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:
Financial information by segment and geographic area, as well as information related to export sales, is included in Note M -- "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 numbers in the report are in thousands of US Dollars unless otherwise indicated.
DESCRIPTION OF BUSINESS SEGMENTS
DISTRIBUTED PRODUCTS
Distributed Products, which includes Enerpac and GB Electrical, is engaged in the manufacture and distribution of tools and consumables to the construction, retail and general industrial markets. Products are generally distributed through wholesale and retail distributors. Both Distributed Products businesses supply approximately 5,000 SKU's each to a broad customer base. Geographic expansion offers a source of growth potential for the Distributed Products businesses.
ENERPAC
Enerpac is involved in the design, manufacture and sale, on a worldwide basis, of labor and cost saving products and systems for industrial and construction operations. The products can be grouped into three product lines: high force tools, production automation, and specially engineered or complementary systems.
Enerpac's high force tool line consists of approximately 5,000 products that are used extensively in general industrial and construction applications. These hydraulic products allow users to apply controlled force and motion that increase productivity and make work safer and easier to perform. Hydraulic pumps, valves, cylinders and presses, as well as more specialized tools such as pipe benders, torque wrenches and electronically-controlled lifting systems are examples of Enerpac's high force tools.
Enerpac's production automation products consist of workholding components and systems which enable a quick change of dies, molds and other equipment used in production and assembly operations. Hydraulic workholding components and systems utilized in metal-cutting machine tools hold parts in position during the machining process, and provide superior accuracy and flexibility to traditional mechanical clamping methods. Enerpac also designs and manufactures quick mold change systems that are used extensively in the injection molding industry.
In addition to its line of high force tools and production automation products, Enerpac custom engineers and assembles equipment and special modified products that are sold directly to original equipment manufacturers ("OEMs").
Enerpac has engineering, manufacturing and warehousing operations in the United States, the Netherlands, Mexico, France, South Korea and Japan, with sales and service operations in a number of other countries. The manufacturing operations in the Netherlands were recently consolidated into the United States, with the Netherlands' location primarily serving as a European warehouse. Products are primarily distributed through a worldwide network of over 2,500 independent distributors as well as directly to certain OEM customers. Enerpac believes its strengths include the breadth of its product line, large distribution network, long operating history, reputation and technical expertise.
GB ELECTRICAL
As a result of niche acquisitions, new product introductions, strong customer service and its expansion into new markets, GB Electrical has tripled its sales since being acquired by the Company in 1988. It has completed three acquisitions between October, 1993 and September, 1995, including Palmer Industries (a manufacturer of plastic and metal staples), New England Controls (an electrical switch manufacturer) and Vision Plastics (a plastic cable tie manufacturer). GB's major product groups include the following: tools and accessories used in industrial, commercial and residential construction, remodeling and maintenance; wire connectors and other wire termination devices; conduit fishing and pulling systems; conduit benders; fastening devices (including cable ties and plastic staples); digital and analog multitesters; and electrical switches.
GB's products are sold through electrical wholesale distributors and mass merchandisers. This network includes approximately 4,000 electrical wholesale accounts as well as merchandisers including Sears, Ace Hardware, Builders Square, Payless Cashways, Wal-Mart, The Home Depot, Cotter & Co. and other major chains, which in total represent over 20,000 consumer outlets.
GB operates manufacturing facilities in Wisconsin, Minnesota, North Carolina, California and Connecticut. GB's products are primarily distributed through its International Distribution Center located in Milwaukee, Wisconsin as well as a number of independent warehouses located throughout the United States. Although the majority of its business is generated in the United States, GB is aggressively pursuing opportunities in Canada, Mexico, Latin America and Asia.
ENGINEERED SOLUTIONS
Engineered Solutions, consisting of Power-Packer, APITECH and Barry Controls, focuses on developing and marketing value-added solutions for OEMs in the transportation, construction, aerospace, defense and industrial markets. Technical sales force members from each of the Engineered Solutions units often work together to develop and market Engineered Solutions products in one technology solution package. These value-added technology solutions offer cost-effective systems to meet the needs of Engineered Solutions' global customer base.
