which
had the effect of increasing earnings by $1.3 ($0.10 per share).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in Millions, except per share amounts)
RESULTS OF CONTINUING OPERATIONS
- - --------------------------------
Years Ended August 31, Percentage of Net Sales
---------------------------- ----------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Net Sales $571.2 $527.1 $433.6 100.0% 100.0% 100.0%
Gross Profit 219.9 201.4 163.5 38.5 38.2 37.7
Operating Expenses 158.5 149.2 121.3 27.7 28.3 28.0
Operating Earnings 61.4 52.2 42.2 10.8 9.9 9.7
Other Expenses 12.3 15.3 16.9 2.2 2.9 3.9
Earnings Before Income Taxes 49.1 36.9 25.3 8.6 7.0 5.8
Income Tax Expense 15.4 11.9 8.4 2.7 2.3 1.9
Earnings Before Accounting Change and
Extraordinary Loss 33.7 25.0 16.9 5.9 4.7 3.9
Extraordinary Loss - (4.9) - - (0.9) -
Net Earnings $ 33.7 $ 20.1 $ 16.9 5.9% 3.8% 3.9%
- - ------------ ------ ------ ------ ---- ----- -----
The preceding table sets forth the results of continuing operations of the
Company for the years ended August 31, 1996, 1995 and 1994.
Net earnings have nearly doubled over the last two years as a result of higher
sales volume, improved operating margins and lower financing costs.
NET SALES
Net sales increased 8% in 1996 with two of the three segments posting solid
sales growth increases. Excluding the unfavorable impact on translated sales
from the stronger US Dollar, sales increased 9% over 1995.
Sales Percentage Change from Prior Year
----------------------------- -------------------------------------
GEOGRAPHIC SALES 1996 1995 1994 1996 1995 1994
- - ---------------------- ------- ------- ------ ------- ------- ------
North America $360.8 $323.0 $279.6 12% 16% 8%
Europe 143.7 136.8 99.2 5 38 14
Japan and Asia Pacific 56.8 55.3 43.5 3 27 5
Latin America 9.9 12.0 11.3 (18) 6 11
- - ---------------------- ------ ------ ------ ----- ----- ----
Totals $571.2 $527.1 $433.6 8% 22% 9%
- - ---------------------- ------ ------ ------ ----- ----- ----
Softening economic conditions experienced throughout the markets in which the
Company operates slowed the growth rates in these regions for fiscal 1996 and
combined to an overall 8% increase. Total sales in 1995 were 22% higher than in
1994, reflecting geographic expansion and an improvement in the economic
environment in North America and Europe. Ignoring the favorable impact on
translated sales from the weaker US Dollar in 1995, sales increased 18% over
1994.
Sales in Europe grew 5% in 1996 compared to 38% in 1995. The slowing economies
in Europe are the primary reasons for the slowing of the growth rate. Sales in
Japan and Asia Pacific increased 3% in 1996 compared to a 27% increase from
1994 to 1995. Excluding the affect of foreign currency fluctuations against the
US Dollar, sales in real terms increased 9% and 14% for fiscal 1996 and 1995,
respectively, in this geographic region. Latin American sales
9
have been unfavorably impacted by the significant devaluation of the Mexican
Peso over the last few years. Excluding the effect of this devaluation, sales
growth was 1% in 1996 and 23% in 1995. The variation of the growth rates is the
result of the changing economies in Latin America.
Sales Percentage Change from Prior Year
------------------------------ -------------------------------------
SEGMENT SALES 1996 1995 1994 1996 1995 1994
- - ------------- ------- ------- ------- ------- ------- -------
Distributed Products $284.5 $264.9 $222.0 7% 19% 4%
Engineered Solutions 190.9 192.2 162.3 (1) 18 10
Wright Line 95.8 70.0 49.3 37 42 29
- - ------------------- ------- ------- ------- ------- ------- -------
Totals $571.2 $527.1 $433.6 8% 22% 9%
- - ------------------- ------- ------- ------- ------- ------- -------
Total sales from Distributed Products increased 7% in 1996, with benefits
coming from the continued expansion into developing markets in Southeast Asia,
Latin America, and South America and approximately $16.7 million from
acquisitions net of product line dispositions. The impact of the stronger US
Dollar negatively impacted Distributed Products sales in 1996 relative to 1995
by approximately 1%, as sales generated by units outside the US translated into
lower US Dollars in 1996. In 1995, Distributed Products sales benefited from
improved economic conditions in North America and Europe, further expansion
into developing markets in Southeast Asia, Latin America, and South America and
approximately $4.0 million from minor acquisitions.
Engineered Solutions had a 1% decrease in sales in 1996 compared to an 18%
increase in 1995. The primary reason for the decrease was the disposition of
the Company's APITECH Mobile equipment product line in January 1996 and
softening markets in the defense, truck, and convertible top markets throughout
the US and Europe. The majority of the growth noted in fiscal 1995 was
attributable to strong demand from European OEM truck and automobile
manufacturers.
Wright Line continued to generate impressive sales growth posting increases of
37% and 42% for fiscal 1996 and 1995, respectively. The strong growth is
attributed to the continued demand for its existing products (most notably its
LAN Management Systems ("LMS") product line), acceptance of its new technical
environment solutions, its expanded direct sales force throughout 1996 and
1995, and geographic expansion into Europe and Asia.
Price changes have not had a significant impact on the comparability of net
sales during the last three years.
GROSS PROFIT
Gross profit increased to $219.9 million in 1996, compared to $201.4 million
and $163.5 million in 1995 and 1994, respectively. The improvement in gross
profit resulted primarily from the sales increases in 1996 and 1995.
GROSS PROFIT PERCENTAGES BY SEGMENT 1996 1995 1994
- - ----------------------------------- ----- ----- -----
Distributed Products 40.0% 42.1% 43.4%
Engineered Solutions 30.5 28.8 28.1
Wright Line 50.0 48.8 42.6
- - ----------------------------------- ----- ----- -----
Totals 38.5% 38.2% 37.7%
- - ------ ---- ---- ----
Items influencing overall gross profit percentages include relative sales mix
between Distributed Products, Engineered Solutions and Wright Line, as well as
production levels. Engineered Solutions gross profit percentages are lower than
either Wright Line or Distributed Products because a much higher proportion of
its sales are made to OEM customers which generate lower margins than non-OEM
customers. As a result, the lower the proportion of its sales to total Company
sales, the higher the Company's overall gross profit percentage. Gross profit
percentages from Distributed Products were lower in 1996 and 1995, relative to
1994, as a result of inefficiencies during the implementation of automated
warehousing, competitive pricing pressures, higher discounts to distributors
and increased shipments to OEM customers. Engineered Solutions and Wright Line
gross profit percentages improved in 1996 due to the benefits of prior year
restructuring at Engineered Solutions, as well as higher production levels at
Wright Line. Both achieved
10
improvement in 1995 over 1994 due to favorable product mix and the impact of
higher production levels on fixed manufacturing costs.
OPERATING EXPENSES
Operating expenses increased 6% and 23% in fiscal years 1996 and 1995,
respectively. During the corresponding periods, sales increased 8% and 22%,
respectively. The majority of the increase since 1994 relates to variable
selling expenses, primarily commissions. Wright Line has a direct sales force
whose compensation is commission-based. As a result of its 94% sales growth
over the last two years, its operating expenses have increased significantly.
As Wright Line becomes a larger part of the total Company, it will exert more
influence on the year-to-year growth in operating expenses.
In addition to variable selling expenses, total operating costs have increased
as a result of acquisitions, product development programs, and expenditures for
geographic expansion into emerging markets. Approximately $1.9 million of the
increase in fiscal 1996 was attributable to businesses acquired since the third
quarter of 1995. During the last few years, the Company has also opened sales
offices in Russia, India and China, and has increased its presence in Latin
America and Southeast Asia. Overall lower corporate expenses and the Company's
goal to continually identify ways to be more cost effective have allowed the
Company to keep operating expenses at a constant 28% of sales over the last
three fiscal years.
OTHER EXPENSE (INCOME)
OTHER EXPENSE (INCOME) 1996 1995 1994
- - --------------------- ------ ------- -------
Net financing costs $ 8.5 $10.3 $11.4
Amortization expense 4.1 3.3 5.1
Other - net (0.2) 1.7 0.4
- - ----------- ----- ------- -------
The reduction in financing costs during the last three years reflects lower
market interest rates and reduced debt levels. The Company refinanced certain
debt in 1995, which also had the impact of lowering its financing costs. For
further information, see "Liquidity and Capital Resources" below.
