Company Quick10K Filing
Applied Industrial Technologies
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 39 $2,237
10-Q 2019-10-31 Quarter: 2019-09-30
10-K 2019-08-16 Annual: 2019-06-30
10-Q 2019-04-30 Quarter: 2019-03-31
10-Q 2019-01-25 Quarter: 2018-12-31
10-Q 2018-11-01 Quarter: 2018-09-30
10-K 2018-08-17 Annual: 2018-06-30
10-Q 2018-04-27 Quarter: 2018-03-31
10-Q 2018-01-26 Quarter: 2017-12-31
10-Q 2017-10-26 Quarter: 2017-09-30
10-K 2017-08-18 Annual: 2017-06-30
10-Q 2017-04-28 Quarter: 2017-03-31
10-Q 2017-01-27 Quarter: 2016-12-31
10-Q 2016-10-27 Quarter: 2016-09-30
10-K 2016-08-24 Annual: 2016-06-30
10-Q 2016-05-03 Quarter: 2016-03-31
10-Q 2016-01-29 Quarter: 2015-12-31
10-Q 2015-11-04 Quarter: 2015-09-30
10-K 2015-08-26 Annual: 2015-06-30
10-Q 2015-05-04 Quarter: 2015-03-31
10-Q 2015-02-04 Quarter: 2014-12-31
10-Q 2014-11-04 Quarter: 2014-09-30
10-K 2014-08-22 Annual: 2014-06-30
10-Q 2014-05-05 Quarter: 2014-03-31
10-Q 2014-02-03 Quarter: 2013-12-31
10-Q 2013-11-08 Quarter: 2013-09-30
10-K 2013-08-20 Annual: 2013-06-30
10-Q 2013-05-08 Quarter: 2013-03-31
10-Q 2012-11-01 Quarter: 2012-09-30
10-K 2012-08-15 Annual: 2012-06-30
10-Q 2012-05-02 Quarter: 2012-03-31
10-Q 2012-02-02 Quarter: 2011-12-31
10-Q 2011-11-02 Quarter: 2011-09-30
10-K 2011-08-17 Annual: 2011-06-30
10-Q 2011-05-04 Quarter: 2011-03-31
10-Q 2011-02-02 Quarter: 2010-12-31
10-Q 2010-11-05 Quarter: 2010-09-30
10-K 2010-08-13 Annual: 2010-06-30
10-Q 2010-05-07 Quarter: 2010-03-31
10-Q 2010-02-09 Quarter: 2009-12-31
8-K 2019-10-30 Earnings, Exhibits
8-K 2019-10-30 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-10-29 Officers, Shareholder Vote
8-K 2019-10-04 Other Events
8-K 2019-08-14 Earnings, Exhibits
8-K 2019-08-13 Officers
8-K 2019-04-26 Earnings, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-10-30 Shareholder Vote
8-K 2018-08-31 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-08-10 Earnings, Exhibits
8-K 2018-06-30 Officers
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-01-31 Enter Agreement, Leave Agreement, M&A, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-01-25 Earnings, Exhibits
8-K 2018-01-08 Enter Agreement, Other Events, Exhibits
AIT 2019-09-30
Part I: Financial Information
Item 2: Management's Discussion and Analysis of Financial Condition
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 a10q93019newexhibit101.htm
EX-10.2 a10q93019newexhibit102.htm
EX-10.3 a10q93019newexhibit103.htm
EX-31 a10q93019newexhibit31.htm
EX-32 a10q93019newexhibit32.htm

Applied Industrial Technologies Earnings 2019-09-30

AIT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
AIT 2,237 2,332 1,435 3,473 1,008 144 257 3,087 29% 12.0 6%
RUN 2,180 5,207 3,720 844 0 -24 147 3,789 0% 25.8 -0%
AVNS 2,082 1,783 506 671 403 -26 9 2,042 60% 237.4 -1%
KAMN 1,751 1,565 907 1,075 470 53 123 2,041 44% 16.6 3%
INGN 1,471 404 70 373 187 42 56 1,257 50% 22.3 10%
TRS 1,406 1,172 524 896 244 80 158 1,660 27% 10.5 7%
MTRN 1,347 837 242 1,195 270 32 71 1,274 23% 17.9 4%
CLGN 1,141 34 16 0 0 0 0 1,141 0%
OFLX 1,000 88 19 110 69 20 27 976 62% 36.4 22%
BOOM 938 285 122 389 140 53 76 959 36% 12.6 18%

Document
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Table of Contents


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, 2019

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 class
Trading Symbol
Name of each exchange on which registered
Common Stock, without par value
AIT
New 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  x    No  o 

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  x   No  o 



Table of Contents

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
x
Accelerated filer
  o
Non-accelerated filer  
o
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 38,655,628 (no par value) shares of common stock outstanding on October 18, 2019.



