10-Q 1 ait-20210930.htm 10-Q ait-20210930
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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, 2021

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  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 

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 38,457,425 (no par value) shares of common stock outstanding on October 15, 2021.


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 5:
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,
 20212020
Net sales$891,681 $747,807 
Cost of sales636,341 532,026 
Gross profit255,340 215,781 
Selling, distribution and administrative expense, including depreciation
180,726 163,473 
Operating income74,614 52,308 
Interest expense, net7,390 7,653 
Other income, net(312)(177)
Income before income taxes67,536 44,832 
Income tax expense14,567 10,048 
Net income$52,969 $34,784 
Net income per share - basic$1.38 $0.90 
Net income per share - diluted$1.36 $0.89 
Weighted average common shares outstanding for basic computation38,502 38,722 
Dilutive effect of potential common shares582 366 
Weighted average common shares outstanding for diluted computation39,084 39,088 
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,
20212020
Net income per the condensed statements of consolidated income$52,969 $34,784 
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments(7,182)5,554 
Post-employment benefits:
Reclassification of net actuarial losses and prior service cost into other income, net and included in net periodic pension costs75 68 
  Unrealized gain (loss) on cash flow hedge596 (17)
  Reclassification of interest from cash flow hedge into interest expense2,585 2,690 
Total other comprehensive (loss) income, before tax(3,926)8,295 
Income tax expense related to items of other comprehensive (loss) income805 786 
Other comprehensive (loss) income, net of tax(4,731)7,509 
Comprehensive income, net of tax$48,238 $42,293 
See notes to condensed consolidated financial statements.

3


APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30,
2021
June 30,
2021
ASSETS
Current assets
Cash and cash equivalents$247,313 $257,745 
Accounts receivable, net530,824 516,322 
Inventories377,978 362,547 
Other current assets54,452 59,961 
Total current assets1,210,567 1,196,575 
Property, less accumulated depreciation of $208,991 and $204,326
113,813 115,589 
Operating lease assets, net94,476 87,111 
Identifiable intangibles, net274,410 279,628 
Goodwill562,791 560,077 
Other assets47,123 32,827 
TOTAL ASSETS$2,303,180 $2,271,807 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable$210,987 $208,162 
Current portion of long-term debt88,401 43,525 
Compensation and related benefits65,509 77,657 
Other current liabilities101,930 98,356 
Total current liabilities466,827 427,700 
Long-term debt730,307 784,855 
Other liabilities129,476 126,706 
TOTAL LIABILITIES1,326,610 1,339,261 
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 capital179,574 177,014 
Retained earnings1,347,375 1,294,413 
Treasury shares—at cost (15,756 and 15,697 shares, respectively)
(462,556)(455,789)
Accumulated other comprehensive loss(97,823)(93,092)
TOTAL SHAREHOLDERS’ EQUITY976,570 932,546 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,303,180 $2,271,807 
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,
20212020
Cash Flows from Operating Activities
Net income$52,969 $34,784 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property5,427 5,352 
Amortization of intangibles8,121 9,726 
Amortization of stock options and appreciation rights1,907 693 
Other share-based compensation expense1,563 677 
Changes in operating assets and liabilities, net of acquisitions(20,404)24,559 
Other, net(941)6,051 
Net Cash provided by Operating Activities48,642 81,842 
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(3,621)(3,597)
Proceeds from property sales48 193 
Net Cash used in Investing Activities(25,502)(3,404)
Cash Flows from Financing Activities
Long-term debt repayments(9,811)(62,450)
Purchases of treasury shares(6,537) 
Interest rate swap settlement payments(1,644) 
Dividends paid(12,712)(12,415)
Acquisition holdback payments(135)(521)
Taxes paid for shares withheld for equity awards(1,141)(1,797)
Net Cash used in Financing Activities(31,980)(77,183)
Effect of Exchange Rate Changes on Cash(1,592)1,254 
(Decrease) Increase in Cash and Cash Equivalents(10,432)2,509 
Cash and Cash Equivalents at Beginning of Period257,745 268,551 
Cash and Cash Equivalents at End of Period$247,313 $271,060 
See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
For the Period Ended
September 30, 2021
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, 202138,516 $10,000 $177,014 $1,294,413 $(455,789)$(93,092)$932,546 
Net income52,969 52,969 
Other comprehensive loss(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 



