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APPLIED INDUSTRIAL TECHNOLOGIES INC - Quarter Report: 2023 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, 2023

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)
(216) 426-4000
Registrant's telephone number, including area code


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒  No  ☐ 

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

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

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

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

There were 38,760,009 (no par value) shares of common stock outstanding on October 20, 2023.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page
No.
Part I:
Item 1:
Item 2:
Item 3:
Item 4:
Part II:
Item 1:
Item 2:
Item 6:
1
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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,
 20232022
Net sales$1,095,188 $1,062,405 
Cost of sales770,106 755,622 
Gross profit325,082 306,783 
Selling, distribution and administrative expense, including depreciation
204,402 200,251 
Operating income120,680 106,532 
Interest expense, net1,320 6,480 
Other expense, net431 1,008 
Income before income taxes118,929 99,044 
Income tax expense25,103 22,164 
Net income$93,826 $76,880 
Net income per share - basic$2.42 $2.00 
Net income per share - diluted$2.39 $1.97 
Weighted average common shares outstanding for basic computation38,700 38,526 
Dilutive effect of potential common shares610 585 
Weighted average common shares outstanding for diluted computation39,310 39,111 
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,
20232022
Net income per the condensed statements of consolidated income$93,826 $76,880 
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustments(6,270)(11,437)
Post-employment benefits:
Reclassification of net actuarial (gains) losses and prior service cost into other expense, net and included in net periodic pension costs(30)8 
  Unrealized gain on cash flow hedge3,634 12,310 
  Reclassification of interest from cash flow hedge into interest expense, net(4,638)796 
Total other comprehensive (loss) income, before tax(7,304)1,677 
Income tax expense related to items of other comprehensive (loss) income(230)3,312 
Other comprehensive loss, net of tax(7,074)(1,635)
Comprehensive income, net of tax$86,752 $75,245 
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,
2023		June 30,
2023
ASSETS
Current assets
Cash and cash equivalents$360,415 $344,036 
Accounts receivable, net694,922 708,395 
Inventories507,641 501,184 
Other current assets81,287 93,192 
Total current assets1,644,265 1,646,807 
Property, less accumulated depreciation of $233,340 and $229,041
113,704 115,041 
Operating lease assets, net102,144 100,677 
Identifiable intangibles, net237,102 235,549 
Goodwill586,478 578,418 
Other assets66,818 66,840 
TOTAL ASSETS$2,750,511 $2,743,332 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable$259,790 $301,685 
Current portion of long-term debt25,171 25,170 
Compensation and related benefits62,448 98,740 
Other current liabilities119,149 114,749 
Total current liabilities466,558 540,344 
Long-term debt596,883 596,926 
Other liabilities150,954 147,625 
TOTAL LIABILITIES1,214,395 1,284,895 
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 capital185,986 188,646 
Retained earnings1,886,432 1,792,632 
Treasury shares—at cost (15,458 and 15,556 shares, respectively)
(483,932)(477,545)
Accumulated other comprehensive loss(62,370)(55,296)
TOTAL SHAREHOLDERS’ EQUITY1,536,116 1,458,437 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,750,511 $2,743,332 
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,
20232022
Cash Flows from Operating Activities
Net income$93,826 $76,880 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property5,717 5,481 
Amortization of intangibles7,393 7,705 
Provision for losses on accounts receivable 867 3,994 
Amortization of stock appreciation rights and options844 1,424 
Other share-based compensation expense1,976 1,939 
Changes in operating assets and liabilities, net of acquisitions(45,245)(72,071)
Other, net831 591 
Net Cash provided by Operating Activities66,209 25,943 
Cash Flows from Investing Activities
Net cash paid for acquisitions, net of cash acquired(21,440)— 
Capital expenditures(4,340)(5,554)
Proceeds from property sales123 56 
Net Cash used in Investing Activities(25,657)(5,498)
Cash Flows from Financing Activities
Long-term debt repayments(62)(40,061)
Purchases of treasury shares— (716)
Interest rate swap settlement receipts3,558 294 
Dividends paid(13,551)(13,100)
Acquisition holdback payments(562)(660)
Exercise of stock appreciation rights and options— 126 
Taxes paid for shares withheld for equity awards(11,866)(1,401)
Net Cash used in Financing Activities(22,483)(55,518)
Effect of Exchange Rate Changes on Cash(1,690)(1,826)
Increase (decrease) in Cash and Cash Equivalents16,379 (36,899)
Cash and Cash Equivalents at Beginning of Period344,036 184,474 
Cash and Cash Equivalents at End of Period$360,415 $147,575 
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, 2023		Shares of
Common
Stock
Outstanding		Common
Stock		Additional
Paid-In
Capital
Retained
Earnings		Treasury
Shares-
at Cost		Accumulated
Other
Comprehensive
Loss		Total
Shareholders'
Equity
Balance at June 30, 202338,657 $10,000 $188,646 $1,792,632 $(477,545)$(55,296)$1,458,437 
Net income93,826 93,826 
Other comprehensive loss(7,074)(7,074)
Cash dividends — $0.35 per share
(23)(23)
Treasury shares issued for:
Exercise of stock appreciation rights and options32 (1,681)(1,912)(3,593)
Performance share awards54 (3,072)(3,487)(6,559)
Restricted stock units13 (726)(910)(1,636)
Compensation expense — stock appreciation rights and options844 844 
Other share-based compensation expense1,976 1,976 
Other(1)(1)(3)(78)(82)
Balance at September 30, 202338,755 $10,000 $185,986 $1,886,432 $(483,932)$(62,370)$1,536,116 