POWER-PACKER
Power-Packer custom designs hydraulic systems and components for OEM customers in the transportation, medical equipment and agricultural equipment markets. Although its principal engineering and assembly operations are based in the United States and the Netherlands, Power-Packer also markets its products
throughout Europe, Japan, South Korea, South America and North America. The majority of its products are sold direct by its technically-trained sales force.
Power-Packer has three primary product applications in the transportation industry: the cab-tilt system, the air suspension system and the convertible top actuation system. The cab-tilt system is installed on heavy-duty, cab-over-engine trucks and tilts and retracts the cab for engine inspection and maintenance. The systems are customized to meet the needs of individual truck manufacturers which include virtually all of the major manufacturers of cab-over-engine trucks in the United States and Western Europe. Power-Packer also markets its cab-tilt systems in Japan through a license agreement. Air suspension systems improve the ride characteristics of trucks, enhance driver comfort and safety while reducing cab maintenance costs. Power-Packer has also developed a leading position in supplying electrically powered hydraulic actuator systems for convertible automobile tops. These systems, which are shipped to automotive OEMs fully assembled and tested, are presently used on many car models in Europe and the United States.
Power-Packer supplies self-contained hydraulic actuators to medical equipment manufacturers that provide portable patient lifting and positioning capability for institutional or home use. Other manually operated products are supplied for hospital bed height adjustment. It also produces power driven systems, in some cases combined with fully integrated microprocessor control, to expand the multi-function capability of beds and examination tables.
APITECH
The Company formed APITECH to develop and market products that combine electronic control with hydraulic technologies to increase the control, safety and performance of end-user products. APITECH employs advanced electronic and software technology in its modular line of products, including electro-hydraulic control valves, microprocessor-based control circuitry, sensors and software. These products can be adapted to customers' control situations and span broad application areas without extensive redesign. The Company has a patented digital electro-hydraulic valve, marketed under the Pulsar ValveTM name, which can be directly controlled by a microprocessor to deliver performance comparable to servo valve technology at a significantly lower cost.
The Company markets APITECH products to a diversified mix of customers, primarily OEMs. The highest demand for electro-hydraulic APITECH products occurs in the off-highway mobile market, the on-highway transportation and maintenance vehicle market and the automotive market. In the off-highway market, APITECH's customers include John Deere, Hameck, F.W. McConnell, Palfinger, Snorkel and Altec. In the on-highway maintenance market, major state and municipal road fleets in the United States and Canada use APITECH's salt and sand spreader control products. In the automotive market, APITECH supplies small fast valves to GM Delphi that are part of the system that provides a semi-active suspension capability in certain Cadillac models. Sales to GM Delphi are a significant portion of APITECH's business.
Products are sold as components or turn-key systems, depending on customer specifications and design capability, typically with long-term supply arrangements. The Company primarily sells its APITECH products through its own sales engineering team as well as through a group of full service mobile equipment distributors in North America and Europe. Sales to the road maintenance equipment market take place through a national network of truck equipment dealers in the United States and Canada. APITECH's operations are based in Butler, Wisconsin.
BARRY CONTROLS
Barry Controls was acquired by Applied Power in 1989, along with Wright Line, in conjunction with the acquisition of Barry Wright Corporation. Barry Controls is engaged in the business of custom designing, manufacturing and marketing engineered products and systems that reduce vibration, shock and structure-borne noise. Products for the commercial aerospace and defense markets include engine vibration isolators for aircraft and vibration and shock isolators for defense and aerospace applications. Industrial products represent an important part of Barry Controls' business, and include vibration isolators and noise dampening
components for a variety of applications including computers, appliances, power tools, industrial equipment, heavy trucks, farm and construction equipment and many other diverse applications.
Principal markets and customers served include OEMs of many types of machinery and equipment, (including computers), aircraft manufacturers, commercial airlines, defense and aerospace contractors, and users of equipment requiring noise or vibration reduction. Products are distributed through its sales engineers, independent sales engineering representatives and specialized distributors. Barry Controls' products are manufactured in two locations in the United States as well as in England.