Amortization expense increased in 1996 due to incremental amortization of
intangible assets added in 1995 and 1996 from acquisitions (see "Liquidity and
Capital Resources" below), but declined in 1995 as certain intangible assets
from the GB Electrical acquisition in 1988 became fully amortized.
"Other - net" includes foreign exchange (gains) losses and miscellaneous other
(income) expense. A net foreign exchange loss was realized in 1996, however it
was more than offset by miscellaneous income realized. In 1995, the Mexican
Peso devaluation caused a $1.3 million foreign exchange loss and represented
the majority of other expense.
INCOME TAX EXPENSE
The Company's effective income tax rate is largely impacted by the proportion
of earnings generated inside and outside the US, as well as the utilization of
foreign tax credits in the US. Higher US earnings and the utilization of
foreign tax credits had a favorable impact on the effective tax rate in 1996
and 1995.
EXTRAORDINARY LOSS
The Company recorded an extraordinary loss of $4.9 million, or $0.36 per share,
in 1995 in connection with the March 30, 1995 extinguishment of its $64.4
million 9.92% Senior Unsecured Notes. The pre-tax extraordinary loss of $7.3
million was comprised of an estimated make whole provision of $4.1 million,
costs associated with the cancellation of underlying interest rate swap
agreements of $3.0 million and the write-off of $0.2 million of deferred
financing costs. For further information, see Note H - "Long-term Debt" in
Notes to Consolidated Financial Statements.
11
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," effective in fiscal 1995.
This adoption had no material effect on the Company's financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company expects to continue to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and include the necessary pro
forma disclosures in its 1997 financial statements.
DISCONTINUED OPERATIONS
In the second quarter of 1994, the Company announced its decision to retain the
remaining Wright Line business, which had been reported as a discontinued
operation since 1992. The Company completed the sale of Wright Line's German
operation in 1993 and Wright Line's Datafile businesses in Canada, Australia,
the UK and the US in 1994. The net assets and results of operations for the
retained Wright Line business were reclassified from discontinued to continuing
operations for the periods it was held for sale. For further information, see
Note B - "Discontinued Operations" in Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Outstanding debt at August 31, 1996 totaled $92.6 million, an increase of $5.7
million since the beginning of the year. The increased level of business
acquisitions and capital expenditures, partially offset by the additional sale
of accounts receivable, are the primary reasons for the increase. End-of-year
debt to total capital was approximately 33% in 1996 compared to 37% in 1995.
Approximately $32.8 million of cash was generated from operating activities in
1996, while $33.9 million of cash was used to fund acquisitions and $22.7
million was used to fund capital expenditures. The balance of cash generated in
1996 originated from the additional sale of receivables. In 1995, $23.8 million
of cash was generated from operations of which $2.8 million was used to fund
acquisitions and $16.0 million was used to fund capital expenditures. The
balance of the cash generated in 1995 was used to reduce debt. Dividends of
$1.6 million were paid during both 1996 and 1995.
Increases in primary working capital (net receivables plus net inventory less
trade accounts payable) used approximately $17.7 million of cash during 1996 as
a result of higher sales volume (receivables) and geographic expansion
(inventory). The Company believes that primary working capital may grow further
in 1997 as a result of anticipated business expansion. During 1995, primary
working capital increased $22.4 million, also the result of increased sales and
geographic expansion.
The Company extinguished all $64.4 million of its 9.92% Senior Unsecured Notes
on March 30, 1995. The funds used to retire the debt and disburse the make
whole payments totaling $4.0 million were obtained from new borrowings,
including those under a temporary expansion of the Company's then existing
$40.0 million Multi-currency revolving credit agreement. The Company replaced
the original $40.0 million Multi-currency credit agreement and the temporary
$40.0 million expansion with the proceeds from a new $120.0 million
Multi-currency credit agreement in August 1995. To reduce interest rate risk
associated with the refinancing, the Company entered into interest rate caps on
a notional $60.0 million in borrowings that limits the maximum applicable base
rate (three month LIBOR) to 8.0%. The interest rate caps expire in March 1997.
In addition, the Company has entered into interest rate swap agreements during
fiscal 1996 which effectively convert $65.5 million of the Company's variable
rate debt to a weighted average fixed rate of 5.92%. The swap agreements expire
on varying dates through 2003. During 1996, the Company incurred interest at a
rate of .375 of 1% above IBOR.
In August 1996, the new Multi-currency credit agreement was amended to provide
unsecured credit availability of $170.0 million and extend the expiration date
to August 2001. For additional information, see Note H - "Long-term Debt" in
Notes to Consolidated Financial Statements.
12
In 1995, the Company replaced its former $25.0 million accounts receivable
financing facility with a new facility that expires in August 1998 and provides
up to $50.0 million of multi-currency accounts receivable financing. During
1996, the agreement was amended to extend the terms through August 1999. An
incremental $13.3 million of receivables were financed in 1996, bringing the
total balance financed to $49.5 million at August 31, 1996. Proceeds were used
to reduce debt. For additional information, see Note E - "Accounts Receivable
Financing" in Notes to Consolidated Financial Statements.
The following table summarizes the Company's total capitalization over the last
three years.
Dollars Percentage of Total Capitalization
------------------------------- ----------------------------------------
TOTAL CAPITALIZATION 1996 1995 1994 1996 1995 1994
- - -------------------- -------- -------- ------- ---------- --------- --------
Total Debt $ 92.6 $ 87.0 $103.5 33% 37% 45%
Shareholders' Equity 168.5 131.7 107.3 61 56 48
Deferred Taxes 15.4 16.4 16.8 6 7 7
- - -------------------- ------ ------ ------ ------ ----- ----
Totals $276.5 $235.1 $227.6 100% 100% 100%
- - -------------------- ------ ------ ------ ------ ----- ----
In order to minimize interest expense, the Company intentionally maintains low
cash balances and uses available cash to reduce short-term bank borrowings.
Funds available under unused non-committed lines and the $170.0 million
Multi-currency credit agreement totaled $47.4 million and $93.7 million,
respectively, as of August 31, 1996. The Company believes that such
availability plus funds generated from operations will be adequate to fund
operating activities, including capital expenditures and working capital, for
the foreseeable future.
INFLATION
No meaningful measures of inflation are available because the Company has a
significant number of small operations which operate in countries with diverse
rates of inflation and currency rate movements.
OUTLOOK
The Company expects its trend of increasing sales and earnings per share to
continue into 1997, assuming no significant downturn in the economy in North
America or Western Europe. Net sales are expected to be in the range of $650.0
to $690.0 million with earnings per share between $2.70 and $3.00. The strength
of its core business segments, integration of the acquisitions that took place
in 1996, and strategic acquisitions will be the driving forces of the growth.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in the above section entitled "Outlook," as well as
statements which are not historical facts, are forward looking statements that
involve risks and uncertainties. There are several risk factors which are
beyond the Company's control which could cause the Company's actual results to
differ from those expressed in such forward looking statements. Those risk
factors include, without limitation, general economic conditions and market
conditions in the industrial production, trucking, construction, aerospace,
automotive, and defense industries in North America, Europe, and Asia, market
acceptance of existing and new products, successful integration of
acquisitions, competitive pricing, foreign currency risk, interest rate risk,
and other factors.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly financial data for 1996 and 1995 is as follows:
(In Millions, except per share amounts)
1996
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------- --------------
Net Sales $ 139.3 $ 137.1 $ 147.5 $ 147.3
Gross Profit 54.1 51.7 55.4 58.7
Net Earnings $ 7.7 $ 7.7 $ 9.1 $ 9.2
============ =========== ============= ==============
Net Earnings Per Share $ 0.55 $ 0.55 $ 0.65 $ 0.66
============ =========== ============= ==============
1995
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------- --------------
Net Sales $ 125.8 $ 124.5 $ 139.4 $ 137.4
Gross Profit 48.2 47.3 53.6 52.3
Earnings Before Extraordinary Loss 5.5 4.6 7.3 7.6
Extraordinary Loss - (4.9) - -
------------ ------------ ------------- --------------
Net Earnings (Loss) $ 5.5 $ (0.3) $ 7.3 $ 7.6
============ =========== ============= ==============
Earnings (Loss) Per Share
Before Extraordinary Loss $ 0.40 $ 0.34 $ 0.53 $ 0.55
Extraordinary Loss - (0.36) - -
------------ ----------- ------------- --------------
Net Earnings (Loss) Per Share $ 0.40 $ (0.02) $ 0.53 $ 0.55
============ =========== ============= ==============
The Consolidated Financial Statements are included on pages 18 to 33 and are
incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
"Election of Directors" and "Other Information -- Section 16(a) Beneficial
Ownership Reporting Compliance" sections of the Company's Proxy Statement for
its Annual Meeting of Shareholders to be held on January 8, 1997 (the "1997
Annual Meeting Proxy Statement"). See also "Executive Officers of the
Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
"Board Meetings, Committees and Director Compensation" section and the
"Executive Compensation" section (other than the subsections thereof entitled
"Report of the Compensation Committee of the Board of Directors on Executive
Compensation" and "Performance Graphs") of the 1997 Annual Meeting Proxy
Statement.