For the Period Ended
September 30, 2020
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, 202038,710 $10,000 $176,492 $1,200,570 $(414,090)$(129,430)$843,542 
Net income34,784 34,784 
Other comprehensive income7,509 7,509 
Cash dividends — $0.32 per share
(18)(18)
Treasury shares issued for:
Exercise of stock appreciation rights and options13 (277)12 (265)
Performance share awards22 (985)(20)(1,005)
Restricted stock units15 (593)96 (497)
Compensation expense — stock appreciation rights and options693 693 
Other share-based compensation expense677 677 
Other15 (29)(14)
Balance at September 30, 202038,760 $10,000 $176,007 $1,235,351 $(414,031)$(121,921)$885,406 
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, 2021, and the results of its operations and its cash flows for the three month periods ended September 30, 2021 and 2020, have been included. The condensed consolidated balance sheet as of June 30, 2021 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, 2021.
Operating results for the three month period ended September 30, 2021 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2022.
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.

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, 2021 and 2020. Other countries consist of Mexico, Australia, New Zealand, and Singapore.
Three Months Ended September 30,
20212020
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
Geographic Areas:
United States$479,164 $285,044 $764,208 $415,242 $228,815 $644,057 
Canada74,566  74,566 56,896  56,896 
Other countries47,141 5,766 52,907 41,146 5,708 46,854 
Total$600,871 $290,810 $891,681 $513,284 $234,523 $747,807 


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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 following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three months ended September 30, 2021 and 2020:
Three Months Ended September 30,
 20212020
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
General Industry34.6 %38.9 %35.9 %36.0 %39.4 %37.0 %
Industrial Machinery10.3 %29.0 %16.4 %9.4 %26.7 %14.9 %
Metals11.0 %7.4 %9.9 %10.2 %7.0 %9.2 %
Food12.5 %2.5 %9.3 %14.1 %3.0 %10.7 %
Forest Products10.4 %2.5 %7.8 %10.8 %2.9 %8.3 %
Chem/Petrochem3.4 %13.8 %6.8 %3.5 %13.3 %6.6 %
Cement & Aggregate8.5 %1.1 %6.1 %7.7 %1.1 %5.6 %
Oil & Gas5.2 %1.2 %3.9 %3.6 %1.2 %2.8 %
Transportation4.1 %3.6 %3.9 %4.7 %5.4 %4.9 %
Total100.0 %100.0 %100.0 %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, 2021 and 2020:
Three Months Ended September 30,
 20212020
Service Center Based DistributionFluid Power & Flow ControlTotalService Center Based DistributionFluid Power & Flow ControlTotal
Power Transmission37.7 %10.1 %28.7 %37.7 %7.6 %28.3 %
Fluid Power12.7 %37.6 %20.8 %13.1 %39.1 %21.3 %
General Maintenance; Hose Products20.6 %18.8 %20.0 %20.2 %13.8 %18.1 %
Bearings, Linear & Seals29.0 %0.4 %19.7 %29.0 %0.4 %20.0 %
Specialty Flow Control %33.1 %10.8 % %39.1 %12.3 %
Total100 %100 %100 %100 %100 %100 %
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, 2021June 30, 2021$ Change% Change
Contract assets$14,563 $15,178 $(615)(4.1)%
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.


8

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 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 Fluid Power & Flow Control segment. The purchase price for the acquisition was $8,094, net tangible assets acquired were $1,813, and intangible assets including goodwill were $6,281 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes $1,000 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the consolidated balance sheet as of September 30, 2021, and which will be paid on the first and second 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.
Fiscal 2021 Acquisitions
On December 31, 2020, the Company acquired 100% of the outstanding shares of Gibson Engineering Company (Gibson), a Norwood, Massachusetts provider of automation products, services, and engineered solutions focused on machine vision, motion control, mobile and collaborative robotic solutions, intelligent sensors, and other related equipment. Gibson is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $15,450, net tangible assets acquired were $1,030, and intangible assets including goodwill were $14,420 based upon estimated fair values at the acquisition date. The purchase price includes $1,938 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of September 30, 2021, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 1.0% 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 October 5, 2020, the Company acquired substantially all of the net assets of Advanced Control Solutions (ACS), which operates four locations in Georgia, Tennessee, and Alabama. ACS is a provider of automation products, services, and engineered solutions focused on machine vision equipment and software, mobile and collaborative robotic solutions, intelligent sensors, logic controllers, and other related equipment. ACS is included in the Fluid Power & Flow Control segment. The purchase price for the acquisition was $17,867, net tangible assets acquired were $1,210, and intangible assets including goodwill were $16,657 based upon estimated fair values at the acquisition date. 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.