WRIGHT LINE
In the second quarter of 1994, the Company announced its decision to retain the remaining Wright Line business, which had been held for sale and included in discontinued operations since the third quarter of 1992. For further information, refer to Note B -- "Discontinued Operations" in Notes to Consolidated Financial Statements.
During the past three years, Wright Line has shifted its strategy to respond to the application and storage demands posed by new and fast changing markets, including Local Area Networks (LAN's), multi-media, engineering test and development and scientific laboratory markets. Its customers require efficient and flexible work centers and equipment for professionals. In addition to these fast growing markets, Wright Line continues to provide cabinets, workstations and work surfaces used in the computerized office.
Wright Line products are primarily sold through its direct sales force in the United States, in addition to a network of independent distributors and value-added resellers. Its products are marketed in foreign markets through direct salespeople, sales representatives and dealers, depending on the country. Products are primarily sold to commercial and governmental end-users. Sales to the government, which have averaged approximately 30% of total Wright Line net sales over the past three years, are made pursuant to a contract between Wright Line and the US Government's General Services Administration.
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 its patents bolster its competitive position.
Applied Power'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 of the Enerpac, GB Electrical, APITECH, and Wright Line businesses are substantially larger than the Company and have greater financial resources. The competitors of Power-Packer are limited to a few specialized firms, which are generally privately held and operate in specific geographic markets. Barry Controls and its principal competitor, a segment of Lord Corporation, are the dominant suppliers in the shock, vibration and noise isolation markets.
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, which constitute a portion of the Company's engineering expense, were $8,725, $7,446 and $5,878 in fiscal years 1995, 1994 and 1993, 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 APITECH, Power-Packer and Barry Controls 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, 1995, the Company had approximately $88,200 in backlog orders, compared to approximately $81,200 at August 31, 1994. Substantially all orders are expected to be completed prior to August 31, 1996. 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, 1995, Applied Power employed 2,840 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 at 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 $573 and $567 were included in the Consolidated Balance Sheet at August 31, 1995 and 1994, respectively. For further information, refer to Note N -- "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:
In addition to these properties, the Company utilizes a number of smaller facilities in South Korea, Spain, Italy, Canada, Brazil, France, Germany, Australia, Russia, Singapore, India, 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 Enerpac and Power-Packer.
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 H -- "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. The Company is currently making additions to the Wright Line facility in Worcester which are expected to be completed within the next year. The Company intends to construct, lease or acquire a larger manufacturing and warehousing facility in South Korea within the next two years to support its expansion in that emerging market. Funding for this project is expected to come from operating cash flow.
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 6). 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 August, 1985, Chief Executive Officer effective September, 1986 and Chairman of the Board effective November, 1988. From January, 1982 through August, 1985, Mr. Sim was a General Manager in the General Electric Medical Systems Business Group. He is also a director of The Gehl Company, IPSCO Inc. and Falcon Building Products, Inc.
William J. Albrecht was named Senior Vice President of Engineered Solutions in May, 1994. Prior to that, he served as Vice President and President of Power-Packer and APITECH since January, 1991. He joined the Company in March, 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.
Robert G. Deuster was appointed Senior Vice President of Distributed Products in May, 1994. He had served as a Vice President since August, 1988, and was named President of Barry Controls in August, 1989. From March, 1987 to August, 1989, Mr. Deuster had responsibility for the APITECH business worldwide. From November, 1985 to March, 1987, he was Vice President Marketing and Sales for Enerpac in the United States. Prior to joining the Company in 1985, Mr. Deuster spent 10 years at General Electric in engineering and as Manager of Marketing in its Medical Systems Business Group.
Gustav H.P. Boel was elected Vice President of the Company and named President of Enerpac in November, 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 November, 1995 and named the President of Wright Line Inc. in August, 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 February, 1988) since September, 1986, and as a Company Vice President
since August, 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 October, 1994. He had served as Vice President, Finance of Distributed Products from August, 1993 to October, 1994. He joined the Company in January, 1992 as Controller. From May, 1988 to December, 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.
Louis E. Font was elected Vice President, Human Resources in October, 1994. From March, 1994 to October, 1994, Mr. Font served as Vice President, Human Resources for Distributed Products. He served from May, 1992 to March, 1994 as Vice President, Human Resources for Enerpac Americas. Prior to joining the Company in 1992, Mr. Font was employed by General Electric for 12 years, holding various human resource positions.