14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
"Certain Beneficial Owners" and "Election of Directors" sections of the 1997
Annual Meeting Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Consolidated Financial Statements
See "Index to Consolidated Financial Statements and Financial
Statement Schedules" on page 16, the Independent Auditors' Report on
page 17 and the Consolidated Financial Statements on pages 18 to 33,
all of which are incorporated herein by reference.
2. Financial Statement Schedules
See "Index to Consolidated Financial Statements and Financial
Statement Schedules" on page 16 and the Financial Statement Schedule
on page 34, all of which are incorporated herein by reference.
3. Exhibits
See "Index to Exhibits" on pages 36 to 40, which is
incorporated herein by reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed in the fourth quarter.
15
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
- - ------------------------------------------ ----
Independent Auditors' Report 17
Consolidated Statement of Earnings
For the years ended August 31, 1996, 1995 and 1994 18
Consolidated Balance Sheet
As of August 31, 1996 and 1995 19
Consolidated Statement of Shareholders' Equity
For the years ended August 31, 1996, 1995 and 1994 20
Consolidated Statement of Cash Flows
For the years ended August 31, 1996, 1995 and 1994 21
Notes to Consolidated Financial Statements 22 - 33
INDEX TO FINANCIAL STATEMENT SCHEDULES
- - --------------------------------------
Schedule II - Valuation and Qualifying Accounts 34
All other schedules are omitted because they are not applicable, not required,
or because the required information is included in the consolidated financial
statements or notes thereto.
16
Independent Auditors' Report
To the Shareholders and Directors of Applied Power Inc.:
We have audited the accompanying consolidated balance sheets of Applied Power
Inc. and subsidiaries as of August 31, 1996 and 1995, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended August 31, 1996. Our audits also
included the consolidated financial statement schedule listed in the Index at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Applied Power Inc. and
subsidiaries at August 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
September 26, 1996
17
APPLIED POWER INC.
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years ended August 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Net sales $ 571,215 $ 527,058 $ 433,644
Cost of products sold 351,283 325,621 270,120
----------- ----------- -----------
Gross Profit 219,932 201,437 163,524
Engineering, selling and administrative expenses 158,485 149,210 121,315
----------- ----------- -----------
Operating Earnings from Continuing Operations 61,447 52,227 42,209
Other Expense(Income)
Net financing costs 8,456 10,291 11,362
Amortization of intangible assets 4,054 3,369 5,092
Other - net (230) 1,694 457
----------- ----------- -----------
Earnings from Continuing Operations Before
Income Tax Expense 49,167 36,873 25,298
Income Tax Expense 15,438 11,868 8,402
----------- ----------- -----------
Earnings from Continuing Operations 33,729 25,005 16,896
Discontinued Operations, net of income taxes
(Income) from operations previously offset against
reserve for estimated loss on disposition - - (348)
----------- ----------- -----------
Loss from Discontinued Operations 0 0 (348)
----------- ----------- -----------
Earnings before Extraordinary Loss 33,729 25,005 16,548
Extraordinary Loss from Early Extinguishment of
Debt, net of $2,423 tax benefit - (4,920) -
----------- ----------- -----------
Net Earnings $ 33,729 $ 20,085 $ 16,548
=========== =========== ===========
Primary Earnings(Loss) Per Share:
Continuing Operations $ 2.41 $ 1.82 $ 1.27
Discontinued Operations - - (0.03)
Extraordinary Loss - (0.36) -
----------- ----------- -----------
Earnings Per Share $ 2.41 $ 1.46 $ 1.25
=========== =========== ===========
Weighted Average Common and Equivalent Shares (000's) 13,983 13,746 13,289
=========== =========== ===========
Fully Diluted Earnings(Loss) Per Share:
Continuing Operations $ 2.41 $ 1.79 $ 1.25
Discontinued Operations - - (0.03)
Extraordinary Loss - (0.35) -
----------- ----------- -----------
Earnings Per Share $ 2.41 $ 1.44 $ 1.23
=========== =========== ===========
Weighted Average Common and Equivalent Shares (000's) 13,983 13,958 13,477
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
18
APPLIED POWER INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
August 31,
------------------------------
1996 1995
------------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 1,001 $ 911
Accounts receivable, less allowances of $4,179 and $3,593, respectively 68,747 71,000
Inventories 120,648 103,358
Prepaid income tax 10,734 10,297
Prepaid expenses 5,775 4,898
------------ -----------
Total Current Assets 206,905 190,464
Other Assets 6,370 6,274
Goodwill, net of accumulated amortization of $13,937 and $11,256, respectively 58,266 57,346
Other Intangibles, net of accumulated amortization of $11,917 and $18,798, respectively 33,464 10,427
Property, Plant and Equipment
Property 1,923 1,909
Plant 40,252 28,850
Machinery and equipment 125,950 122,615
------------ -----------
168,125 153,374
Less: Accumulated depreciation (91,889) (84,939)
------------ -----------
Net Property, Plant and Equipment 76,236 68,435
------------ -----------
Total Assets $ 381,241 $ 332,946
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 16,068 $ 12,620
Trade accounts payable 41,397 37,530
Accrued compensation and benefits 20,805 19,707
Income taxes payable 7,081 7,575
Current maturities of long-term debt - 187
Other current liabilities 22,378 19,828
------------ -----------
Total Current Liabilities 107,729 97,447
Long-term Debt, less current portion 76,548 74,156
Deferred Income Tax 15,395 16,386
Other Deferred Liabilities 13,114 13,271
Shareholders' Equity
Class A common stock, $0.20 par value per share, authorized 40,000,000 shares,
issued and outstanding 13,652,349 and 13,406,590 shares, respectively 2,730 2,681
Additional paid-in capital 34,383 28,328
Retained earnings 126,392 94,285
Cumulative translation adjustments 4,950 6,392
------------ -----------
Total Shareholders' Equity 168,455 131,686
------------ -----------
Total Liabilities and Shareholders' Equity $ 381,241 $ 332,946
============ ===========
The accompanying notes are an integral part of these financial statements
19
APPLIED POWER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended August 31, 1996, 1995 and 1994
----------------------------------------------------------
Class A Additional Cumulative
Common Paid-in Retained Translation
Stock Capital Earnings Adjustments
----------- ---------- ---------- ---------------------
Balances at September 1, 1993 $2,601 $21,654 $ 60,823 $ 2,932
Net earnings for the year - - 16,548 -
Cash dividends declared - $0.12 per share - - (1,569) -
Exercise of stock options 29 1,850 - -
Other - 144 - -
Currency translation adjustments - - - 2,299
------ ------- -------- --------
Balances at August 31, 1994 2,630 23,648 75,802 5,231
Net earnings for the year - - 20,085 -
Cash dividends declared - $0.12 per share - - (1,602) -
Exercise of stock options 51 4,168 - -
Other - 512 - -
Currency translation adjustments - - - 1,161
------ ------- -------- --------
Balances at August 31, 1995 2,681 28,328 94,285 6,392
Net earnings for the year - - 33,729 -
Cash dividends declared - $0.12 per share - - (1,622) -
Exercise of stock options 24 1,582 - -
Issuance of stock in acquisition 25 3,905 - -
Other - 568 - -
Currency translation adjustments - - - (1,442)
------ ------- -------- --------
Balances at August 31, 1996 $2,730 $34,383 $126,392 $ 4,950
====== ======= ======== ========
The accompanying notes are an integral part of these financial statements
20
APPLIED POWER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Years ended August 31,
-----------------------------------
1996 1995 1994
-------- -------- --------
Net Earnings $ 33,729 $ 20,085 $ 16,548
Adjustments to reconcile earnings from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 21,078 18,456 19,406
Other non-cash charge - extraordinary loss - 4,920 -
Other non-cash charge - discontinued operations - - 348
Provision for deferred taxes (1,588) (2,707) (789)
Changes in operating assets and liabilities, excluding
the effects of business acquisitions and disposals:
Accounts receivable (5,703) (15,413) (12,855)
Inventories (14,219) (8,170) (7,182)
Prepaid expenses and other assets (2,505) (2,077) 3,156
Trade accounts payable 2,262 1,231 8,509
Other liabilities (240) 7,499 (4,663)
-------- -------- --------
Net Cash Provided by Operating Activities 32,814 23,824 22,478
Investing Activities
Proceeds on the sale of property, plant and equipment 821 614 1,342
Additions to property, plant and equipment (22,734) (15,986) (12,707)
Business acquisitions (33,949) (2,758) (2,446)
Product line dispositions 5,181 - -
Other 65 162 142
-------- -------- --------
Net Cash Used in Investing Activities (50,616) (17,968) (13,669)
Financing Activities
