UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-11288
APPLIED POWER INC.
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(Exact name of Registrant as specified in its charter)
Wisconsin 39-0168610
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(State of incorporation) (I.R.S. Employer Id. No.)
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) (Zip Code)
(414) 783-9279
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(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Number of outstanding shares of Class A Common Stock: 38,946,173 as of July 13,
1999.
APPLIED POWER INC.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
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Item 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statement of Earnings and Comprehensive Income -
Three and Nine Months Ended May 31, 1999 and May 31, 1998..................... 3
Condensed Consolidated Balance Sheet -
May 31, 1999 and August 31, 1998.............................................. 4
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended May 31, 1999 and May 31, 1998............................... 5
Notes to Condensed Consolidated Financial Statements........................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk............................ 13
PART II - OTHER INFORMATION
- ---------------------------
Item 2 - Changes in Securities................................................................. 14
Item 6 - Exhibits and Reports on Form 8-K...................................................... 14
SIGNATURE...................................................................................... 15
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------------ ---------------------------------
1999 1998 1999 1998
-------- -------- --------- --------
Net Sales $440,505 $303,941 $1,298,119 $858,714
Cost of Products Sold 301,904 197,497 895,607 560,467
-------- -------- ---------- --------
Gross Profit 138,601 106,444 402,512 298,247
Engineering, Selling and Administrative Expenses 81,336 64,750 237,989 186,302
Amortization of Intangible Assets 7,445 3,946 21,599 9,917
Contract Termination Costs - - 7,824 -
-------- -------- ---------- --------
Operating Earnings 49,820 37,748 135,100 102,028
Other Expense(Income):
Net financing costs 17,006 6,642 46,394 18,005
Other - net (35) (5,868) (1,007) (8,135)
-------- -------- ---------- --------
Earnings before Income Tax Expense 32,849 36,974 89,713 92,158
Income Tax Expense 12,320 14,627 33,498 34,159
-------- -------- ---------- --------
Net Earnings $ 20,529 $ 22,347 $ 56,215 $ 57,999
======== ======== ========== ========
Total Comprehensive Income $ 13,054 $ 23,128 $ 50,503 $ 56,138
======== ======== ========== ========
Basic Earnings Per Share:
Earnings Per Share $ 0.53 $ 0.58 $ 1.45 $ 1.51
======== ======== ========== ========
Weighted Average Common
Shares Outstanding (000's) 38,910 38,459 38,783 38,300
======== ======== ========== ========
Diluted Earnings Per Share:
Earnings Per Share $ 0.51 $ 0.55 $ 1.40 $ 1.44
======== ======== ========== ========
Weighted Average Common and Equivalent
Shares Outstanding (000's) 40,130 40,297 40,204 40,181
======== ======== ========== ========
See accompanying Notes to Condensed Consolidated Financial Statements
3
APPLIED POWER INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
May 31, August 31,
1999 1998
--------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 15,492 $ 6,349
Net accounts receivable 146,755 147,380
Net inventories 195,362 164,786
Prepaid expenses and deferred taxes 44,923 46,049
------------ -----------
Total Current Assets 402,532 364,564
Net Property, Plant and Equipment 270,932 225,170
Goodwill and Other Intangibles 865,327 542,869
Other Assets 61,414 42,119
------------ -----------
Total Assets $ 1,600,205 $ 1,174,722
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ - $ 91
Trade accounts payable 152,661 127,470
Accrued compensation and benefits 38,788 45,457
Income taxes payable 41,459 12,898
Other current liabilities 55,890 74,792
------------ -----------
Total Current Liabilities 288,798 260,708
Long-Term Debt 846,333 512,557
Deferred Income Taxes 22,892 23,065
Other Liabilities 48,181 36,510
Shareholders' Equity:
Class A common stock, $0.20 par value,
authorized 80,000,000 shares, issued and
outstanding 38,940,450 and 38,626,068
shares, respectively 7,788 7,725
Additional paid-in capital 9,125 5,817
Accumulated other comprehensive income (13,177) (7,465)
Retained earnings 390,265 335,805
------------ -----------
Total Shareholders' Equity 394,001 341,882
------------ -----------
Total Liabilities and Shareholders' Equity $ 1,600,205 $ 1,174,722
============ ===========
See accompanying Notes to Condensed Consolidated Financial Statements
4
APPLIED POWER INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
May 31,
-----------------------------------------
1999 1998
------------------ -------------------
Operating Activities
- --------------------
Net Earnings $ 56,215 $ 57,999
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 59,084 32,369