For the Period Ended
September 30, 2022		Shares of Common Stock OutstandingCommon StockAdditional Paid-In CapitalRetained EarningsTreasury Shares-
at Cost		Accumulated Other Comprehensive LossTotal Shareholders' Equity
Balance at June 30, 202238,499 $10,000 $183,822 $1,499,676 $(471,848)$(72,295)$1,149,355 
Net income76,880 76,880 
Other comprehensive loss(1,635)(1,635)
Cash dividends — $0.34 per share
Purchases of common stock for treasury(8)(716)(716)
Treasury shares issued for:
Exercise of stock appreciation rights and options21 (860)(366)(1,226)
Performance share awards23 (1,290)(758)(2,048)
Restricted stock units33 (1,668)(902)(2,570)
Compensation expense — stock appreciation rights and options1,424 1,424 
Other share-based compensation expense1,939 1,939 
Other3 (19)(5)61 37 
Balance at September 30, 202238,571 $10,000 $183,348 $1,576,551 $(474,529)$(73,930)$1,221,440 
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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, 2023, and the results of its operations and its cash flows for the three month periods ended September 30, 2023 and 2022, have been included. The condensed consolidated balance sheet as of June 30, 2023 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, 2023.
Operating results for the three month period ended September 30, 2023 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending June 30, 2024.
Inventory
The Company uses the LIFO method of valuing U.S. inventories. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory determination. LIFO expense of $4,591 and $9,060 in the three months ended September 30, 2023 and 2022, respectively, is recorded in cost of sales in the condensed statements of consolidated income.
Recently Issued Accounting Guidance
In July 2023, the SEC issued a final rule to require registrants to provide enhanced and standardized disclosures regarding cybersecurity risk management, strategy, governance, and incidents. The final rule establishes new requirements related to material cybersecurity incidents, which would need to be disclosed on Form 8-K within four business days of their being deemed material, and annual disclosures in Form 10-K pertaining to (1) cybersecurity risk management and strategy, (2) management's role in assessing and managing material risks from cybersecurity threats, and (3) the board of directors' oversight of cybersecurity risks. The Form 10-K disclosures will be due beginning with annual reports for fiscal years ending on or after December 15, 2023, and the Form 8-K disclosures will be due beginning December 18, 2023. The Company will comply with the disclosure requirements set forth in the final rule as each becomes effective.
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, 2023 and 2022. Other countries consist of Mexico, Australia, New Zealand, and Singapore.
Three Months Ended September 30,
20232022
Service Center Based DistributionEngineered SolutionsTotalService Center Based DistributionEngineered SolutionsTotal
Geographic Areas:
United States$617,262 $342,096 $959,358 $584,880 $336,609 $921,489 
Canada75,300 — 75,300 79,770 — 79,770 
Other countries53,971 6,559 60,530 53,338 7,808 61,146 
Total$746,533 $348,655 $1,095,188 $717,988 $344,417 $1,062,405 