Proceeds from issuance of long-term debt 42,433 116,055 13,959
Principal payments on long-term debt (37,877) (123,997) (33,755)
Refinancing expenditures - (4,370) -
Net borrowings(repayments) on short-term credit facilities 3,484 (2,092) (5,700)
Net commercial paper (repayments)borrowings (3,276) (6,671) 9,947
Additional receivables financed 13,275 11,200 -
Dividends paid on common stock (1,622) (1,602) (1,569)
Stock option exercises and other 1,551 4,219 1,879
-------- -------- --------
Net Cash Provided by(Used in) Financing Activities 17,968 (7,258) (15,239)
Effect of Exchange Rate Changes on Cash (76) 406 132
-------- -------- --------
Net Cash Provided by(Used in) Continuing Operations 90 (996) (6,298)
Discontinued Operations Activities
Proceeds from sale of Datafile - - 6,222
Other - - 663
-------- -------- --------
Net Cash Provided by Discontinued Operations 0 0 6,885
-------- -------- --------
Net Increase(Decrease) in Cash and Cash Equivalents 90 (996) 587
Cash and Cash Equivalents - Beginning of Year 911 1,907 1,320
-------- -------- --------
Cash and Cash Equivalents - End of Year $ 1,001 $ 911 $ 1,907
======== ======== ========
The accompanying notes are an integral part of these financial statements
21
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Applied Power Inc. and its majority-owned subsidiaries ("Applied
Power" or the "Company"). All significant intercompany balances, transactions
and profits have been eliminated.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with original maturities of 90 days or less to be cash equivalents.
Inventories: Inventories are comprised of material, direct labor and
manufacturing overhead, and are stated at the lower of cost or market.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Plant and equipment are depreciated over the estimated useful lives of
the assets under the straight-line method for financial reporting purposes and
both straight-line and accelerated methods for tax purposes. Expenditures for
maintenance and repairs not expected to extend the useful life of an asset
beyond its normal useful life are expensed.
Intangible Assets: Goodwill is amortized on a straight-line basis over periods
of fifteen to forty years. Other intangible assets, consisting primarily of
purchased patents, trademarks and noncompete agreements, are amortized over
periods from two to forty years. The Company periodically evaluates the
carrying value of intangible assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Revenue Recognition: Revenues and costs of products sold are recognized as the
related products are shipped.
Research and Development Costs: Research and development costs are expensed as
incurred. Such costs incurred in the development of new products or significant
improvements to existing products totaled approximately $9,852, $8,725 and
$7,446 in 1996, 1995 and 1994, respectively.
Financing Costs: Net financing costs represents interest expense on debt
obligations, investment income, and accounts receivable financing costs.
Income Taxes: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." For further information, see Note M - "Income Taxes."
Earnings Per Share: Earnings per share is based on the weighted average number
of common and common equivalent shares outstanding during the year. The
dilutive effect of stock options, which are considered common stock
equivalents, is calculated using the treasury stock method.
Foreign Currency Translation: Foreign currency translation adjustments are
generally excluded from the Consolidated Statement of Earnings and are included
in Cumulative translation adjustments in the Consolidated Balance Sheet. Gains
and losses resulting from foreign currency transactions are included in Other -
net in the Consolidated Statement of Earnings.
Derivative Financial Instruments: Derivative financial instruments are utilized
by the Company to manage risks generally associated with interest rate market
volatility. The Company does not hold or issue derivative financial instruments
for trading purposes. The Company currently holds both interest rate swap and
cap agreements. The differential to be paid or received is accrued monthly as
interest rates change and is recognized over the life of the agreement as an
adjustment to interest expense. The Company also utilizes, in limited
circumstances, foreign
22
currency forward contracts. Gains and losses resulting from these instruments
are recognized in the same period as the underlying transaction. For further
information, see Note H - "Long-term Debt."
Use of Estimates: The financial statements have been prepared in accordance
with generally accepted accounting principles and necessarily include amounts
based on estimates and assumptions by management. Actual results could differ
from those amounts.
New Accounting Standards: In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." As
permitted by SFAS No. 123, the Company expects to continue to apply Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and include the necessary pro forma disclosures in its 1997 financial
statements.
Reclassifications: Certain amounts shown for 1994 have been reclassified to
conform to the current presentation.
NOTE B - DISCONTINUED OPERATIONS
In the second quarter of 1994, the Company announced its decision to retain the
remaining Wright Line business, which had been included in discontinued
operations since the third quarter of 1992. The retained business has refocused
its business strategy on technical furniture solutions for offices and
laboratories.
The Company had originally intended to sell all of Wright Line in a single
transaction in 1993. However, management subsequently determined that proceeds
could be maximized by selling the assets in a series of separate transactions.
The Company completed the sale of certain assets of Wright Line's German
operation to an existing distributor in exchange for the assumption of certain
liabilities. In early 1994, Wright Line's Datafile businesses in Canada,
Australia, the UK and the US were sold, generating proceeds of $6,222. A short
time later, Wright Line sold its Tapeseal product line to a third party for
future compensation.
The operating results from the retained Wright Line operations have been
reclassified from discontinued operations to continuing operations for all
periods presented. However, the results of the retained operations for the
period June 1992 through November 1993 have remained offset against the reserve
previously established for operating losses until disposition ($398 in fiscal
1994).
NOTE C - ACQUISITIONS
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 Consolidated Statement of Earnings.
On February 23, 1996, the Company's Wright Line division 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. On March 21, 1994, the Company had
increased its ownership interest from approximately 50% to 90%. Cash of $912
was used in such
23
acquisition which resulted in goodwill of $572. The results of operations of
this subsidiary have historically been included in the Consolidated Statement
of Earnings.
On October 26, 1995, the Company's Enerpac division acquired the assets of
Designed Fluid-Air Systems, Inc. ("DFAS"). Consideration included $298 in cash
plus future royalties over the next five years not to exceed $500 in the
aggregate. Approximately $100 of the purchase price was assigned to goodwill.
DFAS, located in Oswego, Illinois, designs, fabricates and assembles customized
quick die change systems utilizing hydraulic, pneumatic and electrical
components. The operating results of DFAS subsequent to the acquisition date
are included in the 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. On January 10, 1996, in a separate
transaction, the Company acquired certain proprietary technology rights and
patents related to Vision. Total consideration for the two transactions of
approximately $21,500 was funded by proceeds from borrowings under existing
credit facilities. Intangible assets of $19,942 were recorded which included
approximately $950 of goodwill. Vision, based in San Diego, California,
manufactures plastic cable ties which are sold through electrical wholesale,
retail and OEM channels. The operating results of Vision subsequent to
September 29, 1995 are included in the Consolidated Statement of Earnings.
The Company acquired all of the outstanding stock of New England Controls, Inc.
("NECON") on June 28, 1995 for approximately $2,059 in cash. Approximately
$1,536 of the purchase price was assigned to goodwill. NECON, based in Milford,
Connecticut, manufactures electrical switches for the electrical wholesale,
retail and OEM markets. The operating results of NECON subsequent to June 28,
1995 are included in the Consolidated Statement of Earnings.
On September 1, 1994, the Company acquired the assets of Enerpac's master
distributor in Brazil for $699 in cash. Approximately $350 of the purchase
price was assigned to goodwill. The operating results of this business
subsequent to such date are included in the Consolidated Statement of Earnings.