Gain on sale of assets (841) (9,894)
Provision for loss on sale of subsidiary - 4,500
Changes in operating assets and liabilities,
excluding the effects of business acquisitions:
Accounts receivable 7,266 (6,513)
Inventories (15,652) 9,933
Prepaid expenses and other assets (4,469) 3,579
Trade accounts payable (10,091) (901)
Other liabilities (14,337) (12,778)
Income taxes payable 6,967 (3,406)
----------- -----------
Net Cash Provided by Operating Activities 84,142 74,888
Investing Activities
- --------------------
Proceeds on the sale of property, plant and equipment and other 10,647 25,575
Purchases of property, plant and equipment (49,096) (36,328)
Cash used for business acquisitions (382,531) (281,229)
Merger related fees (8,100) -
----------- -----------
Net Cash Used in Investing Activities (429,080) (291,982)
Financing Activities
- --------------------
Proceeds from issuance of long-term debt 492,476 262,297
Principal payments on long-term debt (242,711) (83,453)
Net borrowings(repayments) on short-term credit facilities (2,596) 16,432
Net commercial paper borrowings 77,451 -
Debt financing costs (7,460) (382)
Receivables financed 34,713 30,000
Dividends paid on common stock (1,171) (2,738)
Proceeds from stock option exercises 3,332 6,360
----------- -----------
Net Cash Provided by Financing Activities 354,034 228,516
Effect of Exchange Rate Changes on Cash 47 (312)
----------- -----------
Net Increase in Cash and Cash Equivalents 9,143 11,110
Cash and Cash Equivalents - Beginning of Period 6,349 22,047
Cash effect of the ZERO Excluded Period (as described in Note A) - 9,859
----------- -----------
Cash and Cash Equivalents - End of Period $ 15,492 $ 43,016
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
5
APPLIED POWER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Applied Power Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
with the instructions of Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The condensed consolidated balance sheet data as of August 31, 1998 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. For additional information, refer
to the consolidated financial statements and footnotes thereto in the Company's
1998 Annual Report on Form 10-K.
In the opinion of management, all adjustments considered necessary for a fair
presentation of financial results have been made. Such adjustments consist of
only those of a recurring nature. Operating results for the three and nine
months ended May 31, 1999 are not necessarily indicative of the results that may
be expected for the fiscal year ending August 31, 1999.
As described more fully in the Company's 1998 Annual Report on Form 10-K, in
July 1998 a subsidiary of the Company merged with ZERO Corporation ("ZERO") and
ZERO became a wholly-owned subsidiary of the Company. The merger with ZERO has
been accounted for as a pooling of interests. The fiscal 1998 financial data of
Applied Power Inc. and its subsidiaries presented in this Form 10-Q have been
restated to include the historical financial information of ZERO Corporation in
accordance with generally accepted accounting principles and pursuant to
Regulation S-X. Prior to the merger, ZERO had a March 31 fiscal year end. The
consolidated financial statements as of and for the year ended August 31, 1998
(including the Condensed Consolidated Balance Sheet included herein) reflect the
combination of an August 31 year end consolidated financial position, results of
operations and cash flows for ZERO. The results of operations and cash flows
for ZERO from April 1, 1997 to August 31, 1997 are reflected as an adjustment in
the Condensed Consolidated Statement of Cash Flows for the nine months ended May
31, 1998 included herein.
Note B - Earnings Per Share
The reconciliations between basic and diluted earnings per share follow:
($ in 000's) Three Months Ended Nine Months Ended
except per share amounts May 31, May 31,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ---------- ----------- -----------
Numerator:
Net earnings for basic and diluted
earnings per share $ 20,529 $ 22,347 $ 56,215 $ 57,999
============ ========== =========== ===========
Denominator:
Weighted average common shares outstanding for
basic earnings per share 38,910 38,459 38,783 38,300
Net effect of dilutive stock options based on the
treasury stock method using average market price 1,220 1,838 1,421 1,881
------------ ---------- ----------- -----------
Weighted average common and equivalent
shares outstanding for diluted earnings per share 40,130 40,297 40,204 40,181
============ ========== =========== ===========
Basic Earnings Per Share $ 0.53 $ 0.58 $ 1.45 $ 1.51
============ ========== =========== ===========
Diluted Earnings Per Share $ 0.51 $ 0.55 $ 1.40 $ 1.44
============ ========== =========== ===========
6
Note C - Comprehensive Income
Effective September 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of this Statement had no
impact on the Company's net earnings or shareholders' equity. SFAS No. 130
requires the Company's foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform with the requirements of SFAS No. 130.
