APPLIED INDUSTRIAL TECHNOLOGIES INC - Quarter Report: 2021 September (Form 10-Q)

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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


☐			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)

(216) 426-4000

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

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):

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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.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX

Page
No.

Part I:

FINANCIAL INFORMATION

Item 1:

Financial Statements

Condensed Statements of Consolidated Income - Three Months Ended September 30, 2021 and 2020

Condensed Statements of Consolidated Comprehensive Income - Three Months Ended September 30, 2021 and 2020

Condensed Consolidated Balance Sheets - September 30, 2021 and June 30, 2021

Condensed Statements of Consolidated Cash Flows - Three Months Ended September 30, 2021 and 2020

Condensed Statements of Shareholders' Equity - Three Months Ended September 30, 2021 and 2020

Notes to Condensed Consolidated Financial Statements

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 5:

Item 6:

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,
	2021		2020
Net sales	$	891,681	$	747,807
Cost of sales	636,341		532,026
Gross profit	255,340		215,781
Selling, distribution and administrative expense, including depreciation	180,726		163,473

Operating income	74,614		52,308
Interest expense, net	7,390		7,653
Other income, net	(312)		(177)
Income before income taxes	67,536		44,832
Income tax expense	14,567		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 computation	38,502		38,722
Dilutive effect of potential common shares	582		366
Weighted average common shares outstanding for diluted computation	39,084		39,088

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

(Unaudited)

(In thousands)


	Three Months Ended
	September 30,
	2021		2020
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 costs	75		68


Unrealized gain (loss) on cash flow hedge	596		(17)
Reclassification of interest from cash flow hedge into interest expense	2,585		2,690
Total other comprehensive (loss) income, before tax	(3,926)		8,295
Income tax expense related to items of other comprehensive (loss) income	805		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.

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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, net	530,824		516,322
Inventories	377,978		362,547
Other current assets	54,452		59,961
Total current assets	1,210,567		1,196,575
Property, less accumulated depreciation of $208,991 and $204,326	113,813		115,589
Operating lease assets, net	94,476		87,111
Identifiable intangibles, net	274,410		279,628
Goodwill	562,791		560,077
Other assets	47,123		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 debt	88,401		43,525
Compensation and related benefits	65,509		77,657
Other current liabilities	101,930		98,356
Total current liabilities	466,827		427,700
Long-term debt	730,307		784,855
Other liabilities	129,476		126,706
TOTAL LIABILITIES	1,326,610		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 capital	179,574		177,014
Retained earnings	1,347,375		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’ EQUITY	976,570		932,546
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,303,180	$	2,271,807

See notes to condensed consolidated financial statements.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended
	September 30,
	2021		2020
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 property	5,427		5,352
Amortization of intangibles	8,121		9,726


Amortization of stock options and appreciation rights	1,907		693

Other share-based compensation expense	1,563		677
Changes in operating assets and liabilities, net of acquisitions	(20,404)		24,559
Other, net	(941)		6,051
Net Cash provided by Operating Activities	48,642		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 sales	48		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 Period	257,745		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, 2021	38,516	$	10,000	$	177,014	$	1,294,413	$	(455,789)	$	(93,092)	$	932,546
Net income						52,969						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 options	3			(116)				8				(108)
Performance share awards	5			(222)				(73)				(295)
Restricted stock units	12			(572)				(120)				(692)
Compensation expense — stock appreciation rights and options				1,907								1,907
Other share-based compensation expense				1,563								1,563
Other	(2)					(7)		(45)				(52)
Balance at September 30, 2021	38,457	$	10,000	$	179,574	$	1,347,375	$	(462,556)	$	(97,823)	$	976,570


For the Period Ended September 30, 2020	Shares of Common Stock 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, 2020	38,710	$	10,000	$	176,492	$	1,200,570	$	(414,090)	$	(129,430)	$	843,542
Net income						34,784						34,784
Other comprehensive income										7,509		7,509
Cash dividends — $0.32 per share						(18)						(18)