Dale A. Knutson has served as Vice President, Technology since May, 1987. From 1982 until May, 1987, he held the position of Vice President, Product Engineering. Mr. Knutson has been associated with the Company since 1969.
Philip M. Van Praag was named Vice President and Chief Information Officer in November, 1995. Prior to joining the Company in 1994 as Chief Information Officer, Mr. Van Praag was with R.R. Donnelley & Sons since 1989, where he last held the position of Director of Information Systems. From 1979 to 1989, Mr. Van Praag held various positions with Hughes Aircraft Company.
Douglas R. Dorszynski was appointed Vice President, Tax and Treasurer in July, 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.
Andrew G. Lampereur was appointed Corporate Controller in May, 1994. He joined the Company in May, 1993 as Assistant Corporate Controller. Mr. Lampereur was employed by Terex Corporation from 1988 to May, 1993, where he held a number of financial positions, most recently Corporate Controller of its Fruehauf Trailer Corporation subsidiary. Prior to that, he was employed at Price Waterhouse, a public accounting firm, from 1985 to 1988.
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 January, 1986 to January, 1993. He was re-elected Secretary in July, 1994.
Each officer is appointed by the Board of Directors and holds office until he or she 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, 1995, the approximate number of record shareholders of common stock was 468. 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 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- - ------------------------- (1) Earnings from Continuing Operations for 1993, 1992 and 1991 reflect after-tax restructuring charges of $5.0 ($0.38 per share), $3.1 ($0.24 per share) and $3.0 ($0.23 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 RESULTS OF OPERATIONS AND FINANCIAL CONDITION (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, 1995, 1994 and 1993.
The Company recorded restructuring charges, extraordinary losses and adopted new accounting pronouncements during the last three years which impact the comparability of financial information. The following table reconciles reported net earnings from continuing operations to net earnings from continuing operations excluding restructuring costs, extraordinary losses and the cumulative effect of accounting changes:
Earnings have grown over the last three years as a result of higher sales volume, improved operating margins and lower financing costs.
NET SALES
Net sales increased 22% in 1995 with all three segments posting double-digit sales growth percentages. Ignoring the favorable impact on translated sales from the weaker US Dollar, sales increased 18% over 1994.
Improving economic conditions experienced in the last half of fiscal 1994 carried into 1995, with significant strengthening in Europe and North America. Sales in Japan and Asia Pacific increased 27% in 1995, but were 14% higher in real terms. The weak US Dollar relative to the Japanese Yen during 1995 distorts this comparison. Conversely, Latin America sales growth in real terms was 23%, but the significant devaluation of the Mexican Peso in December, 1994 unfavorably impacted the translation into US Dollars.
Total sales from Distributed Products, which consists of Enerpac and GB Electrical, increased 19% in 1995, benefiting 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. The impact of the weaker US Dollar favorably impacted Distributed Products sales in 1995 relative to 1994, as sales generated by units outside the US translated into higher US Dollars in 1995. Ignoring currency rate changes, Distributed Products sales grew 16% in 1995.
Engineered Solutions, consisting of Barry Controls, APITECH and Power-Packer, had an 18% increase in sales in 1995. Ignoring currency rate changes, sales grew 14%. The majority of the growth took place in Power-Packer which enjoyed a 45% increase in sales, resulting from strong demand from European OEM truck and automobile manufacturers. Barry Controls and APITECH had sales increases of 5% and 4%, respectively. In addition to improved economic conditions, Engineered Solutions sales grew from the sale of products introduced in recent years. Sales of the LAN Management System ("LMS") product line, which was introduced in the second half of 1993, continued to have a significant impact on Wright Line sales, which grew 42% in 1995. Sales to government agencies increased 25% in 1995, also having a considerable impact on Wright Line's growth.