Note D - Acquisitions
On September 29, 1998, the Company, through its wholly-owned subsidiary, APW
Enclosure Systems Limited, accepted for payment all shares of Rubicon Group plc
("Rubicon") common stock which had been tendered pursuant to the APW Enclosure
Systems Limited tender offer (with a guaranteed loan note alternative) for all
outstanding shares of common stock at 2.35 pounds sterling per share and all
outstanding cumulative preference shares at 0.50 pounds sterling per share. The
tendered common shares accepted for payment exceeded 90 percent of the
outstanding common shares on October 8, 1998, and APW Enclosure Systems Limited
invoked Section 429 of the UK Companies Act of 1985, as amended, to acquire the
remaining outstanding common shares of Rubicon. APW Enclosure Systems Limited
now owns all of the common shares of Rubicon. Pursuant to the tender offer, APW
Enclosure Systems Limited purchased 27.2% of the outstanding preference shares.
The tender offer for the preference shares has terminated, and 72,810 preference
shares, or 72.8% of the original outstanding preference shares, continue to be
owned by outside shareholders.
Cash paid for Rubicon totaled $371.5 million, with the preliminary purchase
price allocation resulting in $331.1 million of goodwill. To provide the
necessary funds, the Company entered into a Multicurrency Credit Agreement,
dated as of October 14, 1998, providing for an $850.0 million, 5-year revolving
credit facility. The acquisition was accounted for using the purchase method.
The following unaudited pro forma data summarize the results of operations for
the periods presented as if the acquisition of Rubicon had been completed on
September 1, 1997, the beginning of the Company's 1998 fiscal year. The pro
forma data give effect to actual operating results prior to the acquisition and
adjustments to interest expense, goodwill amortization and income tax expense.
These pro forma amounts do not purport to be indicative of the results that
would have actually been obtained if the acquisition had occurred on September
1, 1997 or that may be obtained in the future.
- ------------------------------------------------------------------------------------------------------------------------
($ in 000's) Nine Months Ended May 31,
- ------------------------------------------------------------------------------------------------------------------------
except per share amounts 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Net Sales $ 1,322,759 $ 1,063,626
Net Earnings $ 55,358 $ 58,085
Basic Earnings Per Share $ 1.43 $ 1.52
Shares Used in Computation 38,783 38,300
Diluted Earnings Per Share $ 1.38 $ 1.45
Shares Used in Computation 40,204 40,181
- ------------------------------------------------------------------------------------------------------------------------
Note E - Debt Financing
On April 1, 1999, the Company issued $200.0 million of 8.75% Senior Subordinated
Notes due 2009 (the "Notes"). Net proceeds from the Notes offering approximated
$194.6 million after deducting underwriting discounts and other offering
expenses, and were used to repay a portion of the borrowings outstanding under
the Multicurrency Credit Agreement thereby restoring the Company's borrowing
capacity under that agreement. Interest on the Notes is payable semi-annually,
and the Company has the option to redeem all or a portion of the Notes at
certain specified redemption prices on or after April 1, 2004. The Notes are
subordinate in right of payment to the prior payment in full of all senior debt
as defined in the indenture.
Note F - Accounts Receivable Financing
On December 18, 1998, the Company amended its $90.0 million accounts receivable
financing facility to increase the amount of multi-currency accounts receivable
financing from $90.0 million to $150.0 million. All other substantive terms of
the agreement remain the same. As of May 31, 1999, $124.4 million of accounts
receivable was financed.
7
Note G - Net Inventories
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 information systems of the
Company's operating units are not designed to capture this segregation due to
the very short production cycle of their products and the minimal amount of
work-in-process inventory at any point in time.
Note H - Merger, Restructuring and Other Non-recurring Charges
During the fourth quarter of fiscal 1998, the Company recorded restructuring and
other one-time charges of $52.6 million, net of income tax benefit of $16.8
million. The pre-tax charges of $69.4 million related to costs associated with
the merger of ZERO Corporation, various plant consolidations and other cost
reductions as well as a provision for the rationalization of the Company's
product lines.
Approximately $8.5 million and $21.5 million of accrued merger and restructuring
costs were included in other current liabilities as of May 31, 1999 and August
31, 1998, respectively. Restructuring initiatives resulting from the Company's
fiscal 1998 restructuring plan were largely complete at May 31, 1999. Remaining
reserves at that date were primarily attributable to projects the Company
expects to complete in the fiscal 1999 fourth quarter or to long-term lease
exposure for facilities closed as part of the restructuring.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Results of Operations
Net earnings for the third quarter ending May 31, 1999 were $20.5 million, or
$0.51 per diluted share, an increase of 6% from the $19.5 million, or $0.48 per
diluted share, reported in the prior year's third quarter exclusive of a prior
year, one-time pretax net gain of $5.3 million, or $0.07 per diluted share, on
the sale of two ZERO properties. Sales were a record $440.5 million for the
third quarter, a 45% increase over the prior year quarter.
