10-Q 1 ait-20220930.htm 10-Q ait-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2022

OR        
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission file number 1-2299

APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Ohio
34-0117420
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
One Applied Plaza
Cleveland
Ohio
44115
(Address of principal executive offices)
(Zip Code)
(216426-4000
Registrant's telephone number, including area code


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, without par valueAITNew York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer
Accelerated filer
☐ 
Non-accelerated filer  
Smaller reporting company
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes      No 

There were 38,571,962 (no par value) shares of common stock outstanding on October 21, 2022.


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page
No.
Part I:
Item 1:
Item 2:
Item 3:
Item 4:
Part II:
Item 1:
Item 2:
Item 4:
Item 6:
1

PART I:     FINANCIAL INFORMATION

ITEM I:    FINANCIAL STATEMENTS

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(In thousands, except per share amounts)
 Three Months Ended
September 30,
 20222021
Net sales$1,062,405 $891,681 
Cost of sales755,622 636,341 
Gross profit306,783 255,340 
Selling, distribution and administrative expense, including depreciation
200,251 180,726 
Operating income106,532 74,614 
Interest expense, net6,480 7,390 
Other expense (income), net1,008 (312)
Income before income taxes99,044 67,536 
Income tax expense22,164 14,567 
Net income$76,880 $52,969 
Net income per share - basic$2.00 $1.38 
Net income per share - diluted$1.97 $1.36 
Weighted average common shares outstanding for basic computation38,526 38,502 
Dilutive effect of potential common shares585 582 
Weighted average common shares outstanding for diluted computation39,111 39,084 
See notes to condensed consolidated financial statements.

2

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
September 30,
20222021
Net income per the condensed statements of consolidated income$76,880 $52,969 
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments(11,437)(7,182)
Post-employment benefits:
Reclassification of net actuarial losses and prior service cost into other expense (income), net and included in net periodic pension costs8 75 
  Unrealized gain on cash flow hedge12,310 596 
  Reclassification of interest from cash flow hedge into interest expense796 2,585 
Total other comprehensive income (loss), before tax1,677 (3,926)
Income tax expense related to items of other comprehensive income (loss)3,312 805 
Other comprehensive loss, net of tax(1,635)(4,731)
Comprehensive income, net of tax$75,245 $48,238 
See notes to condensed consolidated financial statements.

3


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30,
2022
June 30,
2022
ASSETS
Current assets
Cash and cash equivalents$147,575 $184,474 
Accounts receivable, net674,136 656,429 
Inventories490,099 449,821 
Other current assets78,686 68,805 
Total current assets1,390,496 1,359,529 
Property, less accumulated depreciation of $218,280 and $215,015
110,539 111,896 
Operating lease assets, net103,037 108,052 
Identifiable intangibles, net242,741 250,590 
Goodwill561,477 563,205 
Other assets65,884 59,316 
TOTAL ASSETS$2,474,174 $2,452,588 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable$277,224 $259,463 
Current portion of long-term debt181 40,174 
Compensation and related benefits61,230 91,166 
Other current liabilities112,628 108,824 
Total current liabilities451,263 499,627 
Long-term debt649,103 649,150 
Other liabilities152,368 154,456 
TOTAL LIABILITIES1,252,734 1,303,233 
Shareholders’ equity
Preferred stock—no par value; 2,500 shares authorized; none issued or outstanding
  
Common stock—no par value; 80,000 shares authorized; 54,213 shares issued
10,000 10,000 
Additional paid-in capital183,348 183,822 
Retained earnings1,576,551 1,499,676 
Treasury shares—at cost (15,642 and 15,714 shares, respectively)
(474,529)(471,848)
Accumulated other comprehensive loss(73,930)(72,295)
TOTAL SHAREHOLDERS’ EQUITY1,221,440 1,149,355 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,474,174 $2,452,588 
See notes to condensed consolidated financial statements.