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, 2021 and the three month period ended September 30, 2021 are as follows:
Service Center Based DistributionFluid Power & Flow ControlTotal
Balance at June 30, 2020$208,570 $332,024 $540,594 
Goodwill acquired during the year 15,757 15,757 
Other, primarily currency translation3,726  3,726 
Balance at June 30, 2021212,296 347,781 560,077 
Goodwill acquired during the period 3,267 3,267 
Other, primarily currency translation(1,018)465 (553)
Balance at September 30, 2021$211,278 $351,513 $562,791 

9

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2021.  The Company concluded that seven (7) of the reporting units’ fair values exceeded their carrying amounts by at least 25% as of January 1, 2021. The fair value of the final reporting unit, which is comprised of the FCX Performance Inc. (FCX) operations, exceeded its carrying value by 14%. The FCX reporting unit has a goodwill balance of $309,012 as of September 30, 2021.
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, earnings before interest, taxes, depreciation, and amortization (EBITDA), 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, EBITDA, and multiples that are applied to management’s forecasted revenues and EBITDA estimates.
The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions at the measurement date. Assumptions in estimating future cash flows are subject to a degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the measurement date. The Company evaluates the appropriateness of its assumptions and overall forecasts by comparing projected results of upcoming years with actual results of preceding years. Key assumptions (Level 3 in the fair value hierarchy) relate to pricing trends, inventory costs, customer demand, and revenue growth. A number of benchmarks from independent industry and other economic publications were also used.
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 additional 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, 2021 and June 30, 2021, 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 Fluid Power & Flow Control 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, 2021AmountAccumulated
Amortization
Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships$354,332 $149,454 $204,878 
Trade names105,621 39,349 66,272 
Vendor relationships11,414 10,018 1,396 
Other2,321 457 1,864 
Total Identifiable Intangibles$473,688 $199,278 $274,410 

10

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
June 30, 2021AmountAccumulated
Amortization
Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships$353,028 $143,862 $209,166 
Trade names104,780 37,626 67,154 
Vendor relationships11,469 9,859 1,610 
Other2,070 372 1,698 
Total Identifiable Intangibles$471,347 $191,719 $279,628 
Fully amortized amounts are written off.
During the three month period ended September 30, 2021, the Company acquired identifiable intangible assets with a preliminary acquisition cost allocation and weighted-average life as follows:
Acquisition Cost AllocationWeighted-Average life
Customer relationships$1,884 20.0
Trade names879 15.0
Other251 6.5
Total Identifiable Intangibles$3,014 17.4
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, 2021) for the next five years is as follows: $23,800 for the remainder of 2022, $30,000 for 2023, $26,300 for 2024, $24,100 for 2025, $22,400 for 2026 and $20,600 for 2027.

5.     DEBT

A summary of long-term debt, including the current portion, follows:
September 30, 2021June 30, 2021
Term Loan$540,500 $550,250 
Trade receivable securitization facility188,300 188,300 
Series C notes40,000 40,000 
Series D notes25,000 25,000 
Series E notes25,000 25,000 
Other786 846 
Total debt$819,586 $829,396 
Less: unamortized debt issuance costs878 1,016 
$818,708 $828,380 
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. The Company had no amount outstanding under the revolver at September 30, 2021 or June 30, 2021. Unused lines under this facility, net of outstanding letters of credit of $200 to secure certain insurance obligations, totaled $249,800 at September 30, 2021 and June 30, 2021, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the term loan was 1.88% as of September 30, 2021 and June 30, 2021.
11