Table of Contents

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 6:
 
 
 
 
 
 
 
 

1

Table of Contents

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,
 
 
2019
 
2018
Net sales
 
$
856,404

 
$
864,515

Cost of sales
 
604,944

 
612,662

Gross profit
 
251,460

 
251,853

Selling, distribution and administrative expense, including depreciation
 
190,294

 
185,514

Operating income
 
61,166

 
66,339

Interest expense, net
 
10,059

 
10,476

Other income, net
 

 
(239
)
Income before income taxes
 
51,107

 
56,102

Income tax expense
 
12,308

 
7,164

Net income
 
$
38,799

 
$
48,938

Net income per share - basic
 
$
1.00

 
$
1.26

Net income per share - diluted
 
$
1.00

 
$
1.24

Weighted average common shares outstanding for basic computation
 
38,611

 
38,714

Dilutive effect of potential common shares
 
350

 
650

Weighted average common shares outstanding for diluted computation
 
38,961

 
39,364

See notes to condensed consolidated financial statements.


2

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
Three Months Ended
 
 
September 30,

 
2019
 
2018
Net income per the condensed statements of consolidated income
 
$
38,799

 
$
48,938

 
 
 
 
 
Other comprehensive (loss) income, before tax:
 
 
 
 
Foreign currency translation adjustments
 
(4,034
)
 
5,714

Post-employment benefits:
 
 
 
 
Reclassification of net actuarial gains and prior service cost into other income, net and included in net periodic pension costs
 
(17
)
 
(75
)
Cumulative effect of adopting accounting standard
 

 
(50
)
  Unrealized loss on cash flow hedge
 
(2,180
)
 

  Reclassification of interest from cash flow hedge into interest expense
 
427

 

Total other comprehensive (loss) income, before tax
 
(5,804
)
 
5,589

Income tax (benefit) expense related to items of other comprehensive (loss) income
 
(557
)
 
242

Other comprehensive (loss) income, net of tax
 
(5,247
)
 
5,347

Comprehensive income, net of tax
 
$
33,552

 
$
54,285

See notes to condensed consolidated financial statements.
 


3

Table of Contents


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 
 
September 30,
2019
 
June 30,
2019
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
98,204

 
$
108,219

Accounts receivable, net
 
529,330

 
540,902

Inventories
 
465,165

 
447,555

Other current assets
 
52,224

 
51,462

Total current assets
 
1,144,923

 
1,148,138

Property, less accumulated depreciation of $184,989 and $181,066
 
125,094

 
124,303

Operating lease assets, net
 
86,557

 

Identifiable intangibles, net
 
374,871

 
368,866

Goodwill
 
671,476

 
661,991

Other assets
 
26,811

 
28,399

TOTAL ASSETS
 
$
2,429,732

 
$
2,331,697

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
229,368

 
$
237,289

Current portion of long-term debt
 
93,912

 
49,036

Compensation and related benefits
 
63,973

 
67,978

Other current liabilities
 
91,469

 
69,491

Total current liabilities
 
478,722

 
423,794

Long-term debt
 
859,172

 
908,850

Other liabilities
 
164,613

 
102,019

TOTAL LIABILITIES
 
1,502,507

 
1,434,663

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;
38,655 and 38,597 outstanding, respectively
 
10,000

 
10,000

Additional paid-in capital
 
172,223

 
172,931

Retained earnings
 
1,264,648

 
1,229,148

Treasury shares—at cost (15,558 and 15,616 shares, respectively)
 
(414,513
)
 
(415,159
)
Accumulated other comprehensive loss
 
(105,133
)
 
(99,886
)
TOTAL SHAREHOLDERS’ EQUITY
 
927,225

 
897,034

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
2,429,732

 
$
2,331,697

See notes to condensed consolidated financial statements.