Net earnings for the nine months ended May 31, 1999 were $56.2 million, or $1.40
per diluted share. Excluding one-time items from both the current and prior
year periods, net earnings were $60.9 million, or $1.52 per diluted share, an
increase of 14% over the $53.4 million, or $1.33 per diluted share, reported in
the first nine months of the prior year. One-time items in the fiscal 1999
year-to-date period include a contract termination pretax charge of $7.8
million, or $0.12 per diluted share, recorded in the first quarter of fiscal
1999. The first nine months of the prior fiscal year included one-time items
including a net pretax gain of $7.0 million, or $0.11 per diluted share,
resulting from gains on the sale of property and a $1.7 million non-taxable
insurance gain, partially offset by a provision for the estimated loss on the
sale of a subsidiary of the acquired ZERO business. Sales for the first nine
months of fiscal 1999 were a record $1.3 billion, an increase of 51% over the
same period last year.
As compared to the prior year periods, foreign currency translation reduced
sales growth by approximately 1% in both the quarter and year-to-date periods.
Excluding the effect of currency translation and acquired businesses, sales
increased 10% and 7% in the three and nine month periods ended May 31, 1999,
respectively, compared with the same periods of the prior fiscal year.
As a result of the Company's business and leadership realignment announced on
May 19, 1999, the Company will now be organized, managed and reported as two
segments: APW Industrial and APW Electronics. APW Electronics is the previous
Enclosure Products and Systems segment plus the McLean Thermal Management units
and the Eder Industries unit, both formerly included in the Engineered Solutions
segment. APW Electronics supplies electronic enclosures, power supplies, thermal
systems, backplanes, and cabling either as individual products, or as an
integrated system incorporating certain of the Company's product design, supply
chain management, assembly and test capabilities. APW Industrial consists of
the previous Tools and Supplies segment combined with the remaining units of the
Engineered Solutions segment. APW Industrial provides both standard and
customized industrial and electrical tools and accessories along with components
and systems using thermal management, hydraulic, actuation and vibration control
technologies through a world-wide distribution system into a variety of niche
markets. The new organizational realignment was implemented to enhance the real-
time decision making leadership that is required to respond to a wide array of
business opportunities. Prior period segment information has been restated to
present the two reportable business segments.
8
- -----------------------------------------------------------------------------------------------------
NET SALES BY SEGMENT
- -----------------------------------------------------------------------------------------------------
($ in 000's) Three Months Ended May 31, Nine Months Ended May 31,
- -----------------------------------------------------------------------------------------------------
1999 1998 Change 1999 1998 Change
- -----------------------------------------------------------------------------------------------------
APW Electronics $ 260,524 $ 139,208 87% $ 773,763 $ 389,267 99%
APW Industrial 179,981 164,733 9% 524,356 469,447 12%
---------- ---------- ---------- ----------
Total $ 440,505 $ 303,941 45% $1,298,119 $ 858,714 51%
=====================================================================================================
APW Electronics continued its impressive growth, reporting sales increases of
87% and 99% for the quarter and year-to-date periods ended May 31, 1999,
respectively, as compared to the same periods last year. In aggregate, acquired
businesses, principally AA Manufacturing, PMP, PTI, Premier, Brown, Vero and
Rubicon, contributed approximately $113.8 million and $369.2 million of the
sales growth for the quarter and year-to-date periods, respectively. Excluding
the effect of foreign currency translations and acquisitions made within the
prior year, APW Electronics revenue grew 16% and 11% in the respective quarter
and year-to-date periods. Fiscal 1999 APW Electronics sales growth resulted
from the continued expansion of the size, territory and content of the segment's
enclosure product lines, partially offset by lower thermal management product
sales as these lines are focused on the higher growth telecommunications
markets.
APW Industrial sales increased 9% and 12% in the quarter and year-to-date
periods ended May 31, 1999, respectively, as compared to the prior year periods.
Excluding the effect of currency translation and acquired businesses, APW
Industrial's sales, as compared to the prior year fiscal period, grew 7% and 5%
in the quarter and year-to-date periods, respectively. Strong growth in the
sale of recreational vehicle slide-outs and leveling systems in North America
and in automotive convertible top and truck lines in Europe contributed to the
sales increase, but were partially offset by weakness in Asia, which accounts
for approximately 3% of the group's sales.