Treasury shares issued for:
Exercise of stock appreciation rights and options	13			(277)				12				(265)
Performance share awards	22			(985)				(20)				(1,005)
Restricted stock units	15			(593)				96				(497)
Compensation expense — stock appreciation rights and options				693								693
Other share-based compensation expense				677								677
Other						15		(29)				(14)
Balance at September 30, 2020	38,760	$	10,000	$	176,007	$	1,235,351	$	(414,031)	$	(121,921)	$	885,406

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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,
	2021						2020
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Geographic Areas:
United States	$	479,164	$	285,044	$	764,208	$	415,242	$	228,815	$	644,057
Canada	74,566		—		74,566		56,896		—		56,896
Other countries	47,141		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,
	2021						2020
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
General Industry	34.6	%	38.9	%	35.9	%	36.0	%	39.4	%	37.0	%
Industrial Machinery	10.3	%	29.0	%	16.4	%	9.4	%	26.7	%	14.9	%
Metals	11.0	%	7.4	%	9.9	%	10.2	%	7.0	%	9.2	%
Food	12.5	%	2.5	%	9.3	%	14.1	%	3.0	%	10.7	%
Forest Products	10.4	%	2.5	%	7.8	%	10.8	%	2.9	%	8.3	%
Chem/Petrochem	3.4	%	13.8	%	6.8	%	3.5	%	13.3	%	6.6	%
Cement & Aggregate	8.5	%	1.1	%	6.1	%	7.7	%	1.1	%	5.6	%
Oil & Gas	5.2	%	1.2	%	3.9	%	3.6	%	1.2	%	2.8	%
Transportation	4.1	%	3.6	%	3.9	%	4.7	%	5.4	%	4.9	%
Total	100.0	%	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,
	2021						2020
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Power Transmission	37.7	%	10.1	%	28.7	%	37.7	%	7.6	%	28.3	%
Fluid Power	12.7	%	37.6	%	20.8	%	13.1	%	39.1	%	21.3	%
General Maintenance; Hose Products	20.6	%	18.8	%	20.0	%	20.2	%	13.8	%	18.1	%
Bearings, Linear & Seals	29.0	%	0.4	%	19.7	%	29.0	%	0.4	%	20.0	%
Specialty Flow Control	—	%	33.1	%	10.8	%	—	%	39.1	%	12.3	%
Total	100	%	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, 2021		June 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.

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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 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 Distribution		Fluid Power & Flow Control		Total
Balance at June 30, 2020	$	208,570	$	332,024	$	540,594
Goodwill acquired during the year	—		15,757		15,757
Other, primarily currency translation	3,726		—		3,726
Balance at June 30, 2021	212,296		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

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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 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, 2021	Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	354,332	$	149,454	$	204,878
Trade names	105,621		39,349		66,272
Vendor relationships	11,414		10,018		1,396
Other	2,321		457		1,864
Total Identifiable Intangibles	$	473,688	$	199,278	$	274,410

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts) (Unaudited)


June 30, 2021	Amount		Accumulated Amortization		Net Book Value
Finite-Lived Identifiable Intangibles:
Customer relationships	$	353,028	$	143,862	$	209,166
Trade names	104,780		37,626		67,154
Vendor relationships	11,469		9,859		1,610
Other	2,070		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 Allocation		Weighted-Average life
Customer relationships	$	1,884	20.0
Trade names	879		15.0
Other	251		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, 2021		June 30, 2021
Term Loan	$	540,500	$	550,250
Trade receivable securitization facility	188,300		188,300
Series C notes	40,000		40,000
Series D notes	25,000		25,000
Series E notes	25,000		25,000
Other	786		846
Total debt	$	819,586	$	829,396
Less: unamortized debt issuance costs	878		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.