4

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
 
 
Three Months Ended
 
 
September 30,
 
 
2019
 
2018
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
38,799

 
$
48,938

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of property
 
5,223

 
4,981

Amortization of intangibles
 
10,374

 
10,921

Amortization of stock options and appreciation rights
 
773

 
651

Other share-based compensation expense
 
919

 
1,043

Changes in operating assets and liabilities, net of acquisitions
 
(8,682
)
 
(53,184
)
Other, net
 
2,612

 
(1,553
)
Net Cash provided by Operating Activities
 
50,018

 
11,797

Cash Flows from Investing Activities
 
 
 
 
Acquisition of businesses, net of cash acquired
 
(35,703
)
 

Property purchases
 
(4,946
)
 
(3,173
)
Proceeds from property sales
 
88

 
77

Net Cash used in Investing Activities
 
(40,561
)
 
(3,096
)
Cash Flows from Financing Activities
 
 
 
 
Net repayments under revolving credit facility
 

 
(19,500
)
Long-term debt borrowings
 

 
175,000

Long-term debt repayments
 
(4,934
)
 
(146,934
)
Payment of debt issuance costs
 

 
(685
)
Dividends paid
 
(11,985
)
 
(11,334
)
Acquisition holdback payments
 
(201
)
 
(219
)
Taxes paid for shares withheld for equity awards
 
(1,754
)
 
(3,203
)
Net Cash used in Financing Activities
 
(18,874
)
 
(6,875
)
Effect of Exchange Rate Changes on Cash
 
(598
)
 
432

(Decrease) increase in Cash and Cash Equivalents
 
(10,015
)
 
2,258

Cash and Cash Equivalents at Beginning of Period
 
108,219

 
54,150

Cash and Cash Equivalents at End of Period
 
$
98,204

 
$
56,408

See notes to condensed consolidated financial statements.


5

Table of Contents

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)

For the Period Ended
September 30, 2019
 
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 July 1, 2019
 
38,597

 
$
10,000

 
$
172,931

 
$
1,229,148

 
$
(415,159
)
 
$
(99,886
)
 
$
897,034

Net income
 

 

 

 
38,799

 

 

 
38,799

Other comprehensive loss
 

 

 

 

 

 
(5,247
)
 
(5,247
)
Cumulative effect of adopting accounting standards
 

 

 

 
(3,275
)
 

 

 
(3,275
)
Cash dividends — $0.31 per share
 

 

 

 
(20
)
 

 

 
(20
)
Exercise of stock appreciation rights and options
 
5

 

 
(177
)
 

 
61

 

 
(116
)
Performance share awards
 
36

 

 
(1,540
)
 

 
362

 

 
(1,178
)
Restricted stock units
 
16

 

 
(631
)
 

 
200

 

 
(431
)
Compensation expense — stock appreciation rights and options
 

 

 
773

 

 

 

 
773

Other share-based compensation expense
 

 

 
919

 

 

 

 
919

Other
 
2

 

 
(52
)
 
(4
)
 
23

 

 
(33
)
Balance at September 30, 2019
 
38,656

 
$
10,000

 
$
172,223

 
$
1,264,648

 
$
(414,513
)
 
$
(105,133
)
 
$
927,225


For the Period Ended
September 30, 2018
 
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 July 1, 2018
 
38,703

 
$
10,000

 
$
169,383

 
$
1,129,678

 
$
(403,875
)
 
$
(90,223
)
 
$
814,963

Net income
 
 
 
 
 
 
 
48,938

 
 
 
 
 
48,938

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
5,347

 
5,347

Cumulative effect of adopting accounting standards
 
 
 
 
 
 
 
3,056

 
 
 
 
 
3,056

Cash dividends — $0.30 per share
 
 
 
 
 
 
 
(13
)
 
 
 
 
 
(13
)
Exercise of stock appreciation rights and options
 
17

 
 
 
(855
)
 
 
 
(210
)
 
 
 
(1,065
)
Performance share awards
 
18

 
 
 
(844
)
 
 
 
(301
)
 
 
 
(1,145
)
Restricted stock units
 
16

 
 