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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, 2023 and 2022:
Three Months Ended September 30,
 20232022
Service Center Based DistributionEngineered SolutionsTotalService Center Based DistributionEngineered SolutionsTotal
General Industry34.7 %37.4 %35.5 %34.4 %39.9 %36.1 %
Industrial Machinery8.9 %25.2 %14.1 %9.9 %27.1 %15.5 %
Food13.7 %3.0 %10.3 %12.8 %2.8 %9.6 %
Metals10.7 %8.1 %9.9 %11.0 %7.9 %10.0 %
Forest Products12.5 %3.8 %9.7 %11.4 %2.6 %8.6 %
Chem/Petrochem2.7 %16.1 %7.0 %3.0 %13.8 %6.5 %
Cement & Aggregate7.1 %1.2 %5.2 %7.8 %1.5 %5.7 %
Oil & Gas6.0 %1.6 %4.6 %5.7 %1.3 %4.3 %
Transportation3.7 %3.6 %3.7 %4.0 %3.1 %3.7 %
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, 2023 and 2022:
Three Months Ended September 30,
 20232022
Service Center Based DistributionEngineered SolutionsTotalService Center Based DistributionEngineered SolutionsTotal
Power Transmission37.6 %10.1 %28.9 %37.4 %10.1 %28.6 %
Fluid Power14.1 %38.7 %21.9 %12.9 %35.5 %20.2 %
General Maintenance, Hose Products & Other21.3 %16.3 %19.8 %21.6 %15.3 %19.5 %
Bearings, Linear & Seals27.0 %0.5 %18.5 %28.1 %0.3 %19.1 %
Specialty Flow Control— %34.4 %10.9 %— %38.8 %12.6 %
Total100.0 %100.0 %100.0 %100.0 %100.0 %100.0 %
Contract Assets
The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer.
Activity related to contract assets, which are included in other current assets on the condensed consolidated balance sheet, is as follows:
September 30, 2023June 30, 2023$ Change% Change
Contract assets$13,085 $17,911 $(4,826)(26.9)%
The difference between the opening and closing balances of the Company's contract assets primarily results from the timing difference between the Company's performance and when the customer is billed.

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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 2024 Acquisitions
On September 1, 2023, the Company acquired substantially all of the net assets of Bearing Distributors, Inc. (BDI), a Columbia, South Carolina based provider of bearings, power transmission, industrial motion, and related service and repair capabilities. BDI is included in the Service Center Based Distribution segment. The purchase price for the acquisition was $18,000, net tangible assets acquired were $4,327, and intangible assets including goodwill were $13,673 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes $1,800 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of September 30, 2023, and which will be paid on the first and second anniversaries of the acquisition date with interest at a fixed rate of 3.0% 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 August 1, 2023, the Company acquired substantially all of the net assets of Cangro Industries, Inc. (Cangro), a Farmingdale, New York based provider of bearings, power transmission, industrial motion, and related service and repair capabilities. Cangro is included in the Service Center Based Distribution segment. The purchase price for the acquisition was $6,219, net tangible assets acquired were $2,175, and intangible assets including goodwill were $4,044 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The purchase price includes $930 of acquisition holdback payments, which are included in other current liabilities and other liabilities on the condensed consolidated balance sheet as of September 30, 2023, and which will be paid on the first, second, and third 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.
Fiscal 2023 Acquisitions
On March 31, 2023, the Company acquired substantially all of the net assets of Advanced Motion Systems Inc. (AMS), a western New York based provider of automation products, services, and engineered solutions focused on a full range of machine vision, robotics, and motion control products and technologies. AMS is included in the Engineered Solutions segment. The purchase price for the acquisition was $10,118, net tangible assets acquired were $1,768, and intangible assets including goodwill were $8,350 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.
On November 1, 2022, the Company acquired substantially all of the net assets of Automation, Inc., a Minneapolis, Minnesota based provider of automation products, services, and engineered solutions focused on machine vision, collaborative and mobile robotics, motion control, intelligent sensors, pneumatics, and other related products and solutions. Automation, Inc. is included in the Engineered Solutions segment. The purchase price for the acquisition was $25,617, net tangible assets acquired were $3,639, and intangible assets including goodwill were $21,978 based upon preliminary estimated fair values at the acquisition date, which are subject to adjustment. The Company funded this acquisition using available cash. The acquisition price and the results of operations for the acquired entity are not material in relation to the Company's consolidated financial statements.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
4.    GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill for both the Service Center Based Distribution segment and the Engineered Solutions segment for the fiscal year ended June 30, 2023 and the three month period ended September 30, 2023 are as follows:
Service Center Based DistributionEngineered SolutionsTotal
Balance at June 30, 2022$211,010 $352,195 $563,205 
Goodwill acquired during the year— 14,517 14,517 
Other, primarily currency translation221 475 696 
Balance at June 30, 2023211,231 367,187 578,418 
Goodwill acquired/adjusted during the period7,486 1,249 8,735 
Other, primarily currency translation(675)— (675)
Balance at September 30, 2023$218,042 $368,436 $586,478 
During the first quarter of fiscal 2024, the Company recorded an adjustment to the preliminary estimated fair value of
intangible assets related to the AMS acquisition. The fair value of the trade name was reduced by $1,249, with a
corresponding increase to goodwill of $1,249.
The Company has eight (8) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2023. The Company concluded that all of the reporting units' fair values exceeded their carrying amounts by at least 20% as of January 1, 2023.
At September 30, 2023 and June 30, 2023, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment and $167,605 related to the Engineered Solutions segment.
The Company’s identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:
September 30, 2023AmountAccumulated
Amortization		Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships$371,613 $193,915 $177,698 
Trade names91,006 33,764 57,242 
Vendor relationships1,931 1,926 5 
Other3,446 1,289 2,157 
Total Identifiable Intangibles$467,996 $230,894 $237,102 