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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

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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 benefits		Cash flow hedge		Total 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)

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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 benefits		Cash flow hedge		Total 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 income	5,439		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,
	2021						2020
	Pre-Tax Amount		Tax Expense		Net Amount		Pre-Tax Amount		Tax 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 costs	75		18		57		68		17		51
Unrealized gain (loss) on cash flow hedge	596		146		450		(17)		(4)		(13)
Reclassification of interest from cash flow hedge into interest expense	2,585		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.

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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 Ended	Service Center Based Distribution		Fluid Power & Flow Control		Total
September 30, 2021
Net sales	$	600,871	$	290,810	$	891,681
Operating income for reportable segments	64,653		34,805		99,458
Assets used in business	1,349,654		953,526		2,303,180
Depreciation and amortization of property	4,379		1,048		5,427
Capital expenditures	3,097		524		3,621

September 30, 2020
Net sales	$	513,284	$	234,523	$	747,807
Operating income for reportable segments	49,901		25,861		75,762
Assets used in business	1,283,031		966,222		2,249,253
Depreciation and amortization of property	4,395		957		5,352
Capital expenditures	3,088		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,
	2021		2020
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 income	74,614		52,308
Interest expense, net	7,390		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.

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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,
	2021		2020
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 benefits	152		71
Life insurance (income) expense, net	(41)		177
Other, net	53		(22)
Total other income, net	$	(312)	$	(177)

11. SUBSEQUENT EVENTS

We have evaluated events and transactions occurring subsequent to September 30, 2021 through the date the financial statements were issued.

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

With more than 5,900 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 2022, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from 570 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, 2021 increased $143.9 million or 19.2% compared to the prior year quarter, with acquisitions increasing sales by $15.4 million or 2.1% and favorable foreign currency translation of $6.0 million increasing sales by 0.8%. Operating margin was 8.4% of sales for the quarter ended September 30, 2021 compared to 7.0% of sales for the same quarter in the prior year. Net income of $53.0 million increased 52.3% compared to the prior year quarter. The current ratio was 2.6 to 1 at September 30, 2021 and 2.8 to 1 at June 30, 2021.

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) index has decreased while the IP index has increased since June 2021. The MCU for September 2021 was 75.2, which is down from the June 2021 revised reading of 75.6. The ISM PMI registered 61.1 in September, up from the June 2021 reading of 60.6. The indices for the months during the current quarter, along with the indices for the prior fiscal year end, were as follows:


	Index Reading
Month	MCU	PMI	IP
September 2021	75.2	61.1	98.7
August 2021	76.2	59.9	99.4
July 2021	76.3	59.5	99.8
June 2021	75.6	60.6	98.1

The number of Company employees was 5,998 at September 30, 2021, 5,976 at June 30, 2021, and 6,141 at September 30, 2020. The number of operating facilities totaled 570 at September 30, 2021, 568 at June 30, 2021 and 583 at September 30, 2020.

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Results of Operations

Three Months Ended September 30, 2021 and 2020

The following table is included to aid in review of Applied's condensed statements of consolidated income.


	Three Months Ended September 30,				Change in $'s Versus Prior Period - % Decrease
	As a Percent of Net Sales
	2021		2020
Net sales	100.0	%	100.0	%	19.2	%
Gross profit	28.6	%	28.9	%	18.3	%
Selling, distribution & administrative expense	20.3	%	21.9	%	10.6	%
Operating income	8.4	%	7.0	%	42.6	%
Net income	5.9	%	4.7	%	52.3	%

During the quarter ended September 30, 2021, sales increased $143.9 million or 19.2% compared to the prior year quarter, with sales from acquisitions adding $15.4 million or 2.1% and favorable foreign currency translation accounting for an increase of $6.0 million or 0.8%. There were 64 selling days in both the quarters ended September 30, 2021 and September 30, 2020. Excluding the impact of businesses acquired and foreign currency translation, sales were up $122.5 million or 16.3% during the quarter, due to increased demand across key end markets.

The following table shows changes in sales by reportable segment.