Total sales in 1994 were 9% higher than 1993, reflecting geographic expansion and the start of improved economic conditions in North America. With the exception of the truck and automotive sectors in Europe, sales in Europe and Japan in 1994 were lower than the prior year due to weak economic conditions. Sales in 1994 of newly introduced products, such as Power-Packer's multi-cylinder convertible top actuation systems, Barry Control's Duo-Plexx and industrial products, APITECH's suspension and motion control systems and Wright Line's LMS product line more than offset declines in cyclical markets that Barry Controls competes in, including commercial aerospace and defense. Foreign currency translation did not materially impact the sales comparison between 1994 and 1993.
Price changes and acquisitions have not had a significant impact on the comparability of net sales during the last three years.
GROSS PROFIT
Gross profit increased to $201.4 million in 1995, compared to $163.5 million and $151.0 million in 1994 and 1993, respectively. The improvement in gross profit resulted primarily from the sales increases in 1995 and 1994.
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 1995 and 1994, relative to 1993, as a result of inefficiencies during the consolidation of Enerpac manufacturing, higher discounts to distributors and increased shipments to OEM customers. Engineered Solutions and Wright Line gross profit percentages improved in 1994 due to the benefits of prior year restructuring, as well as higher production levels. Both achieved additional improvement in 1995 due to favorable product mix and the impact of higher production levels on fixed manufacturing costs.
OPERATING EXPENSES
Engineering expense increased 39% over the last two years to $17.1 million due to new product development programs. The Company believes that its investment in technology in all businesses will continue to provide it with a competitive advantage.
Selling and marketing expenses increased from $68.1 million in 1993 to $72.0 million in 1994 and $89.0 million in 1995. The majority of the increase since 1993 related to variable selling expenses, primarily commissions. Wright Line has a direct salesforce whose compensation is commission-based. As a result of its 83% sales growth over the last two years, its selling and marketing 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 costs, total operating costs have increased as a result of expenditures for geographic expansion into emerging markets. During the last few years, the Company opened sales offices in Russia, India and China, and has significantly increased its presence in Latin America and Southeast Asia.
Administration expense increased 17% from 1993 to 1995. Geographic expansion expenditures, higher information technology, legal and bonus costs and the impact of minor acquisitions were the primary reasons for the increase.
RESTRUCTURING EXPENSE
The Company recorded $7.7 million of pre-tax restructuring charges ($0.38 per share) in 1993, primarily related to consolidating certain manufacturing, distribution and administrative functions at Enerpac and Barry Controls operations in Europe, downsizing field sales and headquarters administrative staff at retained Wright Line operations, and idle facility costs at Barry Controls. Substantially all of the restructuring costs had been incurred as of August 31, 1995, consisting of severance and consolidation expenditures.
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 1994 due to incremental amortization of intangible assets added in 1993 and 1994 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 gain was realized in 1993, while the Mexican Peso devaluation in 1995 caused a $1.3 million foreign exchange loss in 1995.
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, the utilization of foreign tax credits, deferred tax adjustments and lower pre-tax income also had a favorable impact on the effective tax rate in 1993.
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 G -- "Long-term Debt" in Notes to Consolidated Financial Statements.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"), on September 1, 1992, which requires the accrual of postretirement benefits (such as health care and life insurance) during the years an employee provides service. Previously, these costs were recognized as they were paid. The cumulative effect of adopting SFAS 106 was $4.4 million ($0.33 per share) in 1993. For further information, see Note K -- "Postretirement Benefits" in Notes to Consolidated Financial Statements.
The adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") in 1993 had no material impact on net earnings or cash flows. Certain assets and liabilities at acquired companies that previously had been carried on a net-of-tax basis under prior accounting rules, were adjusted to a gross basis.
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. However, the results of operations from June, 1992 to November, 1993 have remained offset against the reserve previously established for the estimated loss on disposition. For further information, see Note B -- "Discontinued Operations" in Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Outstanding debt at August 31, 1995 totaled $87.0 million, a reduction of $16.5 million since the beginning of the year. End-of-year debt to total capital was approximately 37%, its lowest point since 1989. Approximately $23.8 million of cash was generated from operating activities in 1995, $16.0 million of which was used to fund capital expenditures. Dividends of $1.6 million were paid during the year. The Company utilized approximately $2.8 million of cash during 1995 to acquire New England Controls, Inc., and Enerpac's master distributor in Brazil. The resulting cash flow was used to reduce debt.