June 30, 2023AmountAccumulated
Amortization		Net Book
Value
Finite-Lived Identifiable Intangibles:
Customer relationships$364,572 $188,804 $175,768 
Trade names108,301 50,823 57,478 
Vendor relationships9,861 9,744 117 
Other3,347 1,161 2,186 
Total Identifiable Intangibles$486,081 $250,532 $235,549 
Fully amortized amounts are written off.

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
During the three month period ended September 30, 2023, 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$7,471 20.0
Trade names2,660 15.0
Other100 5.0
Total Identifiable Intangibles$10,231 18.5
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, 2023) for the next five years is as follows: $20,500 for the remainder of 2024, $25,900 for 2025, $24,100 for 2026, $22,400 for 2027, $20,700 for 2028 and $19,300 for 2029.
5.     DEBT
A summary of long-term debt, including the current portion, follows:
September 30, 2023June 30, 2023
Revolving credit facility$383,592 $383,592 
Trade receivable securitization facility188,300 188,300 
Series D notes25,000 25,000 
Series E notes25,000 25,000 
Other294 356 
Total debt$622,186 $622,248 
Less: unamortized debt issuance costs132 152 
$622,054 $622,096 
Revolving Credit Facility & Term Loan
In December 2021, the Company entered into a new revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. The revolving credit facility provides a $900,000 unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500,000. In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR. Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $200 to secure certain insurance obligations, totaled $516,208 at September 30, 2023 and June 30, 2023, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the revolving credit facility was 6.33% and 6.11% as of September 30, 2023 and June 30, 2023, respectively.
Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4,046 as of September 30, 2023 and June 30, 2023 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 drawn fees on the AR Securitization Facility to 0.98% per year. On August 4, 2023, the Company amended the AR Securitization Facility, extended the term to August 4, 2026, and reduced the drawn fees to 0.90% 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
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
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. In May 2023, the Company entered into an amendment to the AR Securitization Facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to SOFR. The interest rate on the AR Securitization Facility as of September 30, 2023 and June 30, 2023 was 6.32% and 6.16%, respectively.
Unsecured Shelf Facility
At September 30, 2023 and June 30, 2023, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $50,000. 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 D" notes have a remaining principal amount of $25,000, carry a fixed interest rate of 3.21%, and are due on October 31, 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 November 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 notional amount declines over time. The interest rate swap effectively converts a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and is accounting for this derivative as a cash flow hedge. During the quarter ended December 31, 2020, the Company completed a transaction to amend and extend the interest rate swap agreement which resulted in an extension of the maturity date by an additional three years and a decrease of the weighted average fixed pay rate from 2.61% to 1.63%. The 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. In May 2023, the Company entered into bilateral agreements with its swap counterparties to transition its interest rate swap agreements to SOFR, and further decreased the weighted average fixed pay rate to 1.58%. The Company made various Accounting Standards Codification Topic 848 elections related to changes in critical terms of the hedging relationship due to reference rate
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
reform to not result in a dedesignation of the heding relationship. As of May 31, 2023, the Company's interest rate swap agreement was indexed to SOFR.
The interest rate swap converted $384,000 of variable rate debt to a rate of 2.59% as of September 30, 2023 and June 30, 2023. The fair value (Level 2 in the fair value hierarchy) of the interest rate cash flow hedge was $26,979 and $27,044 as of September 30, 2023 and June 30, 2023, respectively, which is included in other current assets and other assets in the condensed consolidated balance sheet. Amounts reclassified from other comprehensive income, before tax, to interest expense, net totaled $(4,638) and $796 for the three months ended September 30, 2023 and 2022, respectively.
7.    FAIR VALUE MEASUREMENTS
Marketable securities measured at fair value at September 30, 2023 and June 30, 2023 totaled $18,732 and $18,637, respectively. The majority of these marketable securities are held in a rabbi trust for a non-qualified deferred compensation plan. The marketable securities are included in other assets on the accompanying condensed consolidated balance sheets and their fair values were determined using quoted market prices (Level 1 in the fair value hierarchy).
As of September 30, 2023 and June 30, 2023, the carrying values of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximated fair value (Level 2 in the fair value hierarchy).
The revolving credit facility and the AR Securitization Facility contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).
8.    SHAREHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
Changes in the accumulated other comprehensive loss are comprised of the following amounts, shown net of taxes:
Three Months Ended September 30, 2023
Foreign currency translation adjustment Post-employment benefitsCash flow hedgeTotal Accumulated other comprehensive (loss) income
Balance at June 30, 2023$(83,099)$(197)$28,000 $(55,296)
Other comprehensive (loss) income(6,292)— 2,744 (3,548)
Amounts reclassified from accumulated other comprehensive (loss) income— (24)(3,502)(3,526)
Net current-period other comprehensive (loss) income(6,292)(24)(758)(7,074)
Balance at September 30, 2023$(89,391)$(221)$27,242 $(62,370)