Sales by Reportable Segment	Three Months Ended September 30,				Sales Increase		Amount of change due to
	Three Months Ended September 30,								Foreign Currency		Organic Change
	2021		2020				Acquisitions		Foreign Currency		Organic Change
Service Center Based Distribution	$	600.9	$	513.3	$	87.6	$	—	$	6.0	$	81.6
Fluid Power & Flow Control	290.8		234.5		56.3		15.4		—		40.9
Total	$	891.7	$	747.8	$	143.9	$	15.4	$	6.0	$	122.5

Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $87.6 million or 17.1%. Favorable foreign currency translation increased sales by $6.0 million or 1.2%. Excluding the impact of foreign currency translation, sales increased $81.6 million or 15.9%, driven by an increase from operations due to an ongoing end-market recovery, as well as internal sales process initiatives, partially offset by industry-wide supply chain constraints.

Sales from our Fluid Power & Flow Control segment increased $56.3 million or 24.0%. Acquisitions within this segment increased sales by $15.4 million or 6.6%. Excluding the impact of businesses acquired, sales increased $40.9 million or 17.4%, driven by an increase from operations due to strong demand within the technology end market, as well as a ongoing recovery across off-highway mobile, life sciences, chemical, and industrial industries, partially offset by industry-wide supply chain constraints.

The following table shows changes in sales by geographic area. Other countries includes Mexico, Australia, New Zealand, and Singapore.


	Three Months Ended September 30,				Sales Increase		Amount of change due to
	Three Months Ended September 30,								Foreign Currency		Organic Change
Sales by Geographic Area	2021		2020				Acquisitions		Foreign Currency		Organic Change
United States	$	764.2	$	644.1	$	120.1	$	15.4	$	—	$	104.7
Canada	74.6		56.9		17.7		—		3.3		14.4
Other countries	52.9		46.8		6.1		—		2.7		3.4
Total	$	891.7	$	747.8	$	143.9	$	15.4	$	6.0	$	122.5

Sales in our U.S. operations were up $120.1 million or 18.7%, as acquisitions added $15.4 million or 2.4%. Excluding the impact of businesses acquired, U.S. sales were up $104.7 million or 16.3%. Sales from our Canadian operations increased

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

$17.7 million or 31.1%. Favorable foreign currency translation increased Canadian sales by $3.3 million or 5.9%. Excluding the impact of foreign currency translation, Canadian sales were up $14.4 million or 25.2%. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, increased $6.1 million or 12.9% from the prior year. Favorable foreign currency translation increased other country sales by $2.7 million or 5.8%. Excluding the impact of currency translation, other country sales were up $3.4 million, or 7.1% during the quarter.

Our gross profit margin was 28.6% in the quarter ended September 30, 2021 compared to 28.9% in the prior period. The gross profit margin for the current quarter was negatively impacted by 25 basis points due to a $2.4 million increase in LIFO expense.

The following table shows the changes in selling, distribution and administrative expense (SD&A).


	Three Months Ended September 30,				SD&A Increase		Amount of change due to
	Three Months Ended September 30,								Foreign Currency		Organic Change
	2021		2020				Acquisitions		Foreign Currency		Organic Change
SD&A	$	180.7	$	163.5	$	17.2	$	4.5	$	1.6	$	11.1

SD&A consists of associate compensation, benefits and other expenses associated with selling, purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products, as well as costs associated with a variety of administrative functions such as human resources, information technology, treasury, accounting, insurance, legal, and facility related expenses. SD&A was 20.3% of sales in the quarter ended September 30, 2021 compared to 21.9% in the prior year quarter. SD&A increased $17.2 million or 10.6% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter ended September 30, 2021 by $1.6 million or 1.0% compared to the prior year quarter. SD&A from businesses acquired added $4.5 million or 2.8% of SD&A expenses, including $0.4 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased $11.1 million or 6.8% during the quarter ended September 30, 2021 compared to the prior year quarter. Excluding the impact of acquisitions, total compensation increased $17.9 million during the quarter ended September 30, 2021, primarily due to cost reduction actions taken by the Company in the prior year in response to the COVID-19 pandemic, including headcount reductions, temporary furloughs and pay reductions, and suspension of the 401(k) company match. All of the temporary cost reductions were reinstated in the second half of fiscal 2021. The increase was offset by a $4.3 million decrease in bad debt expense during the quarter ended September 30, 2021 due to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in the U.S. and Mexican operations of the Service Center Based Distribution segment. All other expenses within SD&A were down $2.5 million.