Increases in primary working capital (net receivables plus net inventory less trade accounts payable) used approximately $22.4 million of cash during 1995 as a result of higher sales volume (receivables) and geographic expansion (inventory). The Company believes that primary working capital will grow further in 1996 as a result of anticipated business 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. The new facility expires August, 2000. 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%. Currently, the Company incurs interest at a rate of .45 of 1% above IBOR. The interest rate caps expire in March, 1997. For additional information, see Note G -- "Long-term Debt" in Notes to Consolidated Financial Statements.
The Company also replaced its former $25.0 million accounts receivable financing facility in 1995 with a new facility that expires in August, 1998 and provides up to $50.0 million of multi-currency accounts receivable financing. An incremental $11.2 million of receivables were financed in 1995, bringing the total balance financed to $36.2 million at August 31, 1995. Proceeds were used to reduce debt. For additional information, see Note D -- "Accounts Receivable Financing" in Notes to Consolidated Financial Statements.
Outstanding indebtedness declined $14.4 million in 1994. The Company generated $22.5 million of cash in operating activities during the year and used $12.7 million on capital expenditures and $2.4 million for acquisitions. Dividends of $1.6 million were also paid. Total borrowings decreased $6.9 million in 1993. Cash of $12.7 million was generated from operations. Major expenditures included $12.2 million for fixed asset additions. Dividends totaling $1.6 million were also paid.
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 $120.0 million multi-currency credit agreement totaled $41.0 million and $46.0 million, respectively, as of August 31, 1995. The Company believes that such availability, plus funds generated from operations will be adequate to fund operating activities, including modestly higher 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Quarterly financial data for 1995 and 1994 is as follows:
The Consolidated Financial Statements are included on pages 20 to 34 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 -- Compliance with Section 16(a) of the Exchange Act" sections of the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on January 11, 1996 (the "1996 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" and "Executive Compensation" sections of the 1996 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 1996 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 18, the Independent Auditors' Report on page 19 and the Consolidated Financial Statements on pages 20 to 34, all of which are incorporated herein by reference.
2. Financial Statement Schedules
See "Index to Consolidated Financial Statements and Financial Statement Schedules" on page 18 and the Financial Statement Schedule on page 35, all of which are incorporated herein by reference.
3. Exhibits
See "Index to Exhibits" on pages 37 to 39, which is incorporated herein by reference.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated as of August 16, 1995 announcing that its GB Electrical unit had signed a letter of intent to acquire the business of Vision Plastics Manufacturing Company.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
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, 1995 and 1994, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended August 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1995 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.
As discussed in Note K to the consolidated financial statements, effective September 1, 1992 the Company changed its method of accounting for postretirement benefits other than pensions to conform with Statement of Financial Accounting Standards No. 106.
DELOITTE & TOUCHE LLP Milwaukee, Wisconsin September 29, 1995
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 -- 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 seventeen 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 generally expensed as incurred. Such costs incurred in the development of new products or significant improvements to existing products totaled approximately $8,725, $7,446 and $5,878 in 1995, 1994 and 1993, 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 L -- "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.
Financial Instruments: The Company utilizes interest rate swap and cap agreements to manage interest rate exposure. The differential to be paid or received is recorded as interest rates change. For further information, see Note G -- "Long-term Debt." 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. At August 31, 1995, the Company had one immaterial forward contract expiring on September 1, 1995, which hedged an existing exposure. Other than foreign currency forward
contracts and interest rate swap and cap agreements, the Company does not utilize or trade derivative financial instruments.
Reclassifications: Certain amounts shown for 1994 and 1993 have been reclassified to conform to the current year 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. The Company had previously recorded provisions of $31,307 ($2.51 per share) and $5,400 ($0.41 per share) in 1992 and 1993, respectively, to accrue for the estimated loss on the sale of Wright Line and a small French subsidiary, the sale of a previously vacated Wright Line building (completed in 1992), estimated operating losses prior to disposition, and estimated disposition costs. Substantially all of the provisions were utilized for the operations, product lines and assets sold since 1992. The net assets of the retained operations were returned to the appropriate balance sheet captions based on their historical cost. After reviewing the value of such assets, the Company determined that no impairment had taken place.