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

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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
Other Comprehensive Loss
Details of other comprehensive loss are as follows:
Three Months Ended September 30,
20232022
Pre-Tax AmountTax Expense
(Benefit)		Net AmountPre-Tax AmountTax Expense Net Amount
Foreign currency translation adjustments$(6,270)$22 $(6,292)$(11,437)$84 $(11,521)
Post-employment benefits:
Reclassification of net actuarial (gains) losses and prior service cost into other expense, net and included in net periodic pension costs(30)(6)(24)8 2 6 
Unrealized gain on cash flow hedge3,634 890 2,744 12,310 3,030 9,280 
Reclassification of interest from cash flow hedge into interest expense, net(4,638)(1,136)(3,502)796 196 600 
Other comprehensive loss$(7,304)$(230)$(7,074)$1,677 $3,312 $(1,635)
Anti-dilutive Common Stock Equivalents
In the three month periods ended September 30, 2023 and September 30, 2022, stock options and stock appreciation rights related to 96 and 185 shares of common stock, respectively, were not included in the computation of diluted earnings per share for the periods then ended as they were anti-dilutive.
9.    SEGMENT INFORMATION
The accounting policies of the Company’s reportable segments are generally the same as those used to prepare the condensed consolidated financial statements. LIFO expense of $4,591 and $9,060 in the three months ended September 30, 2023 and 2022, respectively, is recorded in cost of sales in the condensed statements of income, and is included in operating income for the related reportable segment, as the Company allocates LIFO expense between the segments. Intercompany sales, primarily from the Engineered Solutions segment to the Service Center Based Distribution segment, of $12,318 and $10,518, in the three months ended September 30, 2023 and 2022, respectively, have been eliminated in the Segment Financial Information tables below.
Three Months EndedService Center Based DistributionEngineered SolutionsTotal
September 30, 2023
Net sales$746,533 $348,655 $1,095,188 
Operating income for reportable segments96,881 49,595 146,476 
Assets used in business1,749,309 1,001,202 2,750,511 
Depreciation and amortization of property4,436 1,281 5,717 
Capital expenditures3,634 706 4,340 
September 30, 2022
Net sales$717,988 $344,417 $1,062,405 
Operating income for reportable segments88,809 45,534 134,343 
Assets used in business1,460,896 1,013,278 2,474,174 
Depreciation and amortization of property4,449 1,032 5,481 
Capital expenditures3,565 1,989 5,554 


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
A reconciliation of operating income for reportable segments to the condensed consolidated income before income taxes is as follows:
Three Months Ended
September 30,
20232022
Operating income for reportable segments$146,476 $134,343 
Adjustment for:
Intangible amortization—Service Center Based Distribution
677 758 
Intangible amortization—Engineered Solutions6,716 6,947 
Corporate and other expense, net
18,403 20,106 
Total operating income120,680 106,532 
Interest expense, net1,320 6,480 
Other expense, net431 1,008 
Income before income taxes$118,929 $99,044 
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.
10.    OTHER EXPENSE, NET
Other expense, net consists of the following:
 Three Months Ended
September 30,
 20232022
Unrealized loss on assets held in rabbi trust for a non-qualified deferred compensation plan$553 $827 
Foreign currency transactions (gain) loss(71)228 
Net other periodic post-employment costs26 143 
Life insurance income, net(137)(111)
Other, net60 (79)
Total other expense, net$431 $1,008 
11.    SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to September 30, 2023 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 6,300 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 2024, business was conducted in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore from approximately 589 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, 2023 increased $32.8 million or 3.1% compared to the prior year quarter, with acquisitions increasing sales by $11.6 million or 1.1% and favorable foreign currency translation of $2.5 million increasing sales by 0.2%. Operating margin was 11.0% of sales for the quarter ended September 30, 2023 compared to 10.0% of sales for the same quarter in the prior year. Net income of $93.8 million increased 22.0% compared to the prior year quarter. The current ratio was 3.5 to 1 at September 30, 2023 and 3.0 to 1 at June 30, 2023.
Applied monitors several economic indices that have been key indicators for industrial economic activity in the United States. These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM). Historically, our performance correlates well with the MCU, which measures productivity and calculates a ratio of actual manufacturing output versus potential full capacity output. When manufacturing plants are running at a high rate of capacity, they tend to wear out machinery and require replacement parts.
The MCU (total industry) and IP indices increased since June 2023. The ISM PMI registered 49.0 in September, up from the June 2023 reading of 46.0. The indices for the months during the current quarter, along with the indices for the prior fiscal year end, were as follows:
Index Reading
MonthMCUPMIIP
September 202379.749.099.8
August 202379.547.699.4
July 202379.646.499.5
June 202378.946.099.1