 
(760
)
 
 
 
(198
)
 
 
 
(958
)
Compensation expense — stock appreciation rights and options
 
 
 
 
 
651

 
 
 
 
 
 
 
651

Other share-based compensation expense
 
 
 
 
 
1,043

 
 
 
 
 
 
 
1,043

Other
 
 
 
 
 
 
 
24

 
(35
)
 
 
 
(11
)
Balance at September 30, 2018
 
38,754

 
$
10,000

 
$
168,618

 
$
1,181,683

 
$
(404,619
)
 
$
(84,876
)
 
$
870,806




6

Table of Contents
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, 2019, and the results of its operations and its cash flows for the three month periods ended September 30, 2019 and 2018, have been included. The condensed consolidated balance sheet as of June 30, 2019 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, 2019.
Operating results for the three month period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2020.
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.
Recently Adopted Accounting Guidance
Leases
In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. This update is effective for annual financial statement periods beginning after December 15, 2018, with earlier application permitted. In July 2018, the FASB issued ASU 2018-10 which clarifies the guidance in ASU 2016-02 and ASU 2018-11 which provides entities with an additional transition method option for adopting the new standard. In December 2018 and January 2019, the FASB issued ASU 2018-20 and ASU 2019-01, respectively, which further clarify the guidance. The Company adopted the new guidance effective July 1, 2019 using the optional transition method, which required application of the new guidance to only those leases that existed at the date of adoption. The Company elected the “package of practical expedients,” which permitted the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Adoption of the new standard resulted in the recognition of right-of-use (ROU) assets and lease liabilities of $83,533 and $89,778, respectively, on July 1, 2019. The difference between the ROU assets and lease liabilities related primarily to the impairment of certain leases in Canada and the United States. In addition, the adoption resulted in an adjustment to opening retained earnings of approximately $3,275, net of tax, on July 1, 2019 primarily due to the impairment of the leases. The standard did not have a material impact on the Company’s condensed statements of consolidated income or cash flows.
Cash Flows
In August 2016, the FASB issued its final standard on the classification of certain cash receipts and cash payments within the statement of cash flows. This standard, issued as ASU 2016-15, makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with early adoption permitted. The Company adopted the new guidance in the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on the Company's financial statements or related disclosures.
Recently Issued Accounting Guidance
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. In November 2018, April 2019, and May 2019 the FASB

7

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

issued ASU 2018-19, ASU 2019-04, and ASU 2019-05, respectively, which clarify the guidance in ASU 2016-13. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures.

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, 2019 and 2018. Other countries consist of Mexico, Australia, New Zealand, and Singapore.
 
Three Months Ended September 30,
 
2019
 
2018
 
Service Center Based Distribution
Fluid Power & Flow Control
Total
 
Service Center Based Distribution
Fluid Power & Flow Control
Total
Geographic Areas:
 
 
 
 
 
 
 
United States
$
492,873

$
250,113

$
742,986

 
$
490,774

$
256,649

$
747,423

Canada
65,946


65,946

 
69,107


69,107

Other countries
44,341

3,131

47,472

 
44,168

3,817

47,985

Total
$
603,160

$
253,244

$
856,404

 
$
604,049

$
260,466

$
864,515


The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three months ended September 30, 2019 and 2018:
 