- ---------------------------------------------------------------------------------------------------
GROSS PROFIT BY SEGMENT
- ---------------------------------------------------------------------------------------------------
($ in 000's) Three Months Ended May 31, Nine Months Ended May 31,
- ---------------------------------------------------------------------------------------------------
1999 1998 Change 1999 1998 Change
- ---------------------------------------------------------------------------------------------------
APW Electronics $ 72,408 $ 48,315 50% $ 212,261 $ 137,091 55%
APW Industrial 66,193 58,129 14% 190,251 161,156 18%
---------- ---------- ---------- ----------
Total $ 138,601 $ 106,444 30% $ 402,512 $ 298,247 35%
===================================================================================================
Third quarter and year-to-date gross profit dollars increased by 30% and 35%,
respectively, over the comparable prior year periods. As a percentage of sales,
gross profit declined from 35.0% in the prior year third quarter to 31.5% in the
current year quarter. As compared to the prior year periods, both the increase
in gross profit dollars and the decline in gross profit as a percent of sales
were driven by rapid expansion of relatively lower margin enclosure and
integration businesses in the APW Electronics group. As a result of cost control
and manufacturing productivity initiatives, the APW Industrial group achieved
substantial increases in gross profit dollar contribution and increased gross
profit as a percentage of sales in the first nine months of fiscal 1999.
- --------------------------------------------------------------------------------------------------
ENGINEERING, SELLING AND ADMINISTRATIVE EXPENSES BY SEGMENT
- --------------------------------------------------------------------------------------------------
($ in 000's) Three Months Ended May 31, Nine Months Ended May 31,
- --------------------------------------------------------------------------------------------------
1999 1998 Change 1999 1998 Change
- --------------------------------------------------------------------------------------------------
APW Electronics $ 44,763 $ 26,623 68% $ 132,431 $ 74,848 77%
APW Industrial 33,547 33,704 (1%) 104,313 99,218 5%
General Corporate 3,026 4,423 (32%) 9,069 12,236 (26%)
---------- ---------- ---------- ----------
Total $ 81,336 $ 64,750 26% $ 245,813 $ 186,302 32%
==================================================================================================
Engineering, selling and administrative ("operating") expenses increased 26% for
the quarter and 32% on a year-to-date basis, primarily reflecting the impact of
acquisitions. As a percentage of sales compared to prior year periods,
operating expenses decreased 2.8% to 18.5% of sales in the third quarter of
fiscal 1999 and, for the first three quarters of fiscal 1999, declined 3.4% to
18.3% of sales. During the first three quarters of fiscal 1999, the
9
Company continued to reduce operating expenses as a percent of net sales by
aggressively managing spending levels and through the acquisition of enclosures
businesses within the APW Electronics group, which typically have a lower
percentage of operating expenses to sales.
Amortization expense of $7.4 million and $21.6 million for the respective three
and nine month periods ended May 31, 1999 was higher than in the comparable
prior year periods due to acquisitions made during and subsequent to the first
nine months of fiscal 1998, including primarily Vero and Rubicon.
Net financing costs for the nine months ended May 31, 1999 increased over the
prior year period primarily as a result of borrowings to finance the acquisition
of Vero and Rubicon, and, with respect to the quarter ended May 31, 1999, the
April 1999 issuance of $200.0 million of higher cost subordinated debt.
Liquidity and Capital Resources
Cash and cash equivalents totaled $15.5 million and $6.3 million at May 31, 1999
and August 31, 1998, respectively. In order to minimize net financing costs, the
Company intentionally maintains relatively low cash balances by using available
cash to reduce short-term bank borrowings.
Net cash provided by operations, after considering non-cash items and changes in
operating assets and liabilities, totaled $84.1 million for the nine months
ended May 31, 1999 versus cash provided by operations of $74.9 million in the
same nine months of the prior year. The increase over the same period last year
resulted primarily from a higher level of earnings before non-cash depreciation
and amortization expense in the current year.
Net cash used by investing activities was $429.1 million in the first nine
months of fiscal 1999 versus $292.0 million in the prior year period. The
fiscal 1999 year-to-date period included a $382.5 million use for business
acquisitions, primarily Rubicon, and a $49.1 million use for capital
expenditures, partially offset by $10.6 million in proceeds from the sale of
property. The prior year period included a $281.2 million use for acquisitions
and capital expenditures of $36.3 million. The Company expects that capital
expenditures will approximate $60 million in each of fiscal 1999 and fiscal
2000.