The Company completed the acquisition of certain assets of Palmer Industries,
Inc. ("Palmer") on October 1, 1993 for approximately $1,534 in cash and a $350
note. Approximately $490 of the purchase price was assigned to goodwill.
Palmer, based in Alexandria, Minnesota, is a leading manufacturer of plastic
and metal staples, fasteners and straps. The operating results of Palmer
subsequent to October 1, 1993 are included in the Consolidated Statement of
Earnings.
All acquisitions were accounted for using the purchase method. The transactions
were not material to the results of operations or the financial position of the
Company.
NOTE D - 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.
NOTE E - ACCOUNTS RECEIVABLE FINANCING
As a part of its overall financing strategy, the Company sells to financial
institutions undivided participation interests in designated pools of accounts
receivable, with limited recourse. Participation interests in new receivables
may be sold as collections reduce previously sold participation interests. The
sold accounts receivable are reflected as a reduction of receivables in the
Consolidated Balance Sheet. The Company retains collection and administrative
24
responsibilities on the participation interests sold as agent for the
purchaser. In August 1995, the Company entered into a new multi-currency
accounts receivable financing agreement that allows up to the equivalent of
$50,000 of sold receivables at any one time. Previously, the Company was a
party to an agreement that provided up to $30,000 of accounts receivable
financing for US Dollar denominated receivables. The new accounts receivable
financing agreement, as amended August 30, 1996, expires in August 1999.
At August 31, 1996 and 1995, accounts receivable were reduced by $49,475 and
$36,200, respectively, representing receivable interests sold under this
program.
Accounts receivable financing costs totaling $2,324, $1,892 and $1,076 for the
years ended August 31, 1996, 1995 and 1994, respectively, are included with
financing costs in the accompanying Consolidated Statement of Earnings.
NOTE F - NET INVENTORIES
Inventory cost is determined using the last-in, first-out ("LIFO") method for
substantially all US owned inventory (approximately 69% and 58% of total
inventories in 1996 and 1995, respectively). The first-in, first-out or average
cost methods are used for all other inventories. If the LIFO method was not
used, inventory balances would be higher than the amounts in the Consolidated
Balance Sheet by approximately $9,222 and $10,296 at August 31, 1996 and 1995,
respectively.
It is not practical to segregate the amounts of raw materials, work-in-process
or finished goods at the respective balance sheet dates, since the segregation
is possible only as the result of physical inventories which are taken at dates
different from the balance sheet dates. The systems at many of the Company's
operating units have not been designed to capture this segregation due to the
very short production cycle of their products and the minimal amount of
work-in-process.
NOTE G - SHORT-TERM BORROWINGS
The Company had borrowings under unsecured non-committed lines of credit with
banks aggregating approximately $16,068 and $12,620 at August 31, 1996 and
1995, respectively. Interest rates vary depending on the currency being
borrowed. The weighted average interest rate on the US and non-US short-term
borrowings was 9.37% at August 31, 1996. The amount of unused available
borrowings under such lines of credit was approximately $47,400 at August 31,
1996.
NOTE H - LONG-TERM DEBT
August 31,
-----------------
1996 1995
------- -------
Borrowings under:
Multi-currency revolving credit agreement $76,298 $70,717
Commercial paper - 3,276
Other notes 250 350
------- -------
Total long-term debt 76,548 74,343
Less current maturities - (187)
------- -------
Long-term Debt, less current portion $76,548 $74,156
======= =======
During the second quarter of 1995, the Company recorded an extraordinary loss
of $4,920 ($0.36 per share) in anticipation of the March 30, 1995
extinguishment of the outstanding $64,350, 9.92% Senior Unsecured Notes. The
pre-tax extraordinary loss of $7,343 was comprised of an estimated make whole
provision of $4,050, costs associated with the cancellation of underlying
interest rate swap agreements of $3,047, and the write-off of deferred
financing costs of $246.
25
Funds used to retire the Senior Unsecured Notes and pay the make whole
obligation were obtained from new borrowings under an existing $40,000
Multi-currency revolving credit agreement and a temporary $40,000 expansion to
the existing Multi-currency revolving credit agreement. These borrowings were
extinguished on August 21, 1995, and all amounts outstanding were simultaneously
reborrowed under a new $120,000 Multi-currency revolving credit agreement (the
"new Multi-currency Credit Agreement").
The new agreement, as amended August 29, 1996, increases the credit line to
$170,000, extends the term to August 2001, and continues to bear interest at a
floating rate of IBOR plus .30 to .50 of 1% annually. Currently, the Company
incurs interest at .375 of 1% above IBOR. A commitment fee, currently computed
at a rate of .175 of 1% annually, is payable quarterly on the average unused
credit line. The unused credit line at August 31, 1996 was $93,702.
The new Multi-currency Credit Agreement contains customary restrictions
concerning investments, liens on assets, sales of assets, dividend payments,
maximum levels of debt and minimum levels of shareholders' equity. In addition,
the agreement requires the Company to maintain certain financial ratios. As of
August 31, 1996, the Company was in compliance with all debt covenants. Under
the most restrictive covenant, approximately $64,132 of retained earnings was
available for the payment of future dividends on common stock as of August 31,
1996.
Commercial paper outstanding at August 31, 1996 and 1995 totaled $0 and $3,276,
respectively, net of discount, and carried an average interest rate of 5.94% in
fiscal 1995. The Company had the ability and intent to maintain the commercial
paper obligations, classified as long-term, for more than one year. Amounts
outstanding as commercial paper reduce the amount available for borrowing under
the new Multi-currency Credit Agreement.
Interest Rate Financial Instruments: As part of its interest rate management
program, the Company periodically enters into interest rate swap and cap
agreements with respect to portions of its outstanding debt. The interest rate
swap agreements in place at August 31, 1996 effectively convert $65,500 of the
Company's variable rate debt to a weighted average fixed rate of 5.92%. The
swap agreements expire on varying dates through 2003. The accompanying
Consolidated Balance Sheet at August 31, 1996 does not reflect a value for
these swap agreements.
Interest rate caps limit the maximum interest rate that is paid. As of August
31, 1996, the Company had interest rate caps in place on a notional $60,000 in
borrowings that limit the maximum applicable base rate (three month LIBOR) to
8.0%. The interest rate caps expire in March 1997, and were recorded at a value
of $75 at August 31, 1996.
The counterparties to these financial instruments consist of major financial
institutions with investment grade or better credit ratings. The Company does
not expect any losses from nonperformance by these counterparties.
Fair Values: The fair value of the Company's short-term borrowings and
long-term debt approximated book value as of August 31, 1996. The fair value of
debt instruments is calculated by discounting the cash flow of such obligations
using the market interest rates for similar instruments at August 31, 1996. The
swap agreements currently in place had a fair value as determined by the
lenders of approximately $886 at August 31, 1996. Given the interest rate
market at August 31, 1996, the Company's interest rate cap agreement had
nominal value.
Aggregate Maturities: Aggregate maturities of long-term debt outstanding at
August 31, 1996, were: $0 in 1997; $250 in 1998; $0 in 1999; $0 in 2000 and
$76,298 in 2001.
The Company paid $8,084, $10,363 and $10,695 for financing costs in 1996, 1995
and 1994, respectively, excluding the make whole payments associated with
refinancing the 9.92% Senior Unsecured Debt.
NOTE I - LEASES
The Company leases certain facilities, computers, equipment and vehicles under
various lease agreements over periods of one to twenty years. Under most
arrangements, the Company pays the property taxes, insurance, maintenance and
expenses related to the leased property. Many of the leases include provisions
which enable the Company to renew leases based upon the fair values on the date
of expiration of the initial lease.
26
Future obligations on non-cancelable operating leases in effect at August 31,
1996 were: $9,839 in 1997; $6,667 in 1998; $4,415 in 1999; $4,077 in 2000;
$3,430 in 2001; and $20,127 thereafter.
Total rental expense under operating leases was $10,739, $11,076 and $11,379 in
1996, 1995 and 1994, respectively.
NOTE J - STOCK OPTION PLANS
At August 31, 1996, 2,004,886 shares of Class A common stock were reserved for
issuance under the Company's stock option plans.