Three Months Ended September 30, 2019
 
Service Center Based Distribution
 
Fluid Power & Flow Control
 
Total
General Industry
34.8
%
 
43.7
%
 
37.5
%
Industrial Machinery
10.2
%
 
22.1
%
 
13.7
%
Metals
12.4
%
 
8.2
%
 
11.1
%
Food
11.1
%
 
2.7
%
 
8.6
%
Oil & Gas
9.3
%
 
1.9
%
 
7.1
%
Chem/Petrochem
2.8
%
 
12.7
%
 
5.7
%
Forest Products
7.7
%
 
3.1
%
 
6.4
%
Cement & Aggregate
6.8
%
 
1.0
%
 
5.1
%
Transportation
4.9
%
 
4.6
%
 
4.8
%
Total
100.0
%
 
100.0
%
 
100.0
%


8

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

 
Three Months Ended September 30, 2018
 
Service Center Based Distribution
 
Fluid Power & Flow Control
 
Total
General Industry
35.8
%
 
44.0
%
 
38.3
%
Industrial Machinery
9.2
%
 
21.4
%
 
12.9
%
Metals
11.1
%
 
7.8
%
 
10.1
%
Food
10.8
%
 
2.5
%
 
8.3
%
Oil & Gas
9.6
%
 
2.1
%
 
7.3
%
Chem/Petrochem
3.5
%
 
15.6
%
 
7.1
%
Forest Products
8.7
%
 
2.6
%
 
6.9
%
Cement & Aggregate
6.8
%
 
1.0
%
 
5.0
%
Transportation
4.5
%
 
3.0
%
 
4.1
%
Total
100.0
%
 
100.0
%
 
100.0
%

The following tables present the Company’s percentage of revenue by reportable segment and product line for the three months ended September 30, 2019 and 2018:
 
Three Months Ended September 30, 2019
 
Service Center Based Distribution
 
Fluid Power & Flow Control
 
Total
Power Transmission
34.5
%
 
9.3
%
 
27.1
%
Fluid Power
13.3
%
 
39.7
%
 
21.1
%
General Maintenance; Hose Products
26.3
%
 
8.0
%
 
20.9
%
Bearings, Linear & Seals
25.9
%
 
0.3
%
 
18.3
%
Specialty Flow Control
%
 
42.7
%
 
12.6
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
Three Months Ended September 30, 2018
 
Service Center Based Distribution
 
Fluid Power & Flow Control
 
Total
Power Transmission
32.8
%
 
1.5
%
 
23.3
%
Fluid Power
14.0
%
 
37.6
%
 
21.1
%
General Maintenance; Hose Products
27.6
%
 
4.7
%
 
20.8
%
Bearings, Linear & Seals
25.6
%
 
%
 
17.9
%
Specialty Flow Control
%
 
56.2
%
 
16.9
%
Total
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, 2019
June 30, 2019
$ Change
% Change
Contract assets
$
7,338

$
8,920

$
(1,582
)
(17.7
)%
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.

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

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 2020 Acquisition
On August 21, 2019, the Company acquired 100% of the outstanding shares of Olympus Controls, a Portland, Oregon automation solutions provider - including design, assembly, integration, and distribution - of motion control, machine vision, and robotic technologies. Olympus Controls is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $34,901, net tangible assets acquired were $9,464, and intangible assets including goodwill was $25,437 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. 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.
Fiscal 2019 Acquisitions
On March 4, 2019, the Company acquired substantially all of the net assets of MilRoc Distribution (MilRoc) and Woodward Steel (Woodward). MilRoc is an Oklahoma based distributor of oilfield specific products, namely pumps and valves, as well as equipment repair services and industrial parts to the oil & gas industry. Woodward is an Oklahoma based steel supplier to the oil & gas and agriculture industries. MilRoc and Woodward are both included in the Service Center Based Distribution segment. The purchase price for the acquisition was $35,000, net tangible assets acquired were $17,788, and intangible assets including goodwill was $17,212 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes acquisition holdback payments of $4,375, which are included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of September 30, 2019, and which will be paid on the first, second, and third anniversaries 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.
On November 2, 2018, the Company acquired substantially all of the net assets of Fluid Power Sales, Inc. (FPS), a Baldwinsville, New York based manufacturer and distributor of fluid power components, specializing in the engineering and fabrication of manifolds and power units. FPS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $8,100, net tangible assets acquired were $4,150, and goodwill was $3,950 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes acquisition holdback payments of $1,200, which is included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of September 30, 2019, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 1.5% 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.