TOTAL CAPITALIZATION ($ in 000's) May 31, 1999 August 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity $ 394,001 31% $ 341,882 39%
Total Debt 846,333 67% 512,648 58%
Deferred Taxes 22,892 2% 23,065 3%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 1,263,226 100% $ 877,595 100%
=================================================================================================================================
Net cash provided by financing activities was $354.0 million in the nine months
ended May 31, 1999 versus cash provided by financing of $228.5 million in the
prior year period. Net borrowings in each period primarily reflected increased
debt incurred to fund acquisitions. Outstanding debt at May 31, 1999 was $846.3
million, an increase of approximately $333.7 million since the beginning of the
fiscal year, but a decrease of $30.1 million from the prior quarter end. The
Company's debt to total capitalization ratio was 67% at May 31, 1999, up from
58% at the beginning of the fiscal year. The increase primarily reflects the
additional borrowings required to fund the Rubicon acquisition. The Company
paid dividends of $1.2 million, while the exercise of employee stock options
generated $3.3 million of cash in the nine month period ended May 31, 1999.
On April 1, 1999, the Company issued $200.0 million of 8.75% Senior Subordinated
Notes maturing in 2009. Net proceeds from the offering were used to reduce
indebtedness outstanding under the Company's Multicurrency Credit Agreement and
had no material effect on net debt outstanding. At May 31, 1999, the Company
had $269.9 million available under the $850.0 million Multicurrency Credit
Agreement for general corporate purposes, including capital expenditures,
working capital requirements and acquisitions.
The Company anticipates that the funds generated from operations and available
under credit facilities or other borrowings will be adequate to meet operating,
debt service, and capital expenditure requirements for the foreseeable future.
10
Year 2000 Considerations
As is the case for most companies, the Year 2000 computer issue creates a risk
for the Company. If the Company's systems, including both information technology
("IT") and other systems which may include embedded technology and micro-
controllers, do not correctly recognize date information when the year changes
to 2000, there could be a material adverse impact on the Company's operations.
The Company has taken action intended to ensure that its computer systems are
capable of processing periods for the Year 2000 and beyond. The Company has
developed and has clearly articulated a written policy that Year 2000 readiness
is an important responsibility for all its business leaders. In addition, the
Company is aggressively pursuing a comprehensive set of programs intended to
reduce the risk of disruptions due to the Year 2000 problem. The Company's Year
2000 plans are designed and monitored centrally but managed and executed on a
local level at each of the Company's more than 100 facilities.
The Company's Year 2000 programs have been executed in four phases as described
below:
Phase 1 - Awareness - During this phase, the Company designed its Year 2000
programs, assigned responsibility for the effort, educated the organization
regarding Year 2000 risk and prepared and distributed a comprehensive
inventory review template.
Phase 2 - Inventory and Compliance Review - This phase included compilation
of an inventory of internal and external systems and risk factors. The
internal factor inventory included office, financial, business and
manufacturing systems and items which might include embedded chip
technology. The inventory of external factors included identification and
survey of critical vendors. The compliance status of each inventoried
system was documented during this phase. Local findings were verified by a
combination of independently trained internal and external Year 2000
auditors.
Phase 3 - Remediation and Contingency Planning - For each system identified
as not being Year 2000 ready in Phase 2, a remediation or contingency plan
was developed. The remediation plan could include system elimination,
replacement, upgrade or the addition of a software patch. Contingency plans
were also developed to address exposure related to critical third-party
vendor systems. With respect to third-party Year 2000 exposure, contingency
plans could include alternative sourcing, increasing inventory levels or
otherwise reducing the Company's exposure to the third-party system.
Phase 4 - Testing - The final phase of the program involves testing the
Year 2000 readiness of all critical IT and non-IT systems. Programs
conducted during this phase include comprehensive testing of business
systems by rolling forward the system clocks to test a number of potential
problem dates, the testing of embedded chip technology in critical
manufacturing systems, the testing of electronic data interchange with
customers and Year 2000 readiness audits of critical third parties.
The Company has completed the first three phases of its Year 2000 programs and
anticipates completion of the final testing phase around the end of fiscal 1999.
The Company believes that this time table provides sufficient time to perform
additional testing of systems to take any further actions that may be deemed
necessary. However, it is impossible for the Company to identify the potential
impact and all related costs and consequences of the potential Year 2000 failure
by third parties, particularly those that have not responded to inquiries by the
Company as to Year 2000 readiness.
Based on the current status of the Company's readiness efforts, the costs
associated with identified Year 2000 issues are not expected to have a material
effect on the results of operations or financial condition of the Company. Most
of the Company's business units have installed or are in the process of
installing new business management systems which go beyond just Year 2000
readiness. The costs of purchased software and implementation of that software
are capitalized. Some businesses have chosen to upgrade existing systems to be
compliant. These costs are being expensed as incurred to the extent the upgrades
do not provide additional functionality. The Company does not believe that its
Year 2000 programs have resulted in the deferral of other IT programs. The
Company historically has not quantified the costs of Year 2000 readiness and
remediation, but believes costs incurred to date were not material to the
Company's financial position. The Company estimates
11
fiscal 1999 costs, including internal costs such as payroll expenses incurred
for the Year 2000 project, to range between $3.0 million and $5.0 million, which
are expected to be funded with cash flow from operations.