NOTE C -- ACQUISITIONS
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.
On March 21, 1994, the Company increased its ownership interest in Applied Power Korea from approximately 50% to 90%. Cash of $912 was used in the acquisition which resulted in Goodwill of $572. The operating results of this subsidiary have historically been included in the Consolidated Statement of Earnings.
All acquisitions were accounted for using the purchase method.
NOTE D -- 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 expires in August, 1998.
At August 31, 1995 and 1994, accounts receivable were reduced by $36,200 and $25,000, respectively, representing receivable interests sold under this program.
Accounts receivable financing costs totaling $1,892, $1,076 and $795 for the years ended August 31, 1995, 1994 and 1993, respectively, are included in the accompanying Consolidated Statement of Earnings.
NOTE E -- NET INVENTORIES
Inventory cost is determined using the last-in, first-out ("LIFO") method for substantially all inventory in the United States (approximately 58% and 59% of total inventories in 1995 and 1994, 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 $10,296 and $9,748 at August 31, 1995 and 1994, 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 F -- SHORT-TERM BORROWINGS
The Company had borrowings under unsecured non-committed lines of credit with banks aggregating approximately $12,620 and $14,707 at August 31, 1995 and 1994, respectively. Interest rates vary depending on the currency being borrowed. The weighted average interest rate on the short-term borrowings was 9.38% at August 31, 1995. The amount of unused available borrowings under such lines of credit was approximately $41,000 at August 31, 1995.
NOTE G -- LONG-TERM DEBT
Refinancing: 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 Multi-currency Credit Agreement provides total unsecured credit availability of $120,000, bears interest at a floating rate of IBOR plus .3 - .5 of 1% annually, and expires in August, 2000. Interest is payable monthly. Pursuant to the agreement, borrowings may be denominated in various currencies at the Company's option. 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, 1995 was $46,007.
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, 1995, the Company was in compliance with all debt covenants. Under the most restrictive covenant, approximately $35,795 of retained earnings was available for the payment of future dividends on common stock as of August 31, 1995.
Commercial paper outstanding at August 31, 1995 and 1994 totaled $3,276 and $9,947, respectively, net of discount, and carried average interest rates of 5.94% and 4.73%, respectively. The Company has the ability and intent to maintain these 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. Interest rate swap agreements typically convert the variable nature of debt to fixed rate, or vice versa. Interest rate caps limit the maximum interest rate that is paid. As of August 31, 1995, the Company had interest rate caps in place on a notional $60,000 in borrowings that limits the maximum applicable base rate (three month LIBOR) to 8.0%. Currently, the Company incurs interest at .45 of 1% above IBOR. The interest rate caps expire in March, 1997, and were recorded at a value of $225 at August 31, 1995.
Fair Values: The fair value of the Company's short-term borrowings and long-term debt approximated book value as of August 31, 1995. 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, 1995. The fair value of the Company's interest rate cap agreement and foreign currency forward exchange contract at August 31, 1995 approximated book value.
Aggregate Maturities: Aggregate maturities of long-term debt outstanding at August 31, 1995, were: $187 in 1996; $75 in 1997; $81 in 1998; $7 in 1999 and $73,993 in 2000.
The Company paid $10,363, $10,695 and $11,894 for financing costs in 1995, 1994 and 1993, respectively, excluding the make whole payments associated with refinancing the 9.92% Senior Unsecured Debt.
NOTE H -- 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, 1995 were: $10,941 in 1996; $9,745 in 1997; $7,491 in 1998; $4,992 in 1999; $4,530 in 2000; and $21,778 thereafter.
Total rental expense under operating leases was $11,076, $11,379 and $12,250 in 1995, 1994 and 1993, respectively.
NOTE I -- INCENTIVE STOCK OPTION PLANS
At August 31, 1995, 2,127,835 shares of Class A common stock were reserved for issuance under the Company's stock option plans.