Operating income increased $22.3 million or 42.6%, and as a percent of sales increased to 8.4% from 7.0% during the prior year quarter.

Operating income, as a percentage of sales for the Service Center Based Distribution segment increased to 10.8% in the current year quarter from 9.7% in the prior year quarter. Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 12.0% in the current year quarter from 11.0% in the prior year quarter.

Other income, net was income of $0.3 million for the current year quarter, which included favorable foreign currency transaction gains of $0.6 million, offset by net other periodic benefit costs of $0.2 million and $0.1 million of unrealized losses on investments held by non-qualified deferred compensation trusts. During the prior year quarter, other income, net was income of $0.2 million, which included unrealized gains on investments held by non-qualified deferred compensation trusts of $0.8 million, offset by net unfavorable foreign currency transaction losses of $0.4 million and $0.2 million of expense from other items.

The effective income tax rate was 21.6% for the quarter ended September 30, 2021 compared to 22.4% for the quarter ended September 30, 2020. The decrease in the effective tax rate over the prior year is primarily due to discrete adjustments during the quarter ended September 30, 2021. We expect our full year tax rate for fiscal 2022 to be in the 22.0% to 23.0% range.

As a result of the factors addressed above, net income for the quarter ended September 30, 2021 increased $18.2 million or 52.3% compared to the prior year quarter. Net income was $1.36 per share for the quarter ended September 30, 2021 compared to $0.89 per share in the prior year quarter, an increase of 52.8%.

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At September 30, 2021, we had total debt obligations outstanding of $819.6 million compared to $829.4 million at June 30, 2021. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations will be sufficient to finance normal working capital needs in each of the countries in which we operate, payment of dividends, acquisitions, investments in properties, facilities and equipment, debt service, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company's credit standing and financial strength.

The Company's working capital at September 30, 2021 was $743.7 million, compared to $768.9 million at June 30, 2021. The current ratio was 2.6 to 1 at September 30, 2021 and 2.8 to 1 at June 30, 2021.

Net Cash Flows

The following table is included to aid in review of Applied's condensed statements of consolidated cash flows; all amounts are in thousands.


	Three Months Ended September 30,
Net Cash Provided by (Used in):	2021		2020
Operating Activities	$	48,642	$	81,842
Investing Activities	(25,502)		(3,404)
Financing Activities	(31,980)		(77,183)
Exchange Rate Effect	(1,592)		1,254
(Decrease) Increase in Cash and Cash Equivalents	$	(10,432)	$	2,509

The decrease in cash provided by operating activities during the three months ended September 30, 2021 is driven by changes in working capital for the period offset by increased operating results. Changes in cash flows between periods related to working capital were driven by:


Accounts receivable	$	(16,294)
Inventory	$	(45,237)
Accounts payable	$	10,710

Net cash used in investing activities during the three months ended September 30, 2021 decreased from the prior period primarily due to $14.8 million used for payments for loans on company-owned life insurance as well as $7.1 million used for the acquisition of R.R. Floody in the current year period.

Net cash used in financing activities during the three months ended September 30, 2021 decreased from the prior period primarily due to a change in net debt activity, as there was $9.8 million of debt payments in the current year period compared to $62.5 million of debt payments in the prior year period.