Employee Plans: The Company has three nonqualified stock option plans for
employees - the 1985, 1987 and 1990 Plans. No further options may be granted
under the 1985 or 1987 Plans, although options previously issued and
outstanding under these plans remain exercisable pursuant to the provisions of
the plans. A total of 3,050,000 shares may be issued under all three stock
option plans (equal to 950,000 shares authorized under the 1985 Plan, 1,200,000
shares under the 1987 Plan and 900,000 shares under the 1990 Plan). Any
available unissued shares under the 1985 and 1987 Plans at the date of adoption
of the 1990 Plan became available for issuance under the 1990 Plan.
Options may be granted to officers and key employees. Options generally have a
maximum term of ten years and an exercise price equal to 100% of the fair
market value of a share of the Company's common stock at the date of grant.
Options generally vest 50% after 2 years and 100% after 5 years.
A summary of option activity under the three plans is as follows:
Number of Price
Shares Range
---------- --------------------
Outstanding at September 1, 1993 1,716,610 $ 2.21 - $26.75
Granted 189,400 15.81 - 21.38
Exercised (146,288) 2.21 - 20.56
Canceled (174,187) 12.75 - 26.75
--------- --------------------
Outstanding at August 31, 1994 1,585,535 $ 2.21 - $24.13
Granted 227,740 24.13 - 29.25
Exercised (250,136) 2.21 - 24.13
Canceled (119,450) 15.44 - 29.25
--------- --------------------
Outstanding at August 31, 1995 1,443,689 $ 2.21 - $29.25
Granted 80,854 22.68 - 32.44
Exercised (121,949) 2.21 - 22.25
Canceled (154,699) 15.63 - 29.25
--------- --------------------
Outstanding at August 31, 1996 1,247,895 $ 3.50 - $32.44
--------- --------------------
Exercisable at August 31, 1996 797,263 $ 3.50 - $29.25
--------- --------------------
Outside Director Plan: Annually, each outside director is automatically granted
stock options to purchase 1,000 shares of common stock at a price equal to the
market price of the underlying stock on the date of grant. A maximum of 60,000
shares may be issued under this plan. Options vest 100% after 11 months.
27
A summary of option activity under this plan is as follows:
Number of Price
Shares Range
--------- -----------------------
Outstanding at September 1, 1993 14,000 $12.75 - $ 24.13
Granted 6,000 16.69
Canceled (1,000) 16.69
-------- -----------------------
Outstanding at August 31, 1994 19,000 $12.75 - $ 24.13
Granted 5,000 25.00
Exercised (4,000) 12.75 - 24.13
-------- -----------------------
Outstanding at August 31, 1995 20,000 $12.75 - $ 25.00
Granted 6,000 27.63
Exercised (1,000) 17.00
-------- -----------------------
Outstanding at August 31, 1996 25,000 $12.75 - $ 27.63
-------- -----------------------
Exercisable at August 31, 1996 19,000 $12.75 - $ 25.00
-------- -----------------------
NOTE K - EMPLOYEE STOCK OWNERSHIP AND RETIREMENT PLANS
US Employees: Primarily all of the Company's full-time US employees are
participants in the Applied Power Inc. Employee Stock Ownership Plan (the "ESOP
Plan"). Under the provisions of the ESOP Plan, the plan administrator acquires
shares of Class A common stock on the open market and allocates such shares to
accounts set aside for Company employees' retirements. Contributions equal 3%
of each employee's annual cash compensation except "initial participants," who
received no allocation of shares until 1995. During the years ended August 31,
1996, 1995 and 1994, pre-tax expense related to the ESOP Plan was $1,735,
$1,720 and $534, respectively.
The Company also offers an employee 401(k) Savings Plan (the "Savings Plan") to
encourage eligible employees to save on a regular basis for their retirements.
Primarily all full-time US employees are eligible to participate in the Savings
Plan, and generally may contribute up to 15% of their base compensation.
Effective January 1, 1996, the Company's annual match equals approximately 25%
of each participant's first 6% of earnings. Expense attributable to the Savings
Plan was $672, $643 and $293 for 1996, 1995 and 1994, respectively.
Non-US Employees: The Company contributes to a number of retirement programs
for employees outside the US. Pension expense amounted to $948, $821 and $631
in 1996, 1995 and 1994, respectively. These plans are not required to report to
US governmental agencies under ERISA and do not otherwise determine the
actuarial value of accumulated plan benefits or net assets available for
benefits.
NOTE L - POSTRETIREMENT BENEFITS
The Company does not offer postretirement health care and life insurance
benefits to employees. However, certain employees of businesses previously
acquired by the Company were entitled to such benefits upon retirement. The
individuals receiving health care benefits under these programs are required to
make monthly contributions to defray a portion of the cost. Retiree
contributions are adjusted annually. Retirees currently do not contribute
toward the cost of life insurance. The accounting for retiree health care
benefits assumes retirees will continue to contribute toward the cost of such
benefits.
Net periodic postretirement benefit expense for 1996, 1995 and 1994 included
the following components:
1996 1995 1994
--------- --------- ---------
Service cost of benefits earned $ 8 $ 9 $ 9
Interest cost on accumulated postretirement benefit obligation 400 482 553
Amortization of unrecognized gain (251) (180) (91)
----- ----- ----
Total Postretirement Benefit Expense $ 157 $ 311 $471
===== ===== ====
28
The Company's accumulated postretirement benefit obligation for such benefits
is as follows:
August 31,
----------------
1996 1995
------- -------
Retirees $4,174 $4,887
Vested former employees 1,029 1,419
Active employees 225 238
------- -------
Subtotal 5,428 6,544
Unrecognized gain 4,131 3,037
------- -------
Accumulated Postretirement Benefit Obligation $9,559 $9,581
======= =======
The Company's postretirement benefit obligation is not funded. Benefits paid in
1996 were $22 higher than that expensed during the year. Payments in 1995 and
1994 were $24 and $202 lower than that expensed during those years,
respectively.
The health care cost trend rate used in the actuarial calculations was 10.6%,
trending downward to 6.5% by the year 2010, and remaining level thereafter. The
discount rate used in determining the accumulated postretirement benefit
obligation was 7.75% in each of the years 1996, 1995 and 1994. The effect of a
one percentage-point change in health care cost trend rates would change the
accumulated postretirement benefit obligation by approximately 9%.
NOTE M - INCOME TAXES
Income tax expense for continuing operations consists of the following:
1996 1995 1994
--------- --------- ---------
Currently Payable:
Federal $ 9,361 $ 7,007 $ 4,475
Foreign 6,059 6,313 3,621
State 1,606 1,255 1,095
------- ------- -------
Subtotals 17,026 14,575 9,191
------- ------- -------
Deferred:
Federal (711) (2,582) (2,166)
Foreign (780) 230 1,672
State (97) (355) (295)
------- ------- -------
Subtotals (1,588) (2,707) (789)
------- ------- -------
Totals $15,438 $11,868 $ 8,402
======= ======= =======
Components of deferred income tax benefits include the following:
1996 1995 1994
---------- ---------- ----------
Compensation and other employee benefits $ 371 $ (443) $ (962)
Inventory items (694) 26 (519)
Depreciation and amortization (1,917) (956) (1,798)
Restructuring expenses 373 574 2,504
Deferred income 574 (1,225) (119)
Book reserves and other items (295) (683) 105
------- ------- ------
Totals $(1,588) $(2,707) $ (789)
======= ======= ======
29
Income tax expense differs from the amounts computed by applying the Federal
income tax rate to earnings before income tax expense. A reconciliation of
income taxes at the US statutory rate to the effective tax rate follows:
Percent of Pre-tax Earnings
-------------------------------
1996 1995 1994
--------- --------- ---------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal effect 2.0 1.6 2.1
Non-deductible amortization 0.9 1.2 1.8
Net effects of foreign tax rates and credits (5.0) (5.6) (4.2)
Other items (1.5) - (1.5)
---- ---- ----
Effective Tax Rate 31.4% 32.2% 33.2%
==== ==== ====
Temporary differences and carryforwards which gave rise to the deferred tax
assets and liabilities included the following items:
1996 1995
------------ ------------
Deferred tax assets:
Operating loss and foreign tax credit carryforwards $ 2,064 $ 4,167
Compensation and other employee benefits 5,327 5,698
Inventory items 5,821 4,446
Restructuring expenses 177 550
Deferred income 1,137 1,711
Book reserves and other items 3,092 2,501
------- -------
17,618 19,073
Valuation allowance (2,441) (4,700)
------- -------
15,177 14,373
------- -------
Deferred tax liabilities:
Depreciation and amortization 10,313 11,485
Inventory items 4,045 3,364
Other items 5,480 5,613
------- -------
19,838 20,462
------- -------
Net Deferred Tax Liability $(4,661) $(6,089)
======= =======
The valuation allowance primarily represents foreign loss and foreign tax
credit carryforwards for which utilization is uncertain. The majority of the
foreign losses may be carried forward indefinitely; however, the foreign tax
credit carryforwards expire in 1997.