At this time, the Company does not expect the reasonably foreseeable
consequences of the Year 2000 problem to have material adverse effects on the
Company's business, operations or financial condition. However, the Company
cannot be certain that it will not suffer business interruptions, either due to
its own Year 2000 problems or those of its customers or suppliers whose Year
2000 problems may make it difficult or impossible to fulfill their commitments
to the Company. Furthermore, the Year 2000 problem has many elements and
potential consequences, some of which may not be reasonably foreseeable, and
there can be no assurances that every material Year 2000 problem will be
identified and addressed or that unforeseen consequences will not arise and
possibly have a material adverse effect on the Company. Unanticipated factors
while implementing the changes necessary to mitigate Year 2000 problems,
including, but not limited to, the ability to locate and correct all relevant
codes in computer and imbedded systems, or the failure of critical third parties
to communicate and mitigate their Year 2000 problems, could result in
unanticipated adverse impacts on the business activities or operations of the
Company.
Outlook
During the third quarter of fiscal 1999, the Company revised its net sales
forecast for the current fiscal year downward to approximately $1.8 billion, the
reduced expectation based on notification of a sales shortfall at one of the
Company's largest customers and the strengthening of the U.S. dollar against key
European currencies. As a result, the Company revised its earnings forecast for
the fiscal year ended 1999 to be in the range of $2.05 to $2.15 per share
excluding non-recurring items. For both APW Electronics and APW Industrial, the
Company expects operating profit will continue to improve in the remainder of
fiscal 1999 as a result of increased sales and the streamlining and cost
reduction efforts initiated in the fourth quarter of 1998. Improved operating
profit is expected to be partially offset by higher interest expense as a result
of the April 1, 1999 issuance of $200.0 million in 8.75% Senior Subordinated
Notes due 2009.
Risk Factors That May Affect Future Results
Certain statements in this Form 10-Q, including statements in the above sections
entitled "Liquidity and Capital Resources," "Year 2000 Considerations" and
"Outlook," as well as statements in other Company communications, which are not
historical facts, are forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. The terms "anticipate," "believe," "estimate," "expect,"
"objective," "plan," "project" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements are subject to
inherent risks and uncertainties that may cause actual results or events to
differ materially from those contemplated by such forward-looking statements. In
addition to the assumptions and other factors referred to specifically in
connection with such statements, factors that may cause actual results or events
to differ materially from those contemplated by such forward-looking statements
include, without limitation, general economic conditions and market conditions
in the industrial production, trucking, construction, aerospace, automotive,
recreational vehicle, computer, semiconductor, telecommunication, electronic and
defense industries in North America, Europe and, to a lesser extent, Asia,
market acceptance of existing and new products, successful integration of
acquisitions, competitive pricing, foreign currency fluctuations, interest rate
risk, unforeseen costs or consequences of Year 2000 issues and other factors
that may be referred to in the Company's reports filed with the Securities and
Exchange Commission from time to time.
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company is exposed to market risk from changes in foreign exchange and
interest rates and, to a lesser extent, commodities. To reduce such risks, the
Company selectively uses financial instruments. All hedging transactions are
authorized and executed pursuant to clearly defined policies and procedures,
which strictly prohibit the use of financial instruments for trading purposes.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1998 within Note A - "Summary of Significant
Accounting Policies" in Notes to Consolidated Financial Statements, and further
disclosure relating to financial instruments is included in Note I - "Long-term
Debt."
Currency Risk - The Company has significant international operations. In most
- -------------
instances, the Company's products are produced at manufacturing facilities
located near the customer. As a result, significant volumes of finished goods
are manufactured in countries for sale into those markets. For goods purchased
from other Company affiliates, the Company denominates the transaction in the
functional currency of the producing operation.
The Company has adopted the following guidelines to manage its foreign exchange
exposures:
(i) increase the predictability of costs associated with goods whose purchase
price is not denominated in the functional currency of the buyer;
(ii) minimize the cost of hedging through the use of naturally offsetting
positions (borrowing in local currency), netting, pooling; and
(iii) where possible, sell product in the functional currency of the producing
operation.
The Company's identifiable foreign exchange exposures result primarily from the
anticipated purchase of product from affiliates and third-party suppliers along
with the repayment of intercompany loans with foreign subsidiaries denominated
in foreign currencies. The Company identifies naturally occurring offsetting
positions and then purchases hedging instruments to protect anticipated
exposures. The Company's financial position is not materially sensitive to
fluctuations in exchange rates as any gains or losses on foreign currency
exposures are generally offset by gains and losses on underlying payables,
receivables and net investments in foreign subsidiaries. See above "Outlook"
caption which discusses the effect of the strengthening U.S. dollar against key
European currencies.