4

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
September 30,
20222021
Cash Flows from Operating Activities
Net income$76,880 $52,969 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property5,481 5,427 
Amortization of intangibles7,705 8,121 
Provision for losses on accounts receivable 3,994 798 
Amortization of stock appreciation rights and options1,424 1,907 
Other share-based compensation expense1,939 1,563 
Changes in operating assets and liabilities, net of acquisitions(72,071)(20,404)
Other, net591 (1,739)
Net Cash provided by Operating Activities25,943 48,642 
Cash Flows from Investing Activities
Net cash paid for acquisitions, net of cash acquired (7,094)
Cash payments for loans on company-owned life insurance (14,835)
Capital expenditures(5,554)(3,621)
Proceeds from property sales56 48 
Net Cash used in Investing Activities(5,498)(25,502)
Cash Flows from Financing Activities
Long-term debt repayments(40,061)(9,811)
Purchases of treasury shares(716)(6,537)
Interest rate swap settlement receipts (payments)294 (1,644)
Dividends paid(13,100)(12,712)
Acquisition holdback payments(660)(135)
Exercise of stock appreciation rights and options126  
Taxes paid for shares withheld for equity awards(1,401)(1,141)
Net Cash used in Financing Activities(55,518)(31,980)
Effect of Exchange Rate Changes on Cash(1,826)(1,592)
Decrease in Cash and Cash Equivalents(36,899)(10,432)
Cash and Cash Equivalents at Beginning of Period184,474 257,745 
Cash and Cash Equivalents at End of Period$147,575 $247,313 
See notes to condensed consolidated financial statements.

5

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
For the Period Ended
September 30, 2022
Shares of
Common
Stock
Outstanding
Common
Stock
Additional
Paid-In
Capital

Retained
Earnings
Treasury
Shares-
at Cost
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders'
Equity
Balance at June 30, 202238,499 $10,000 $183,822 $1,499,676 $(471,848)$(72,295)$1,149,355 
Net income76,880 76,880 
Other comprehensive loss(1,635)(1,635)
Cash dividends — $0.34 per share
Purchases of common stock for treasury(8)(716)(716)
Treasury shares issued for:
Exercise of stock appreciation rights and options21 (860)(366)(1,226)
Performance share awards23 (1,290)(758)(2,048)
Restricted stock units33 (1,668)(902)(2,570)
Compensation expense — stock appreciation rights and options1,424 1,424 
Other share-based compensation expense1,939 1,939 
Other3 (19)(5)61 37 
Balance at September 30, 202238,571 $10,000 $183,348 $1,576,551 $(474,529)$(73,930)$1,221,440 


For the Period Ended
September 30, 2021
Shares of Common Stock OutstandingCommon StockAdditional Paid-In CapitalRetained EarningsTreasury Shares-
at Cost
Accumulated Other Comprehensive Income (Loss)Total Shareholders' Equity
Balance at June 30, 202138,516 $10,000 $177,014 $1,294,413 $(455,789)$(93,092)$932,546 
Net income52,969 52,969 
Other comprehensive income(4,731)(4,731)
Cash dividends — $0.33 per share
Purchases of common stock for treasury(77)(6,537)(6,537)
Treasury shares issued for:
Exercise of stock appreciation rights and options3 (116)8 (108)
Performance share awards5 (222)(73)(295)
Restricted stock units12 (572)(120)(692)
Compensation expense — stock appreciation rights and options1,907 1,907 
Other share-based compensation expense1,563 1,563 
Other(2)(7)(45)(52)
Balance at September 30, 202138,457 $10,000 $179,574 $1,347,375 $(462,556)$(97,823)$976,570 
6

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)

1.    BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position of Applied Industrial Technologies, Inc. (the “Company”, or “Applied”) as of September 30, 2022, and the results of its operations and its cash flows for the three month periods ended September 30, 2022 and 2021, have been included. The condensed consolidated balance sheet as of June 30, 2022 has been derived from the audited consolidated financial statements at that date. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2022.
Operating results for the three month period ended September 30, 2022 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2023.
Inventory
The Company uses the LIFO method of valuing U.S. inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination. LIFO expense of $9,060 and $3,571 in the three months ended September 30, 2022 and 2021, respectively, is recorded in cost of sales in the condensed statements of consolidated income.
Reportable Segments
The Company has two reportable segments: Service Center Based Distribution and Engineered Solutions (formerly known as Fluid Power & Flow Control). The Company changed the reportable segment name to Engineered Solutions in the first quarter of fiscal 2023. There was no change in the composition of either reportable segment. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment operates through local service centers and distribution centers with a focus on providing products and services addressing the maintenance and repair of motion control infrastructure and production equipment. Products primarily include industrial bearings, motors, belting, drives, couplings, pumps, linear motion products, hydraulic and pneumatic components, filtration supplies, and hoses, as well as other related supplies for general operational needs of customers’ machinery and equipment. The Engineered Solutions segment includes our operations that specialize in distributing, engineering, designing, integrating, and repairing hydraulic and pneumatic fluid power technologies, and engineered flow control products and services. This segment also includes our operations that focus on advanced automation solutions including machine vision, robotics, motion control, industrial networking, and smart technologies.