The number of Company employees was 6,359 at September 30, 2023, 6,223 at June 30, 2023, and 6,067 at September 30, 2022. The number of operating facilities totaled 589 at September 30, 2023, 577 at June 30, 2023 and 567 at September 30, 2022.


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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, 2023 and 2022
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 -
% Increase
As a Percent of Net Sales
20232022
Net sales100.0 %100.0 %3.1 %
Gross profit29.7 %28.9 %6.0 %
Selling, distribution & administrative expense18.7 %18.8 %2.1 %
Operating income11.0 %10.0 %13.3 %
Net income8.6 %7.2 %22.0 %
During the quarter ended September 30, 2023, sales increased $32.8 million or 3.1% compared to the prior year quarter, with sales from acquisitions adding $11.6 million or 1.1% and favorable foreign currency translation accounting for an increase of $2.5 million or 0.2%. There were 63 selling days in the quarter ended September 30, 2023 and 64 selling days in the quarter ended September 30, 2022. Excluding the impact of businesses acquired and foreign currency translation, sales were up $18.7 million or 1.8% during the quarter, driven by an increase from operations of 3.4% reflecting steady underlying demand against more difficult comparisons and normalizing customer production activity industry wide, offset by 1.6% due to one less sales day.
The following table shows changes in sales by reportable segment (amounts in millions).
Sales by Reportable SegmentThree Months Ended
September 30,		Sales IncreaseAmount of change due to
Foreign CurrencyOrganic Change
20232022Acquisitions
Service Center Based Distribution$746.5 $718.0 $28.5 $3.9 $2.5 $22.1 
Engineered Solutions348.7 344.4 4.3 7.7 — (3.4)
Total$1,095.2 $1,062.4 $32.8 $11.6 $2.5 $18.7 
Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $28.5 million or 4.0%. Acquisitions within this segment increased sales by $3.9 million or 0.6%. Favorable foreign currency translation increased sales by $2.5 million or 0.3%. Excluding the impact of businesses acquired and foreign currency translation, sales increased $22.1 million or 3.1%, driven by an increase from operations of 4.7% due to ongoing benefits from market position, sales process initiatives, solid growth across national strategic accounts, as well as benefits from cross-selling actions, offset by 1.6% due to one less sales day.
Sales from our Engineered Solutions segment increased $4.3 million or 1.2%. Acquisitions within this segment increased sales by $7.7 million or 2.2%. Excluding the impact of businesses acquired, sales decreased $3.4 million or 1.0%, driven by a 1.6% decrease due to one less sales day, offset by a 0.6% increase from operations reflecting positive underlying segment demand with support from engineering capabilities, backlog, and a diverse end-market mix despite reduced activity across the technology sector and ongoing supply chain constraints.