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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 Fluid Power & Flow Control segment for the fiscal year ended June 30, 2019 and the three month period ended September 30, 2019 are as follows:
 
Service Center Based Distribution
 
Fluid Power & Flow Control
 
Total
Balance at July 1, 2018
$
203,084

 
$
443,559

 
$
646,643

Goodwill acquired during the period
9,943

 
4,798

 
14,741

Other, primarily currency translation
607

 

 
607

Balance at June 30, 2019
$
213,634

 
$
448,357

 
$
661,991

Goodwill adjusted/acquired during the period
(3,393
)
 
12,773

 
9,380

Other, primarily currency translation
105

 

 
105

Balance at September 30, 2019
$
210,346

 
$
461,130

 
$
671,476

During the first quarter of fiscal 2020, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the MilRoc/Woodward acquisition. The fair values of the customer relationships, trade name, and non-compete intangible assets were increased by $1,524, $1,809, and $60, respectively, with a corresponding total decrease to goodwill of $3,393. The changes to the preliminary estimated fair values resulted in an increase to amortization expense of $303 during the first quarter of fiscal 2020, which is recorded in selling, distribution, and administrative expense on the condensed statements of consolidated income.
The Company has seven (7) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2019.  The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts by at least 20% as of January 1, 2019. Specifically, the Canada reporting unit's fair value exceeded its carrying value by 25%, and the reporting unit comprised of the FCX Performance Inc. operations' fair value exceeded its carrying value by 20%. The Canada and FCX reporting units have goodwill balances of $28,067 and $440,012, respectively, as of September 30, 2019. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the income and market approaches.  The income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors, and requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins, and discount rates. The market approach utilizes an analysis of comparable publicly traded companies and requires management to make significant estimates and assumptions related to the forecasts of future revenues, earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiples that are applied to management’s forecasted revenues and EBITDA estimates.
Changes in future results, assumptions, and estimates after the measurement date may lead to an outcome where additional impairment charges would be required in future periods.  Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.  Further, continued adverse market conditions could result in the recognition of impairment if the Company determines that the fair values of its reporting units have fallen below their carrying values. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of the Company’s reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; (ii) inability to achieve the sales from our strategic growth initiatives.
At September 30, 2019 and June 30, 2019, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment and $36,605 related to the Fluid Power & Flow Control segment.

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

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, 2019
 
Amount
 
Accumulated
Amortization
 
Net Book
Value
Finite-Lived Identifiable Intangibles:
 
 
 
 
 
 
Customer relationships
 
$
435,325

 
$
142,389

 
$
292,936

Trade names
 
107,695

 
29,189

 
78,506

Vendor relationships
 
11,306

 
8,315

 
2,991

Non-competition agreements
 
1,462

 
1,024

 
438

Total Identifiable Intangibles
 
$
555,788

 
$
180,917

 
$
374,871


June 30, 2019
 
Amount
 
Accumulated
Amortization
 
Net Book
Value
Finite-Lived Identifiable Intangibles:
 
 
 
 
 
 
Customer relationships
 
$
422,367

 
$
135,879

 
$
286,488

Trade names
 
105,946

 
27,232

 
78,714

Vendor relationships
 
11,367

 
8,156

 
3,211

Non-competition agreements
 
2,702

 
2,249

 
453

Total Identifiable Intangibles
 
$
542,382

 
$
173,516

 
$
368,866

Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
During the three month period ended September 30, 2019, the Company acquired identifiable intangible assets with a preliminary acquisition cost allocation and weighted-average life as follows:
 
 
Acquisition Cost Allocation
 
Weighted-Average Life
Customer relationships
 
$
12,664

 
20
Total Intangibles Acquired
 
$
12,664

 
20

Estimated future amortization expense by fiscal year (based on the Company’s identifiable intangible assets as of September 30, 2019) for the next five years is as follows: $30,200 for the remainder of 2020, $38,600 for 2021, $36,400 for 2022, $34,200 for 2023, $30,000 for 2024 and $26,000 for 2025.