Income taxes paid during 1996, 1995 and 1994 were $17,039, $12,280 and $9,191,
respectively.
The Company's policy is to remit earnings from foreign subsidiaries only to the
extent any resultant foreign income taxes are creditable in the US.
Accordingly, the Company does not currently provide for the additional US and
foreign income taxes which would become payable upon remission of undistributed
earnings of foreign subsidiaries. Undistributed earnings on which additional
income taxes have not been provided amounted to approximately $40,000 at August
31, 1996. If all such undistributed earnings were remitted, an additional
provision for income taxes of approximately $2,700 would have been necessary as
of August 31, 1996.
Earnings from continuing operations before income taxes from non-US operations
were $10,639, $16,156 and $12,041 for 1996, 1995 and 1994, respectively.
30
NOTE N - SEGMENT INFORMATION
The Company's operations are classified into three business segments:
Distributed Products, Engineered Solutions and Wright Line. Distributed
Products is involved in the design, manufacture and distribution of tools and
consumables to the construction, electrical wholesale, retail DIY, datacom,
retail automotive, industrial and production automation markets. Engineered
Solutions focuses on developing and marketing value-added, customized solutions
for OEMs in the automotive, truck, off-highway equipment, medical, aerospace,
semiconductor, defense and industrial markets. Wright Line designs,
manufactures and sells furnishings and enclosures utilized in technology
intensive business environments.
Summarized financial information by business segment is as follows:
1996 1995 1994
----------- ------------ -----------
NET SALES:
Distributed Products $284,490 $264,823 $222,076
Engineered Solutions 190,940 192,219 162,296
Wright Line 95,785 70,016 49,272
-------- -------- --------
Totals $571,215 $527,058 $433,644
======== ======== ========
OPERATIONS BEFORE INCOME TAXES:
Distributed Products $ 36,590 $ 37,379 $ 32,023
Engineered Solutions 16,801 15,200 12,314
Wright Line 14,362 8,587 4,242
General corporate and other (18,586) (24,293) (23,281)
-------- -------- --------
Totals $ 49,167 $ 36,873 $ 25,298
======== ======== ========
DEPRECIATION:
Distributed Products $ 6,242 $ 4,826 $ 4,165
Engineered Solutions 8,165 7,800 7,346
Wright Line 2,551 2,406 2,761
General corporate and other 66 55 42
-------- -------- --------
Totals $ 17,024 $ 15,087 $ 14,314
======== ======== ========
CAPITAL EXPENDITURES:
Distributed Products $ 9,515 $ 6,440 $ 5,917
Engineered Solutions 6,497 6,321 5,957
Wright Line 6,715 2,955 769
General corporate and other 7 270 64
-------- -------- --------
Totals $ 22,734 $ 15,986 $ 12,707
======== ======== ========
August 31,
-----------------------------------
1996 1995 1994
-------- -------- --------
ASSETS:
Distributed Products $210,939 $163,053 $148,737
Engineered Solutions 121,000 129,682 128,190
Wright Line 37,077 25,969 23,838
General corporate 12,225 14,242 16,637
-------- -------- --------
Totals $381,241 $332,946 $317,402
======== ======== ========
31
Summarized financial information by geographic region is as follows:
1996 1995 1994
----------- ----------- -----------
NET SALES:
North America $360,844 $323,015 $279,613
Europe 143,683 136,813 99,215
Japan and Asia Pacific 56,750 55,208 43,516
Latin America 9,938 12,022 11,300
-------- -------- --------
Totals $571,215 $527,058 $433,644
======== ======== ========
OPERATIONS BEFORE INCOME TAXES:
North America $ 48,538 $ 37,777 $ 32,672
Europe 16,483 15,208 8,352
Japan and Asia Pacific 3,796 7,227 7,043
Latin America (1,064) 954 512
General corporate and other (18,586) (24,293) (23,281)
-------- -------- --------
Totals $ 49,167 $ 36,873 $ 25,298
======== ======== ========
August 31,
----------------------------------
1996 1995 1994
-------- -------- --------
ASSETS:
North America $240,420 $192,032 $192,103
Europe 78,445 77,505 64,919
Japan and Asia Pacific 38,834 37,200 32,690
Latin America 11,317 11,967 11,053
General corporate 12,225 14,242 16,637
-------- -------- --------
Totals $381,241 $332,946 $317,402
======== ======== ========
Operations before income taxes for each business and geographic segment do not
include general corporate expenses, amortization expense, interest expense or
currency exchange adjustments. Sales between business segments and geographic
areas are insignificant and are accounted for at prices intended to yield a
reasonable return to the selling affiliate. No single customer accounted for
more than 10% of total sales in 1996, 1995 or 1994. Export sales from domestic
operations were less than 10% in each of the periods presented.
Corporate assets, which are not allocated, represent principally cash and
prepaid taxes.
NOTE O - CONTINGENCIES AND LITIGATION
The Company had outstanding letters of credit totaling $830 and $1,300 at
August 31, 1996 and 1995, respectively. The letters of credit generally serve
as collateral for liabilities included in the Consolidated Balance Sheet.
The Company is involved in various legal proceedings which have arisen in the
normal course of its business. These legal proceedings typically include
product liability and patent claims. The Company has recorded reserves for loss
contingencies based on the specific circumstances of each case. Such reserves
are recorded when the occurrence of loss is probable and can be reasonably
estimated. In the opinion of management, the resolution of these contingencies
will not have a materially adverse effect on the Company's financial condition
or results of operations.
The Company has facilities at numerous geographic locations, which are subject
to a range of environmental laws and regulations. Environmental costs are
expensed or capitalized depending on their future economic benefit.
Expenditures that have no future economic value are expensed. Liabilities are
recorded when environmental remediation is probable, and the costs can be
reasonably estimated. Although the level of future expenditures for
32
environmental remediation is impossible to determine with any degree of
certainty, it is management's opinion that such costs will not have a material
effect on the Company's financial position. Environmental remediation accruals
of $611 and $573 were included in the Consolidated Balance Sheet at August 31,
1996 and 1995, respectively.
NOTE P - SUBSEQUENT EVENT
On September 26, 1996, the Company, through its Wright Line subsidiary,
completed the acquisition of the net assets of Everest Electronic Equipment,
Inc. ("Everest"). Consideration for the transaction was approximately $52,000,
and was funded by proceeds from borrowings under existing credit facilities.
Everest, based in Anaheim, California, manufactures custom and standard
electronic enclosures used primarily by the computer, telecom, and datacom
industries.
33
APPLIED POWER INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- - -------------------------------------------------------------------------------
(Dollars in Thousands)
Additions Deductions
-------------------------- ---------------------
Accounts
Balance at Charged to Written Off Balance
Beginning Costs and Net Less at End
Description of Period Expenses Acquired Recoveries Other of Period
- - --------------------------- ------------ ------------ ------------ ------------ ------- -----------
Deducted from assets to
which they apply:
- - -----------------
Allowance for losses -
trade accounts receivable
August 31, 1996 $3,593 $1,203 $100 $ 717 - $4,179
====== ====== ==== ====== ======= ======
August 31, 1995 $3,131 $1,255 - $ 793 - $3,593
====== ====== ==== ====== ======= ======
August 31, 1994 $3,053 $1,379 - $1,301 - $3,131
====== ====== ==== ====== ======= ======
Allowance for losses -
inventory
August 31, 1996 $8,371 $7,529 $ 30 $3,885 - 12,045
====== ====== ==== ====== ======= ======
August 31, 1995 $6,268 $5,413 - $3,310 - $8,371
====== ====== ==== ====== ======= ======
August 31, 1994 $4,854 $3,998 - $2,584 - $6,268
====== ====== ==== ====== ======= ======
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Dated: November 15, 1996 By:/s/ Robert C. Arzbaecher
---------------------------
Robert C. Arzbaecher
Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard G. Sim and Robert C. Arzbaecher, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments to this report, and
to file the same, with all and any other regulatory authority, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.*
SIGNATURE TITLE
--------- -----
/s/ Richard G. Sim Chairman of the Board, President and Chief Executive
- - ------------------ Officer; Director
Richard G. Sim
/s/ Robert C. Arzbaecher Vice President and Chief Financial Officer
- - ------------------------ (Principal Financial Officer)
Robert C. Arzbaecher
/s/ Richard D. Carroll Controller
- - ---------------------- (Principal Accounting Officer)
Richard D. Carroll
/s/ H. Richard Crowther Director
- - -----------------------
H. Richard Crowther
/s/ Jack L. Heckel Director
- - -----------------------
Jack L. Heckel
/s/ Richard M. Jones Director
- - -----------------------
Richard M. Jones
/s/ Richard A. Kashnow Director
- - -----------------------
Richard A. Kashnow
/s/ L. Dennis Kozlowski Director
- - -----------------------
L. Dennis Kozlowski
/s/ Raymond S. Troubh Director
- - -----------------------
Raymond S. Troubh
/s/ John J. McDonough Director
- - -----------------------
John J. McDonough
- - -------------
* Each of the above signatures is affixed as of November 15, 1996.