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

The following table shows changes in sales by geographic area. Other countries includes Mexico, Australia, New Zealand, and Singapore (amounts in millions).
Three Months Ended
September 30,		Sales IncreaseAmount of change due to
Foreign CurrencyOrganic Change
Sales by Geographic Area20232022Acquisitions
United States$959.4 $921.5 $37.9 $11.6 $— $26.3 
Canada75.3 79.8 (4.5)— (2.2)(2.3)
Other countries60.5 61.1 (0.6)— 4.7 (5.3)
Total$1,095.2 $1,062.4 $32.8 $11.6 $2.5 $18.7 
Sales in our U.S. operations were up $37.9 million or 4.1%, as acquisitions added $11.6 million or 1.3%. Excluding the impact of businesses acquired, U.S. sales were up $26.3 million or 2.8%, driven by a 4.4% increase in operations, offset by 1.6% due to one less sales day. Sales from our Canadian operations decreased $4.5 million or 5.6%. Unfavorable foreign currency translation decreased Canadian sales by $2.2 million or 2.8%. Excluding the impact of foreign currency translation, Canadian sales were down $2.3 million or 2.8%, driven by a 1.6% decrease due to one less sales day and a 1.2% decrease from operations. Consolidated sales from our other country operations, which include Mexico, Australia, New Zealand, and Singapore, decreased $0.6 million or 1.0% from the prior year. Favorable foreign currency translation increased other country sales by $4.7 million or 7.6%. Excluding the impact of currency translation, other country sales were down $5.3 million, or 8.6% during the quarter.
Our gross profit margin was 29.7% in the quarter ended September 30, 2023 compared to 28.9% in the prior period. Gross profit margin expanded year over year primarily reflecting broad-based execution across the business and countermeasures in response to ongoing inflation and supply chain dynamics. The gross profit margin for the current quarter was positively impacted by 41 basis points due to a $4.5 million decrease in LIFO expense.
The following table shows the changes in selling, distribution and administrative expense (SD&A) (amounts in millions).
Three Months Ended
September 30,		SD&A IncreaseAmount of change due to
Foreign CurrencyOrganic Change
20232022Acquisitions
SD&A$204.4 $200.3 $4.1 $3.3 $0.2 $0.6 
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 18.7% of sales in the quarter ended September 30, 2023 compared to 18.8% in the prior year quarter. SD&A increased $4.1 million or 2.1% 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, 2023 by $0.2 million or 0.1% compared to the prior year quarter. SD&A from businesses acquired added $3.3 million or 1.7% 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 $0.6 million or 0.3% during the quarter ended September 30, 2023 compared to the prior year quarter.
Operating income increased $14.1 million or 13.3%, and as a percent of sales increased to 11.0% from 10.0% during the prior year quarter.
Operating income, as a percentage of sales for the Service Center Based Distribution segment increased to 13.0% in the current year quarter from 12.4% in the prior year quarter. Operating income as a percentage of sales for the Engineered Solutions segment increased to 14.2% in the current year quarter from 13.2% in the prior year quarter.
The effective income tax rate was 21.1% for the quarter ended September 30, 2023 compared to 22.4% for the quarter ended September 30, 2022. The decrease in the effective tax rate over the prior year is primarily due to compensation-related deductions during the quarter ended September 30, 2023. We expect our full year tax rate for fiscal 2024 to be in the 23.0% to 24.0% range.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

As a result of the factors addressed above, net income for the quarter ended September 30, 2023 increased $16.9 million or 22.0% compared to the prior year quarter. Diluted net income per share was $2.39 per share for the quarter ended September 30, 2023 compared to $1.97 per share in the prior year quarter, an increase of 21.3%.