7

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
2.    REVENUE RECOGNITION

Disaggregation of Revenues
The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the three months ended September 30, 2022 and 2021. Other countries consist of Mexico, Australia, New Zealand, and Singapore.
Three Months Ended September 30,
20222021
Service Center Based DistributionEngineered SolutionsTotalService Center Based DistributionEngineered SolutionsTotal
Geographic Areas:
United States$584,880 $336,609 $921,489 $479,164 $285,044 $764,208 
Canada79,770  79,770 74,566  74,566 
Other countries53,338 7,808 61,146 47,141 5,766 52,907 
Total$717,988 $344,417 $1,062,405 $600,871 $290,810 $891,681 

The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three months ended September 30, 2022 and 2021:
Three Months Ended September 30,
 20222021
Service Center Based DistributionEngineered SolutionsTotalService Center Based DistributionEngineered SolutionsTotal
General Industry34.4 %39.9 %36.1 %34.6 %38.9 %35.9 %
Industrial Machinery9.9 %27.1 %15.5 %10.3 %29.0 %16.4 %
Metals11.0 %7.9 %10.0 %11.0 %7.4 %9.9 %
Food12.8 %2.8 %9.6 %12.5 %2.5 %9.3 %
Forest Products11.4 %2.6 %8.6 %10.4 %2.5 %7.8 %
Chem/Petrochem3.0 %13.8 %6.5 %3.4 %13.8 %6.8 %
Cement & Aggregate7.8 %1.5 %5.7 %8.5 %1.1 %6.1 %
Oil & Gas5.7 %1.3 %4.3 %5.2 %1.2 %3.9 %
Transportation4.0 %3.1 %3.7 %4.1 %3.6 %3.9 %
Total100.0 %100.0 %100.0 %100.0 %100.0 %100.0 %

8

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
The following tables present the Company’s percentage of revenue by reportable segment and product line for the three months ended September 30, 2022 and 2021:
Three Months Ended September 30,
 20222021
Service Center Based DistributionEngineered SolutionsTotalService Center Based DistributionEngineered SolutionsTotal
Power Transmission37.4 %10.1 %28.6 %37.7 %10.1 %28.7 %
Fluid Power12.9 %35.5 %20.2 %12.7 %37.6 %20.8 %
General Maintenance, Hose Products & Other21.6 %15.3 %19.5 %20.6 %18.8 %20.0 %
Bearings, Linear & Seals28.1 %0.3 %19.1 %29.0 %0.4 %19.7 %
Specialty Flow Control %38.8 %12.6 % %33.1 %10.8 %
Total100.0 %100.0 %100.0 %100.0 %100.0 %100.0 %
Contract Assets
The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer.
Activity related to contract assets, which are included in other current assets on the condensed consolidated balance sheet, is as follows:
September 30, 2022June 30, 2022$ Change% Change
Contract assets$17,890 $18,050 $(160)(0.9)%
The difference between the opening and closing balances of the Company's contract assets primarily results from the timing difference between the Company's performance and when the customer is billed.

3.    BUSINESS COMBINATIONS

The operating results of all acquired entities are included within the consolidated operating results of the Company from the date of each respective acquisition.
Fiscal 2022 Acquisitions
On August 18, 2021, the Company acquired substantially all of the net assets of R.R. Floody Company (Floody), a Rockford, Illinois provider of high technology solutions for advanced factory automation. Floody is included in the Engineered Solutions segment. The purchase price for the acquisition was $8,038, net tangible assets acquired were $1,040, and intangible assets including goodwill were $6,998 based upon estimated fair values at the acquisition date. The purchase price includes $1,000 of acquisition holdback payments, of which $500 was paid during the quarter ended September 30, 2022. The remaining balance of $500 is included in other current liabilities on the condensed consolidated balance sheet as of September 30, 2022, and will be paid on the second anniversary of the acquisition date with interest at a fixed rate of 2.0% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.