Share Repurchases

The Board of Directors has authorized the repurchase of shares of the Company's common stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. We acquired 76,658 shares of treasury stock on the open market in the three months ended September 30, 2021 for $6.5 million. During the three months ended September 30, 2020, the Company did not acquire any shares of treasury stock on the open market. At September 30, 2021, we had authorization to repurchase 387,960 shares.

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Borrowing Arrangements

A summary of long-term debt, including the current portion, follows (amounts in thousands):


	September 30, 2021		June 30, 2021
Unsecured credit facility	$	540,500	$	550,250
Trade receivable securitization facility	188,300		188,300
Series C notes	40,000		40,000
Series D notes	25,000		25,000
Series E notes	25,000		25,000
Other	786		846
Total debt	$	819,586	$	829,396
Less: unamortized debt issuance costs	878		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 $780.0 million unsecured term loan and a $250.0 million 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 $0.2 million to secure certain insurance obligations, totaled $249.8 million 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.

Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4.8 million and $4.5 million 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 $250.0 million 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 $250.0 million 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.

Other Long-Term Borrowings

In 2014, the Company assumed $2.4 million 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.

The Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $420.0 million of the Company’s U.S. dollar-denominated unsecured variable rate debt. For more information, see note 6, Derivatives, to the consolidated financial statements, included in Item 1 under the caption “Notes to Condensed Consolidated Financial Statements.”

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At September 30, 2021, the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). At September 30, 2021, the Company's net indebtedness was less than 2.5 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at September 30, 2021.

Accounts Receivable Analysis

The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable:


	September 30,			June 30,
	2021			2021
Accounts receivable, gross	$	547,296		$	532,777
Allowance for doubtful accounts	16,472			16,455
Accounts receivable, net	$	530,824		$	516,322
Allowance for doubtful accounts, % of gross receivables	3.0		%	3.1		%

	Three Months Ended September 30,
	2021			2020
Provision for losses on accounts receivable	$	798		$	5,098
Provision as a % of net sales	0.09		%	0.68		%

Accounts receivable are reported at net realizable value and consist of trade receivables from customers. Management monitors accounts receivable by reviewing Days Sales Outstanding (DSO) and the aging of receivables for each of the Company's locations.

On a consolidated basis, DSO was 53.6 at September 30, 2021 compared to 51.9 at June 30, 2021.

As of September 30, 2021, approximately 3.6% of our accounts receivable balances are more than 90 days past due, compared to 3.0% at June 30, 2021. On an overall basis, our provision for losses from uncollected receivables represents 0.09% of our sales in the three months ended September 30, 2021, compared to 0.68% of sales for the three months ended September 30, 2020. The decrease primarily relates to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in the U.S. and Mexican operations of the Service Center Based Distribution segment. Historically, this percentage is around 0.10% to 0.15%. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels.

Inventory Analysis

Inventories are valued using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. Management uses an inventory turnover ratio to monitor and evaluate inventory. Management calculates this ratio on an annual as well as a quarterly basis, and believes that using average costs to determine the inventory turnover ratio instead of LIFO costs provides a more useful analysis. The annualized inventory turnover based on average costs for the period ended September 30, 2021 was 4.5 versus 4.3 for the period ended June 30, 2021. We believe our inventory turnover ratio at the end of the year will be similar or slightly better than the ratio at September 30, 2021.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Cautionary Statement Under Private Securities Litigation Reform Act

Management’s Discussion and Analysis contains statements that are forward-looking based on management’s current expectations about the future. Forward-looking statements are often identified by qualifiers, such as “guidance”, “expect”, “believe”, “plan”, “intend”, “will”, “should”, “could”, “would”, “anticipate”, “estimate”, “forecast”, “may”, "optimistic" and derivative or similar words or expressions. Similarly, descriptions of objectives, strategies, plans, or goals are also forward-looking statements. These statements may discuss, among other things, expected growth, future sales, future cash flows, future capital expenditures, future performance, and the anticipation and expectations of the Company and its management as to future occurrences and trends. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.

Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors, many of which are outside the Company’s control. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of those statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company assumes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise, except as may be required by law.

Important risk factors include, but are not limited to, the following: risks relating to the operations levels of our customers and the economic factors that affect them; risks relating to the effects of the COVID-19 pandemic; changes in the prices for products and services relative to the cost of providing them; reduction in supplier inventory purchase incentives; loss of key supplier authorizations, lack of product availability, changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems and risks relating to their proper functioning, the security of those systems, and the data stored in or transmitted through them; the impact of economic conditions on the collectability of trade receivables; reduced demand for our products in targeted markets due to reasons including consolidation in customer industries; our ability to retain and attract qualified sales and customer service personnel and other skilled executives, managers and professionals; our ability to identify and complete acquisitions, integrate them effectively, and realize their anticipated benefits; the variability, timing and nature of new business opportunities including acquisitions, alliances, customer relationships, and supplier authorizations; the incurrence of debt and contingent liabilities in connection with acquisitions; our ability to access capital markets as needed on reasonable terms; disruption of operations at our headquarters or distribution centers; risks and uncertainties associated with our foreign operations, including volatile economic conditions, political instability, cultural and legal differences, and currency exchange fluctuations; the potential for goodwill and intangible asset impairment; changes in

accounting policies and practices; our ability to maintain effective internal control over financial reporting; organizational changes within the Company; risks related to legal proceedings to which we are a party; potentially adverse government regulation, legislation, or policies, both enacted and under consideration, including with respect to federal tax policy, international trade, data privacy and security, and government contracting; and the occurrence of extraordinary events (including prolonged labor disputes, power outages, telecommunication outages, terrorist acts, public health emergency, earthquakes, extreme weather events, other natural disasters, fires, floods, and accidents). Other factors and unanticipated events could also adversely affect our business, financial condition or results of operations. Risks can also change over time. Further, the disclosure of a risk should not be interpreted to imply that the risk has not already materialized.

We discuss certain of these matters and other risk factors more fully throughout this Form 10-Q as well as other of our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended June 30, 2021.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended June 30, 2021.

APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company's management, under the supervision and with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have not been any changes in internal control over financial reporting during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company is a party to pending legal proceedings with respect to various product liability, commercial, personal injury, employment, and other matters. Although it is not possible to predict the outcome of these proceedings or the range of reasonably possible loss, the Company does not expect, based on circumstances currently known, that the ultimate resolution of any of these proceedings will have, either individually or in the aggregate, a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of common stock in the quarter ended September 30, 2021 were as follows:


Period	(a) Total Number of Shares	(b) Average Price Paid per Share ($)	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2021 to July 31, 2021	510	$89.07	0	464,618
August 1, 2021 to August 31, 2021	0	$0.00	0	464,618
September 1, 2021 to September 30, 2021	76,658	$85.27	76,658	387,960
Total	77,168	$85.30	76,658	387,960

(1)During the quarter the Company purchased 510 shares in connection with the Deferred Compensation Plan.

(2)On October 24, 2016, the Board of Directors authorized the repurchase of up to 1.5 million shares of the Company's common stock, replacing the prior authorization. We publicly announced the new authorization on October 26, 2016. Purchases can be made in the open market or in privately negotiated transactions.

The authorization is in effect until all shares are purchased, or the Board revokes or amends the authorization.

ITEM 5. Other Information

Jason W. Vasquez, Vice President-Sales & Marketing, U.S. Service Centers, was elected an officer of the Company effective on September 1, 2021.

ITEM 6. Exhibits


Exhibit No.						Description
3.1						Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 25, 2005 (filed as Exhibit 3(a) to the Company’s Form 10-Q for the quarter ended December 31, 2005, SEC File No. 1-2299, and incorporated here by reference).

3.2						Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to the Company’s Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference).

4.1						Certificate of Merger of Bearings, Inc. (Ohio) (now named Applied Industrial Technologies, Inc.) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to the Company’s Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference).