Employee Plans: The Company has three non-qualified 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 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 J -- EMPLOYEE STOCK OWNERSHIP AND RETIREMENT PLANS
US Employees: 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, 1995, 1994 and 1993, pre-tax expense related to the ESOP Plan was $1,720, $534 and $450, 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. 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, 1995, the Company's annual match equals approximately 25% of each participant's first 3% of earnings. Expense attributable to the Savings Plan was $643, $293 and $307 for 1995, 1994 and 1993, respectively.
Non-US Employees: The Company contributes to a number of retirement programs for employees outside the US. Pension expense amounted to $821, $631 and $1,213 in 1995, 1994 and 1993, 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 K -- POSTRETIREMENT BENEFITS
The Company adopted SFAS No. 106 -- "Employers' Accounting for Postretirement Benefits Other Than Pensions" effective September 1, 1992. This new pronouncement requires the accrual of postretirement benefits (such as health care and life insurance) during the years an employee provides service. In connection with the adoption of SFAS No. 106, the Company elected to recognize as expense in 1993 the accumulated postretirement benefit obligation rather than amortizing such amount to expense over a 20-year period. The Company recorded a $4,355 charge (net of a $2,579 tax benefit) in 1993 for the cumulative effect of this accounting change.
The Company's current policy is not to 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 1995, 1994 and 1993 included the following components:
The Company's accumulated postretirement benefit obligation for such benefits is as follows:
The Company's postretirement benefit obligations are not funded. Benefits paid in 1995, 1994 and 1993 were $24, $202 and $420 lower than that expensed during those years, respectively.
The health care cost trend rate used in the actuarial calculations was 11.0%, 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 both 1995 and 1994, and 8.0% in 1993. The effect of a one percentage-point change in health care cost trend rates would change the accumulated postretirement benefit obligation by approximately 10%.
NOTE L -- 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 1996 and 1997.
Income taxes paid during 1995, 1994 and 1993 were $12,280, $9,191 and $5,080, 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 $33,000 at August 31, 1995. If all such undistributed earnings were remitted, an additional provision for income taxes of approximately $2,400 would have been necessary as of August 31, 1995.
Earnings from continuing operations before income taxes from non-US operations were $16,156, $12,041 and $2,293 for 1995, 1994 and 1993, respectively.
NOTE M -- SEGMENT INFORMATION
The Company's operations are classified into three business segments: Distributed Products, Engineered Solutions and Wright Line. Distributed Products, consisting of Enerpac and GB Electrical, is involved in the manufacture and distribution of tools and consumables to the construction, retail and general industrial markets. Engineered Solutions, which consists of Barry Controls, Power-Packer and APITECH, focuses on high-volume technology products for OEM customers in the transportation, industrial, defense and aerospace markets. Wright Line develops, manufactures and sells technical furniture solutions for offices and laboratories.
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 1995, 1994 or 1993. Export sales from domestic operations were less than 10% in each of the periods presented.
Corporate assets, which are not allocated, represent principally cash, prepaid taxes and investments.
NOTE N -- CONTINGENCIES AND LITIGATION
The Company had outstanding letters of credit totaling $1,300 and $1,640 at August 31, 1995 and 1994, 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 $573 and $567 were included in the Consolidated Balance Sheet at August 31, 1995 and 1994, respectively.
NOTE O -- SUBSEQUENT EVENT
On September 29, 1995, the Company completed the acquisition of substantially all of the assets and certain liabilities of Vision Plastics Manufacturing Company ("Vision"). Certain proprietary technology rights and patents related to the business are to be acquired in a separate transaction that is expected to close in January, 1996. Total consideration for the two transactions is approximately $21,500, and will be funded by proceeds from borrowings under existing credit facilities. Vision, based in San Diego, California, manufactures plastic cable ties which are sold through electrical wholesale, retail and OEM channels.
APPLIED POWER INC. AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
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)
By: /s/ ROBERT C. ARZBAECHER ------------------------------------ Robert C. Arzbaecher Vice President and Chief Financial Officer
Dated: November 16, 1995
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.*
- - ------------------------- * Each of the above signatures is affixed as of November 16, 1995
APPLIED POWER INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1995
INDEX TO EXHIBITS
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+ 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.
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* Management contracts and executive compensation plans and arrangements required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.