9

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
4.    GOODWILL AND INTANGIBLES

The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Engineered Solutions segment for the fiscal year ended June 30, 2022 and the three month period ended September 30, 2022 are as follows:
Service Center Based DistributionEngineered SolutionsTotal
Balance at June 30, 2021$212,296 $347,781 $560,077 
Goodwill acquired during the year 3,984 3,984 
Other, primarily currency translation(1,286)430 (856)
Balance at June 30, 2022211,010 352,195 563,205 
Other, primarily currency translation(1,728) (1,728)
Balance at September 30, 2022$209,282 $352,195 $561,477 

The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2022. The Company concluded that all of the reporting units' fair values exceeded their carrying amounts by at least 25% as of January 1, 2022.
At September 30, 2022 and June 30, 2022, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment and $167,605 related to the Engineered Solutions segment.
The Company’s identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
September 30, 2022AmountAccumulated
Amortization
Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships$352,635 $171,251 $181,384 
Trade names105,627 46,388 59,239 
Vendor relationships11,222 10,613 609 
Other2,321 812 1,509 
Total Identifiable Intangibles$471,805 $229,064 $242,741 

June 30, 2022AmountAccumulated
Amortization
Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships$353,836 $166,623 $187,213 
Trade names105,629 44,637 60,992 
Vendor relationships11,320 10,533 787 
Other2,321 723 1,598 
Total Identifiable Intangibles$473,106 $222,516 $250,590 
Fully amortized amounts are written off.
Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable.
Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of September 30, 2022) for the next five years is as follows: $22,200 for the remainder of 2023, $26,300 for 2024, $24,100 for 2025, $22,300 for 2026, $20,600 for 2027 and $19,100 for 2028.


10

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
5.     DEBT

A summary of long-term debt, including the current portion, follows:
September 30, 2022June 30, 2022
Revolving credit facility$410,592 $410,592 
Trade receivable securitization facility188,300 188,300 
Series C notes 40,000 
Series D notes25,000 25,000 
Series E notes25,000 25,000 
Other542 603 
Total debt$649,434 $689,495 
Less: unamortized debt issuance costs150 171 
$649,284 $689,324 
Revolving Credit Facility & Term Loan
In December 2021, the Company entered into a new five-year revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. This agreement provides a $900,000 unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500,000. Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or LIBOR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $200 to secure certain insurance obligations, totaled $489,208 at September 30, 2022 and June 30, 2022, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the revolving credit facility was 4.04% and 2.81% as of September 30, 2022 and June 30, 2022, respectively.
Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4,694 and $4,735 as of September 30, 2022 and June 30, 2022, respectively, in order to secure certain insurance obligations.
Trade Receivable Securitization Facility
In August 2018, the Company established a trade receivable securitization facility (the “AR Securitization Facility”) with a termination date of August 31, 2021. On March 26, 2021, the Company amended the AR Securitization Facility to expand the eligible receivables, which increased the maximum availability to $250,000 and increased the drawn fees on the AR Securitization Facility to 0.98% per year. Availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $250,000 of funding available under the AR Securitization Facility. The AR Securitization Facility effectively increases the Company’s borrowing capacity by collateralizing a portion of the amount of the U.S. operations’ trade accounts receivable. The Company uses the proceeds from the AR Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. Borrowings under this facility carry variable interest rates tied to LIBOR. The interest rate on the AR Securitization Facility as of September 30, 2022 and June 30, 2022 was 4.06% and 2.60%, respectively. The termination date of the AR Securitization Facility is March 26, 2024.
Unsecured Shelf Facility
At September 30, 2022 and June 30, 2022, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $50,000 and $90,000, respectively. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The "Series C" notes carried a fixed interest rate of 3.19%, and the remaining principal balance of $40,000 was paid in July 2022. The "Series D" notes have a remaining principal amount of $25,000, carry a fixed interest rate of 3.21%, and are due in October 2023. The “Series E” notes have a principal amount of $25,000, carry a fixed interest rate of 3.08%, and are due in October 2024.

