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.
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
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.
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.
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.
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.
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.
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.
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.
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.
PART II
ITEM 5.
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:
Quarterly dividends of $0.03 per share were declared and paid for each of the quarters above.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions, except per share amounts)
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.
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
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.
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.
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
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)
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.
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.
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.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly financial data for 1996 and 1995 is as follows: (In Millions, except per share amounts)
The Consolidated Financial Statements are included on pages 18 to 33 and are incorporated by reference herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
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.
ITEM 12.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
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.
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.
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
APPLIED POWER INC. CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these financial statements
APPLIED POWER INC. CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these financial statements
APPLIED POWER INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these financial statements
APPLIED POWER INC. CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these financial statements
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
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
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
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
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.
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.
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:
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.
A summary of option activity under this plan is as follows:
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:
The Company's accumulated postretirement benefit obligation for such benefits is as follows:
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:
Components of deferred income tax benefits include the following:
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:
Temporary differences and carryforwards which gave rise to the deferred tax assets and liabilities included the following items:
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.
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:
Summarized financial information by geographic region is as follows:
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
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.
APPLIED POWER INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - - ------------------------------------------------------------------------------- (Dollars in Thousands)
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.
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
+ 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.
*Management contracts and executive compensation plans and arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
* Management contracts and executive compensation plans and arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
* Management contracts and executive compensation plans and arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
* Management contracts and executive compensation plans and arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.