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4,768 and $4,540 as of September 30, 2021 and June 30, 2021, 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”). 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 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, 2021 and June 30, 2021 was 1.06% and 1.20%, respectively. The termination date of the AR Securitization is March 26, 2024.
Unsecured Shelf Facility
At September 30, 2021 and June 30, 2021, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $90,000. 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 had an original principal amount of $120,000, carry a fixed interest rate of 3.19%, and the remaining principal balance is due in July 2022. The "Series D" notes had an original principal amount of $50,000, carry a fixed interest rate of 3.21%, and the remaining principal balance is 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.
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
12

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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 $420,000 of variable rate debt to a rate of 3.38% as of September 30, 2021 and June 30, 2021. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $12,671 and $14,346 as of September 30, 2021 and June 30, 2021, respectively, which is included in other current liabilities and other liabilities in the condensed consolidated balance sheet. Amounts reclassified from other comprehensive (loss) income, before tax to interest expense, net totaled $2,585 and $2,690 for the three months ended September 30, 2021 and 2020, respectively.

7.    FAIR VALUE MEASUREMENTS

Marketable securities measured at fair value at September 30, 2021 and June 30, 2021 totaled $16,880 and $16,844, 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, 2021 and June 30, 2021, 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).

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, 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)

13

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, 2020
Foreign currency translation adjustment Post-employment benefitsCash flow hedgeTotal Accumulated other comprehensive (loss) income
Balance at June 30, 2020$(105,094)$(4,564)$(19,772)$(129,430)
Other comprehensive income (loss)5,439  (13)5,426 
Amounts reclassified from accumulated other comprehensive (loss) income 51 2,032 2,083 
Net current-period other comprehensive income5,439 51 2,019 7,509 
Balance at September 30, 2020$(99,655)$(4,513)$(17,753)$(121,921)


Other Comprehensive (Loss) Income
Details of other comprehensive (loss) income are as follows:
Three Months Ended September 30,
20212020
Pre-Tax AmountTax ExpenseNet AmountPre-Tax AmountTax Expense (Benefit)Net Amount
Foreign currency translation adjustments$(7,182)$6 $(7,188)$5,554 $115 $5,439 
Post-employment benefits:
Reclassification of net actuarial losses and prior service cost into other income, net and included in net periodic pension costs75 18 57 68 17 51 
Unrealized gain (loss) on cash flow hedge596 146 450 (17)(4)(13)
Reclassification of interest from cash flow hedge into interest expense2,585 635 1,950 2,690 658 2,032 
Other comprehensive (loss) income$(3,926)$805 $(4,731)$8,295 $786 $7,509 
Anti-dilutive Common Stock Equivalents
In the three month periods ended September 30, 2021 and September 30, 2020, stock options and stock appreciation rights related to 109 and 578 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.


14

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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 $3,571 and $1,133 in the three months ended September 30, 2021 and 2020, 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 Fluid Power & Flow Control segment to the Service Center Based Distribution segment, of $8,132 and $7,496, in the three months ended September 30, 2021 and 2020, respectively, have been eliminated in the Segment Financial Information tables below.
Three Months EndedService Center Based DistributionFluid Power & Flow ControlTotal
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 
September 30, 2020
Net sales$513,284 $234,523 $747,807 
Operating income for reportable segments49,901 25,861 75,762 
Assets used in business1,283,031 966,222 2,249,253 
Depreciation and amortization of property4,395 957 5,352 
Capital expenditures3,088 509 3,597 

A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:
Three Months Ended
September 30,
20212020
Operating income for reportable segments$99,458 $75,762 
Adjustment for:
Intangible amortization—Service Center Based Distribution
892 2,581 
Intangible amortization—Fluid Power & Flow Control
7,229 7,145 
Corporate and other expense, net
16,723 13,728 
Total operating income74,614 52,308 
Interest expense, net7,390 7,653 
Other income, net(312)(177)
Income before income taxes$67,536 $44,832 

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.


15

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

Other income, net consists of the following:
 Three Months Ended
September 30,
 20212020
Unrealized loss (gain) on assets held in rabbi trust for a non-qualified deferred compensation plan$91 $(819)
Foreign currency transactions (gain) loss(567)416 
Net other periodic post-employment benefits152 71 
Life insurance (income) expense, net(41)177