11

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Other Long-Term Borrowing
In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency, and matures in May 2024.

6.     DERIVATIVES

Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
In January 2019, the Company entered into an interest rate swap to mitigate variability in forecasted interest payments on $463,000 of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. During the quarter ended December 31, 2020, the Company completed a transaction to amend and extend the interest rate swap agreement which resulted in an extension of the maturity date by an additional three years and a decrease of the weighted average fixed pay rate from 2.61% to 1.63%. The new pay-fixed interest rate swap is considered a hybrid instrument with a financing component and an embedded at-market derivative that was designated as a cash flow hedge. The interest rate swap converted $409,000 of variable rate debt to a rate of 2.54% as of September 30, 2022 and at a rate of 2.75% as of June 30, 2022. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $29,569 and $17,827 as of September 30, 2022 and June 30, 2022, respectively, which is included in other current assets and other assets in the condensed consolidated balance sheet. Amounts reclassified from other comprehensive income (loss), before tax to interest expense, net totaled $796 and $2,585 for the three months ended September 30, 2022 and 2021, respectively.

7.    FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at September 30, 2022 and June 30, 2022 totaled $15,409 and $15,317, respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are included in other assets on the accompanying condensed consolidated balance sheets and their fair values were determined using quoted market prices (Level 1 in the fair value hierarchy).
As of September 30, 2022 and June 30, 2022, the carrying values of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximated fair value (Level 2 in the fair value hierarchy). The revolving credit facility and the AR Securitization Facility contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).

12

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
8.    SHAREHOLDERS' EQUITY

Accumulated Other Comprehensive Loss
Changes in the accumulated other comprehensive loss are comprised of the following amounts, shown net of taxes:
Three Months Ended September 30, 2022
Foreign currency translation adjustment Post-employment benefitsCash flow hedgeTotal Accumulated other comprehensive (loss) income
Balance at June 30, 2022$(90,738)$(1,303)$19,746 $(72,295)
Other comprehensive (loss) income(11,521) 9,280 (2,241)
Amounts reclassified from accumulated other comprehensive (loss) income 6 600 606 
Net current-period other comprehensive (loss) income(11,521)6 9,880 (1,635)
Balance at September 30, 2022$(102,259)$(1,297)$29,626 $(73,930)

Three Months Ended September 30, 2021
Foreign currency translation adjustment Post-employment benefitsCash flow hedgeTotal Accumulated other comprehensive (loss) income
Balance at June 30, 2021$(80,838)$(3,673)$(8,581)$(93,092)
Other comprehensive (loss) income(7,188) 450 (6,738)
Amounts reclassified from accumulated other comprehensive (loss) income 57 1,950 2,007 
Net current-period other comprehensive (loss) income(7,188)57 2,400 (4,731)
Balance at September 30, 2021$(88,026)$(3,616)$(6,181)$(97,823)

Other Comprehensive Loss
Details of other comprehensive loss are as follows:
Three Months Ended September 30,
20222021
Pre-Tax AmountTax ExpenseNet AmountPre-Tax AmountTax Expense Net Amount
Foreign currency translation adjustments$(11,437)$84 $(11,521)$(7,182)$6 $(7,188)
Post-employment benefits:
Reclassification of net actuarial losses and prior service cost into other expense (income), net and included in net periodic pension costs8 2 6 75 18 57 
Unrealized gain on cash flow hedge12,310 3,030 9,280 596 146 450 
Reclassification of interest from cash flow hedge into interest expense796 196 600 2,585 635 1,950 
Other comprehensive loss$1,677 $3,312 $(1,635)$(3,926)$805 $(4,731)

13

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Anti-dilutive Common Stock Equivalents
In the three month periods ended September 30, 2022 and September 30, 2021, stock options and stock appreciation rights related to 185 and 109 shares of common stock, respectively, were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive.