35
APPLIED POWER INC.
(COMMISSION FILE NO. 1-11288)
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
INDEX TO EXHIBITS
INCORPORATED HEREIN FILED
EXHIBIT DESCRIPTION BY REFERENCE TO HEREWITH
- - ----------- ------------------------------------- ----------------------------------- -----------
3.1 (a) Amended and Restated Exhibit 19.1(a) to the Registrant's
Articles of Incorporation (as Form 10-Q for quarter ended
adopted January 8, 1987) February 28, 1990
("2/28/90 10-Q")
(b) Articles of Amendment to Exhibit 19.1(b) to 2/28/90 10-Q
Amended and Restated Articles
of Incorporation, amending
Sections 3.1 and 3.2 of Article
III and Article IV (as adopted
January 13, 1990)
3.2 Amended and Restated By-Laws X
(as last amended by amendment to
Section 3.01 increasing the
number of directors to eight, adopted
August 8, 1996)
4+
4.1 Articles III, IV and V of Amended See Exhibit 3.1 above
and Restated Articles of
Incorporation, as amended
4.2 Agreement for Purchase and Sale, Exhibit 19.2(a)-(g) to the
dated August 29, 1990, between Registrant's Form 10-Q for
Minnesota Mining and quarter ended May 31, 1991
Manufacturing Company and
Applied Power Inc., and seven related
Leases, each dated April 29, 1991,
between Bernard Garland and
Sheldon Garland, d/b/a Garland
Enterprises, as Landlord, and
Applied Power Inc., as Tenant
+ Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant agrees
to furnish to the Securities and Exchange Commission upon request a copy of any
unfiled instruments, or any unfiled exhibits or schedules to filed instruments,
defining the rights of security holders.
36
INCORPORATED HEREIN FILED
EXHIBIT DESCRIPTION BY REFERENCE TO HEREWITH
- - ------- -------------------------------------- -------------------------------- --------
4.3 (a) Multi-currency Credit Agreement, Exhibit 4.3 to the Registrant's
dated as of August 22, 1995 Form 10-K for fiscal year ended
between Applied Power Inc. and August 31, 1995
Applied Power Finance S.A., as ("1995 10-K")
borrowers, various financial
institutions, as lenders, Bank of
America National Trust and Savings
Association, as agent, and BA
Securities, Inc., as arranger
(b) First Amendment Agreement X
dated as of August 29, 1996
4.4 (a) Amended and Restated Receivables Exhibit 4.4 to 1995 10-K
Purchase Agreement, dated as of
August 30, 1995, between Applied
Power Inc., Barry Wright
Corporation, Wright Line Inc., GB
Electrical, Inc., and certain other
subsidiaries from time to time
parties thereto, as sellers, and PNC
Bank, National Association, and
other financial institutions from time
to time parties thereto, as
purchasers
(b) First Amendment to Amended X
and Restated Receivables Purchase
Agreement dated as of August 30,
1996
10.1* Employment Agreement dated Exhibit 10.1 to the Registrant's
May 9, 1994 between Applied form 10-K for fiscal year ended
Power Inc. and Richard G. Sim August 31, 1994
(superseding Employment Agreement
dated July 5, 1985, as amended)
*Management contracts and executive compensation plans and arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
37
INCORPORATED HEREIN FILED
EXHIBIT DESCRIPTION BY REFERENCE TO HEREWITH
- - ------- ------------------------------------ ----------------------------------- --------
10.2* (a) Applied Power Inc. 1985 Stock Exhibit 10.2(a) to the Registrant's
Option Plan adopted by Board of Form 10-K for fiscal year ended
Directors on August 1, 1985 and August 31, 1989
approved by shareholders on ("1989 10-K")
January 6, 1986, as amended
("1985 Plan")
(b) Amendment to 1985 Plan adopted Exhibit 10.2(b) to 1989 10-K
by Board of Directors on November
8, 1989 and approved by shareholders
on January 13, 1990
(c) Amendment to 1985 Plan adopted Exhibit 10.2(c) to the Registrant's
by Board of Directors on August 9, Form 10-K for fiscal year ended
1990 August 31, 1990
("1990 10-K")
10.3* (a) Applied Power Inc. 1987 Exhibit 10.8 to the Registrant's
Nonqualified Stock Option Plan Form 10-K for fiscal year ended
adopted by Board of Directors on August 31,1987
November 3, 1987 and approved by
shareholders on January 7, 1988
("1987 Plan")
(b) Amendment to 1987 Plan adopted See Exhibit 10.2(b)
by Board of Directors on November
8, 1989 and approved by shareholders
on January 13, 1990
10.4* (a) Applied Power Inc. 1990 Stock Exhibit A to the Registrant's Proxy
Option Plan adopted by Board of Statement dated December 5, 1990
Directors on August 9, 1990 and for 1991 Annual Meeting of
approved by shareholders on Shareholders
January 7, 1991 ("1990 Plan")
(b) Amendment to 1990 Plan adopted Exhibit 10.5(b) to the Registrant's
by Board of Directors on August 10, Form 10-K for fiscal year ended
1992 and approved by shareholders August 31, 1992
on January 7, 1993
* Management contracts and executive compensation plans and arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
38
INCORPORATED HEREIN FILED
EXHIBIT DESCRIPTION BY REFERENCE TO HEREWITH
- - ------- ---------------------------------- --------------------------------- --------
10.5* Description of Fiscal 1996 Exhibit 10.6 to 1995 10-K
Management Bonus Arrangements
10.6* Description of Fiscal 1997 X
Management Bonus Arrangements
10.7* (a) Applied Power Inc. 1989 Exhibit 10.7 to 1989 10-K
Outside Directors' Stock Option
Plan adopted by Board of Directors
on November 8, 1989 and
approved by shareholders on
January 13, 1990 ("1989 Plan")
(b) Amendment to 1989 Plan Exhibit 10.7(b) to 1990 10-K
adopted by Board of Directors on
November 9, 1990 and approved
by shareholders on January 7, 1991
(c) Amendment to 1989 Plan X
adopted by Board of Directors on
October 31, 1996
10.8* Outside Directors' Deferred Exhibit 10.8 to 1995 10-K
Compensation Plan adopted by Board
of Directors on May 4, 1995
10.9 Asset Purchase Agreement Exhibit 2.1 to the Registrant's
between Applied Power Inc. and Form 8-K dated October 11, 1996
Wright Line Inc., on the one hand
and Everest Electronic Equipment,
Inc., Wallace H. Twedt, Terry D.
Wells and Robert L. Wells, on the
other hand dated August 27, 1996
10.10* 1996 Stock Plan adopted by Board Annex A to the Registrant's Proxy
of Directors on August 8, 1996 and Statement dated November 19, 1996
proposed for shareholder approval for 1997 Annual Meeting of
on January 8, 1997 Shareholders
* Management contracts and executive compensation plans and arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
39
INCORPORATED HEREIN FILED
EXHIBIT DESCRIPTION BY REFERENCE TO HEREWITH
- - ------- -------------------------------- --------------------------------- --------
10.11* Deferred Compensation Plan X
adopted by Board of Directors on
October 31, 1996 and proposed
for shareholder approval on
January 8, 1997
11 Statement regarding Computation X
of Earnings Per Share
21 Subsidiaries of the Registrant X
23 Consent of Deloitte & Touche LLP X
24 Power of Attorney See Signature Page of this report
27 Financial Data Schedule X
* Management contracts and executive compensation plans and arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
40