Interest Rate Risk - The Company enters into interest rate swaps to stabilize
- ------------------
financing costs by minimizing the effect of potential interest rate increases on
floating-rate debt in a rising interest rate environment. Under these
agreements, the Company contracts with a counter-party to exchange the
difference between a fixed rate and a floating rate applied to the notional
amount of the swap. The Company's existing swap contracts range between two and
seven years in duration. The differential to be paid or received on interest
rate swap agreements is accrued as interest rates change and is recognized in
net income as an adjustment to interest expense. Credit and market risk is
minimized through diversification among counter-parties with high credit
ratings.
Commodity Prices - The Company is exposed to fluctuation in market prices for
- ----------------
steel. Therefore, the Company has established a program for centralized
negotiation of steel prices. This program allows the Company to take advantage
of economies of scale as well as to cap pricing. All business units are able to
purchase steel under this arrangement. In general, the contracts lock steel
pricing for 18 months and enable the Company to pay less if market prices fall.
13
PART II - OTHER INFORMATION
Item 2 - Changes in Securities
- ------------------------------
The Indenture for Debt Securities of Applied Power Inc. dated as of April 1,
1999, related to the 8.75% Senior Subordinated Notes due 2009, contains
limitations on restricted payments including that the Company may not declare or
pay any dividend or make any distribution in respect of its capital stock or to
the holders thereof, excluding any dividends or distributions by the Company
payable solely in shares of its capital stock or in options, warrants or other
rights to acquire its capital stock, unless no event of default has occurred or
would result therefrom and other specified conditions are met.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) See Index to Exhibits on page 16, which is incorporated herein by reference.
(b) On April 14, 1999, the Company filed a Current Report on Form 8-K dated as
of April 1, 1999 reporting under Item 5 that the Company sold $200.0 million
aggregate principal amount of its 8.75% Senior Subordinated Notes due 2009
(the "Notes") and filing under Item 7 certain exhibits in connection with
the offering of the Notes.
14
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED POWER INC.
------------------
(Registrant)
Date: July 14, 1999 By: /s/Robert C. Arzbaecher
------------------------
Robert C. Arzbaecher
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and duly authorized to sign
on behalf of the registrant)
15
APPLIED POWER INC.
(the "Registrant")
(Commission File No. 1-11288)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 1999
INDEX TO EXHIBITS
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
- --------- -------------------------------------- ------------------------------------ ----------------
4.1 (a) Multicurrency Credit Agreement, Exhibit 4.4 to the Registrant's
dated as of October 14, 1998, among Form 10-K for the fiscal year ended
Applied Power Inc. and Enerpac B.V., August 31, 1998 ("1998 10-K")
as Borrowers, various financial
institutions from time to time party
thereto, as Lenders, The First
National Bank of Chicago, as
Syndication Agent, Societe Generale,
as Documentation Agent, and Bank of
America National Trust and Savings
Association, as Administrative Agent,
arranged by NationsBanc Montgomery
Securities LLC
(b) Form of Consent to Multicurrency Exhibit 4.1(b) to the Registrant's
Credit Agreement, dated as of October Form 10-Q for quarter ended
14, 1998, effective February 3, 1999 February 28, 1999
4.2 (a) Receivables Purchase Agreement, Exhibit 4.1 to the Registrant's
dated as of November 20, 1997, among Form 10-Q for quarter ended
Applied Power Credit Corporation as November 30, 1997
Seller, Applied Power Inc.
individually and as Servicer and
Barton Capital Corporation as
Purchaser and Societe Generale as
Agent
(b) First Amendment to Receivables Exhibit 4.5(b) to 1998 10-K
Purchase Agreement dated as of August
28, 1998
(c) Second Amendment to Receivables Exhibit 4.2(c) to the Registrant's
Purchase Agreement dated as of Form 10-Q for quarter ended
December 18, 1998 November 30, 1998
4.3 (a) Indenture for Debt Securities of Exhibit 4.1 to the Registrant's
Applied Power Inc. dated as of April Current Report on Form 8-K dated as
1, 1999 (the "Indenture"). of April 1, 1999 ("4/1/99 8-K")
(b) Securities Resolution No. 1 Exhibit 4.2 to the 4/1/99 8-K
pursuant to the Indenture relating to
the 8.75% Senior Subordinated Notes
due 2009.
27.1 Financial Data Schedule X
16