9.    SEGMENT INFORMATION

The accounting policies of the Company’s reportable segments are generally the same as those used to prepare the condensed consolidated financial statements. LIFO expense of $9,060 and $3,571 in the three months ended September 30, 2022 and 2021, respectively, is recorded in cost of sales in the condensed statements of income, and is included in operating income for the related reportable segment, as the Company allocates LIFO expense between the segments. Intercompany sales, primarily from the Engineered Solutions segment to the Service Center Based Distribution segment, of $10,518 and $8,132, in the three months ended September 30, 2022 and 2021, respectively, have been eliminated in the Segment Financial Information tables below.
Three Months EndedService Center Based DistributionEngineered SolutionsTotal
September 30, 2022
Net sales$717,988 $344,417 $1,062,405 
Operating income for reportable segments88,809 45,534 134,343 
Assets used in business1,460,896 1,013,278 2,474,174 
Depreciation and amortization of property4,449 1,032 5,481 
Capital expenditures3,565 1,989 5,554 
September 30, 2021
Net sales$600,871 $290,810 $891,681 
Operating income for reportable segments64,653 34,805 99,458 
Assets used in business1,349,654 953,526 2,303,180 
Depreciation and amortization of property4,379 1,048 5,427 
Capital expenditures3,097 524 3,621 

A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:
Three Months Ended
September 30,
20222021
Operating income for reportable segments$134,343 $99,458 
Adjustment for:
Intangible amortization—Service Center Based Distribution
758 892 
Intangible amortization—Engineered Solutions6,947 7,229 
Corporate and other expense, net
20,106 16,723 
Total operating income106,532 74,614 
Interest expense, net6,480 7,390 
Other expense (income), net1,008 (312)
Income before income taxes$99,044 $67,536 

The change in corporate and other expense, net is due to changes in corporate expenses, as well as in the amounts and levels of certain expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support, and other items.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
10.    OTHER EXPENSE (INCOME), NET

Other expense (income), net consists of the following:
 Three Months Ended
September 30,
 20222021
Unrealized loss on assets held in rabbi trust for a non-qualified deferred compensation plan$827 $91 
Foreign currency transactions loss (gain)228 (567)
Net other periodic post-employment costs143 152 
Life insurance income, net(111)(41)
Other, net(79)53 
Total other expense (income), net$1,008 $(312)

11.    SUBSEQUENT EVENTS

We have evaluated events and transactions occurring subsequent to September 30, 2022 through the date the financial statements were issued.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

With more than 6,000 employees across North America, Australia, New Zealand, and Singapore, Applied Industrial Technologies (“Applied,” the “Company,” “We,” “Us” or “Our”) is a leading value-added distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. Our leading brands, specialized services, and comprehensive knowledge serve MRO (Maintenance, Repair & Operations) and OEM (Original Equipment Manufacturer) end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, and expertise. We have a long tradition of growth dating back to 1923, the year our business was founded in Cleveland, Ohio. During the first quarter of fiscal 2023, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from 567 facilities.
The following is Management's Discussion and Analysis of significant factors which have affected our financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated balance sheets, statements of consolidated income, consolidated comprehensive income and consolidated cash flows. When reviewing the discussion and analysis set forth below, please note that the majority of SKUs (Stock Keeping Units) we sell in any given period were not necessarily sold in the comparable period of the prior year, resulting in the inability to quantify certain commonly used comparative metrics analyzing sales, such as changes in product mix and volume.
Overview
Consolidated sales for the quarter ended September 30, 2022 increased $170.7 million or 19.1% compared to the prior year quarter, with acquisitions increasing sales by $1.7 million or 0.2% and unfavorable foreign currency translation of $4.7 million decreasing sales by 0.5%. Operating margin was 10.0% of sales for the quarter ended September 30, 2022 compared to 8.4% of sales for the same quarter in the prior year. Net income of $76.9 million increased 45.1% compared to the prior year quarter. The current ratio was 3.1 to 1 at September 30, 2022 and 2.7 to 1 at June 30, 2022.
Applied monitors several economic indices that have been key indicators for industrial economic activity in the United States. These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and require replacement parts.
The MCU (total industry) and IP indices increased since June 2022. The ISM PMI registered 50.9 in September, down from the June 2022 reading of 53.0. The indices for the months during the current quarter, along with the indices for the prior fiscal year end, were as follows:
Index Reading