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

5.     DEBT

Revolving Credit Facility & Term Loan
In January 2018, the Company refinanced its existing credit facility and entered into a new five-year credit facility with a group of banks expiring in January 2023. This agreement provides for a $780,000 unsecured term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.10% to 0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR or prime at the Company's discretion. At September 30, 2019 and June 30, 2019, the Company had $608,750 and $613,625, respectively, outstanding under the term loan. The interest rate on the term loan as of September 30, 2019 and June 30, 2019 was 3.81% and 4.19%, respectively. The Company had no amount outstanding under the revolver at September 30, 2019 or June 30, 2019. Unused lines under this facility, net of outstanding letters of credit of $2,462 and $3,215, respectively, to secure certain insurance obligations, totaled $247,538 and $246,785 at September 30, 2019 and June 30, 2019, respectively, and were available to fund future acquisitions or other capital and operating requirements.
Additionally, the Company had letters of credit outstanding with a separate bank, not associated with the revolving credit agreement, in the amount of $3,087 and $2,698 as of September 30, 2019 and June 30, 2019, 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. The maximum availability under the AR Securitization Facility is $175,000. 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 $175,000 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 Service Center Based Distribution reportable segment’s U.S. operations’ trade accounts receivable. The collateralized trade accounts receivable is equal to the borrowed amount outstanding under the AR Securitization Facility and there are no restrictions on cash or other assets. 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 and fees on the AR Securitization Facility are 0.90% per year. As of September 30, 2019, and June 30, 2019, the Company borrowed $175,000 under the AR Securitization Facility. The interest rate on the AR securitization as of September 30, 2019 and June 30, 2019 was 3.04% and 3.33%, respectively.
Other Long-Term Borrowings
At September 30, 2019 and June 30, 2019, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000. 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 have a principal amount of $120,000 and carry a fixed interest rate of 3.19%, and are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principal amount of $50,000, carry a fixed interest rate of 3.21%, and are due in equal principal payments in October 2019 and 2023.
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, maturing in May 2024. At September 30, 2019 and June 30, 2019, $1,145 and $1,204 was outstanding, respectively.
Unamortized debt issue costs of $577 are included as a reduction of current portion of long-term debt on the condensed consolidated balance sheets as of September 30, 2019 and June 30, 2019. Unamortized debt issue costs of $1,234 and $1,366 are included as a reduction of long-term debt on the condensed consolidated balance sheets as of September 30, 2019 and June 30, 2019, respectively.

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

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

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. The interest rate swap converts $463,000 of variable rate debt to a rate of 3.88%. The fair value of the interest rate cash flow hedge was $15,955 and $14,202 as of September 30, 2019 and June 30, 2019 (Level 2 in the fair value hierarchy), respectively, which is included in other current liabilities and other liabilities in the condensed consolidated balance sheet. Realized losses related to the interest rate cash flow hedge were not material during the three months ended September 30, 2019.

7.    FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at September 30, 2019 and June 30, 2019 totaled $11,360 and $11,246, 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, 2019 and June 30, 2019, 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, the term loan and the AR Securitization Facility contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).



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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, 2019
 
 
Foreign currency translation adjustment

 
Post-employment benefits

 
Cash flow hedge

 
Total Accumulated other comprehensive (loss) income

Balance at July 1, 2019
 
$
(86,330
)
 
$
(2,852
)
 
$
(10,704
)
 
$
(99,886
)
Other comprehensive loss
 
(3,913
)
 

 
(1,643
)
 
(5,556
)
Amounts reclassified from accumulated other comprehensive (loss) income
 

 
(13
)
 
322

 
309

Net current-period other comprehensive loss
 
(3,913
)
 
(13
)
 
(1,321
)
 
(5,247
)
Balance at September 30, 2019
 
$
(90,243
)
 
$
(2,865
)
 
$
(12,025
)
 
$
(105,133
)

 
 
Three Months Ended September 30, 2018
 
 
Foreign currency translation adjustment

 
Unrealized gain on securities available for sale

 
Post-employment benefits

 
Total Accumulated other comprehensive (loss) income

Balance at July 1, 2018
 
$
(87,974
)
 
$
50

 
$
(2,299
)
 
$
(90,223
)
Other comprehensive income
 
5,453

 

 

 
5,453

Amounts reclassified from accumulated other comprehensive (loss) income
 

 

 
(56
)
 
(56
)
Net current-period other comprehensive income (loss)
 
5,453

 
(50
)
 
(56
)
 
5,347

Balance at September 30, 2018
 
$
(82,521
)
 
$

 
$
(2,355
)
 
$
(84,876
)


Other Comprehensive (Loss) Income
Details of other comprehensive (loss) income are as follows:
 
Three Months Ended September 30,
 
2019
 
2018
 
Pre-Tax Amount
 
Tax Expense (Benefit)
 
Net Amount
 
Pre-Tax Amount
 
Tax Expense (Benefit)
 
Net Amount
Foreign currency translation adjustments
$
(4,034
)
 
$
(121
)
 
$
(3,913
)
 
$
5,714