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4.2						Amended and Restated Note Purchase and Private Shelf Agreement dated as of October 30, 2019, between Applied and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), and certain of its affiliates (filed as Exhibit 10.1 to the Company's Form 8-K filed November 5, 2019, SEC File No. 1-2299, and incorporated here by reference).

4.3						Amendment No. 1 to Amended and Restated Note Purchase and Private Shelf Agreement dated as of March 26, 2021 between Applied Industrial Technologies, Inc. and PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), and certain of its affiliates (filed as Exhibit 4.3 to Applied's Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.4						Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Amended and Restated Note Purchase and Private Shelf Agreement, between Applied Industrial Technologies, Inc. and PGIM, Inc. (filed as Exhibit 10.1 to the Company's Form 8-K filed July 2, 2014, SEC File No. 1-2299, and incorporated here by reference).

4.5						Credit Agreement dated as of January 31, 2018, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 10.1 to the Company's Form 8-K filed February 6, 2018, SEC File No. 1-2299, and incorporated here by reference).

4.6						First Amendment to Credit Agreement dated as of March 26, 2021, among Applied Industrial Technologies, Inc., Key Bank National Association as Agent, and various financial institutions (filed as Exhibit 4.6 to Applied's Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference) .

4.7						Receivables Financing Agreement dated as of August 31, 2018 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.1 to the Company's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference).

4.8						Amendment No. 1 to Receivables Financing Agreement and Reaffirmation of Performance Guaranty dated as of March 26, 2021 among AIT Receivables LLC, as borrower, PNC Bank, National Association, as administrative agent, Applied Industrial Technologies, Inc., as initial servicer, PNC Capital Markets LLC, as structuring agent and the additional persons from time to time party thereto, as lenders (filed as Exhibit 10.2 to Applied's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.9						Purchase and Sale Agreement dated as of August 31, 2018 among various entities listed on Schedule I thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to Applied's Form 8-K filed September 6, 2018, SEC File No. 1-2299, and incorporated here by reference).

4.10						Amendment No. 1 to Purchase and Sale Agreement dated as of November 19, 2018 among Applied Industrial Technologies, Inc. and various of its affiliates, as originators, Applied Industrial Technologies, Inc., as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 4.10 to Applied's Form 10-Q for the quarter ended March 31, 2021, SEC File No. 1-2299, and incorporated here by reference).

4.11						Amendment No. 2 to Purchase and Sale Agreement dated as of March 26, 2021, among various entities listed on Schedule 1 thereto (including Applied Industrial Technologies, Inc.), as originators, Applied Industrial Technologies, Inc, as servicer, and AIT Receivables LLC, as buyer (filed as Exhibit 10.2 to Applied's Form 8-K filed March 29, 2021, SEC File No. 1-2299, and incorporated here by reference).

10.1						Schedule of executive officer participants in the Key Executive Restoration Plan, as amended and restated.

31						Rule 13a-14(a)/15d-14(a) certifications

32						Section 1350 certifications

101						The following financial information from Applied Industrial Technologies Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Statements of Consolidated Income, (ii) the Condensed Statements of Consolidated Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Statements of Consolidated Cash Flows, (v) the Condensed Statements of Shareholders' Equity, and (vi) the Notes to Condensed Consolidated Financial Statements.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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The Company will furnish a copy of any exhibit described above and not contained herein upon payment of a specified reasonable fee which shall be limited to the Company’s reasonable expenses in furnishing the exhibit.

Certain instruments with respect to long-term debt have not been filed as exhibits because the total amount of securities authorized under any one of the instruments does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


		APPLIED INDUSTRIAL TECHNOLOGIES, INC.
		(Company)

Date:	October 28, 2021	By: /s/ Neil A. Schrimsher
		Neil A. Schrimsher
		President & Chief Executive Officer


Date:	October 28, 2021	By: /s/ David K. Wells
		David K. Wells
		Vice President-Chief Financial Officer & Treasurer