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. We had total debt obligations outstanding of $622.2 million at September 30, 2023 and June 30, 2023. 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, 2023 was $1,177.7 million, compared to $1,106.5 million at June 30, 2023. The current ratio was 3.5 to 1 at September 30, 2023 and 3.0 to 1 at June 30, 2023.
Net Cash Flows
The following table is included to aid in review of Applied's condensed statements of consolidated cash flows (amounts in thousands).
Three Months Ended September 30,
Net Cash Provided by (Used in):20232022
Operating Activities$66,209 $25,943 
Investing Activities(25,657)(5,498)
Financing Activities(22,483)(55,518)
Exchange Rate Effect(1,690)(1,826)
Increase (Decrease) in Cash and Cash Equivalents$16,379 $(36,899)
The increase in cash provided by operating activities during the three months ended September 30, 2023 from the prior period is driven by an increase operating results and changes in working capital for the period. Changes in working capital between periods caused a $26.8 million increase in cash provided by operating activities, driven by (amounts in thousands):
Three Months Ended September 30,
20232022
Accounts receivable$16,142 $(25,692)
Inventory(7,254)(45,913)
Accounts payable(43,008)19,273 
Net cash used in investing activities during the three months ended September 30, 2023 increased from the prior period primarily due to $21.4 million used for the acquisitions of Cangro and BDI in the current year.
Net cash used in financing activities during the three months ended September 30, 2023 decreased from the prior period primarily due to a change in net debt activity, as there was $0.1 million of debt payments in the current year period compared to $40.1 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. During the three months ended September 30, 2023, the Company did not acquire any shares of treasury stock on the open market. During the three months ended September 30, 2022, the Company acquired 8,000 shares of treasury stock on the open market for $0.7 million. At September 30, 2023, we had authorization to repurchase 1,500,000 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, 2023June 30, 2023
Revolving credit facility$383,592 $383,592 
Trade receivable securitization facility188,300 188,300 
Series D notes25,000 25,000 
Series E notes25,000 25,000 
Other294 356 
Total debt$622,186 $622,248 
Less: unamortized debt issuance costs132 152 
$622,054 $622,096 
Revolving Credit Facility & Term Loan
In December 2021, the Company entered into a new revolving credit facility with a group of banks to refinance the existing credit facility as well as provide funds for ongoing working capital and other general corporate purposes. The revolving credit facility provides a $900.0 million unsecured revolving credit facility and an uncommitted accordion feature which allows the Company to request an increase in the borrowing commitments, or incremental term loans, under the credit facility in aggregate principal amounts of up to $500.0 million. In May 2023, the Company and the administrative agent entered into an amendment to the credit facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR. Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or SOFR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of $0.2 million to secure certain insurance obligations, totaled $516.2 million at September 30, 2023 and June 30, 2023, and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the revolving credit facility was 6.33% and 6.11% as of September 30, 2023 and June 30, 2023, respectively.
Additionally, the Company had letters of credit outstanding with separate banks, not associated with the revolving credit agreement, in the amount of $4.0 million as of September 30, 2023 and June 30, 2023 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 drawn fees on the AR Securitization Facility to 0.98% per year. On August 4, 2023, the Company amended the AR Securitization Facility, extended the term to August 4, 2026, and reduced the drawn fees to 0.90% 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. In May 2023, the Company entered into an amendment to the AR Securitization Facility to replace LIBOR as a reference rate available for use in the computation of interest and replace it with SOFR, therefore borrowings under this facility carry variable interest rates tied to SOFR. The interest rate on the AR Securitization Facility as of September 30, 2023 and June 30, 2023 was 6.32% and 6.16%, respectively.
Unsecured Shelf Facility
At September 30, 2023 and June 30, 2023, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $50.0 million. 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 D" notes have a remaining principal amount of $25.0 million, carry a fixed interest rate of 3.21%, and are due on October 31, 2023. The “Series E” notes have a principal amount of $25.0 million, carry a fixed interest rate of 3.08%, and are due in October 2024.


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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Other Long-Term Borrowing
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 November 2024.
The Company entered into an interest rate swap which mitigates variability in forecasted interest payments on $384.0 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.”
The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At September 30, 2023, 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, 2023, the Company's net indebtedness was less than 0.6 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants at September 30, 2023.
Accounts Receivable Analysis
The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable (amounts in thousands):
September 30,June 30,
20232023
Accounts receivable, gross$717,619 $730,729 
Allowance for doubtful accounts22,697 22,334 
Accounts receivable, net$694,922 $708,395 
Allowance for doubtful accounts, % of gross receivables3.2 %3.1 %
Three Months Ended September 30,
20232022
Provision for losses on accounts receivable$867 $3,994 
Provision as a % of net sales0.08 %0.38 %
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 57.1 at September 30, 2023 compared to 55.1 at June 30, 2023. As of September 30, 2023, approximately 2.9% of our accounts receivable balances are more than 90 days past due, compared to 2.5% at June 30, 2023. On an overall basis, our provision for losses from uncollected receivables represents 0.08% of our sales in the three months ended September 30, 2023, compared to 0.38% of sales for the three months ended September 30, 2022. The decrease primarily relates to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in the U.S. 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, 2023 was 4.3 versus 4.4 for the period ended June 30, 2023. 


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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; continuing risks relating to the effects of the COVID-19 pandemic; inflationary or deflationary trends in the cost of products, energy, labor and other operating costs, and 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 (such as due to supply chain strains), changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; 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, war, 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, 2023.
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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, 2023.

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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, 2023 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, 2023 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) (2)
July 1, 2023 to July 31, 2023524$148.2601,500,000
August 1, 2023 to August 31, 20230$0.0001,500,000
September 1, 2023 to September 30, 20230$0.0001,500,000
Total524$0.0001,500,000

(1)During the quarter the Company purchased 524 shares in connection with the Deferred Compensation Plan.
(2)On August 9, 2022, 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 August 11, 2022. 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 6.         Exhibits
Exhibit No.Description
3.1
3.2
4.1
4.2
4.3
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4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
10.1
31
32
101
The following financial information from Applied Industrial Technologies Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 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.
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104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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 27, 2023
By: /s/ Neil A. Schrimsher
Neil A. Schrimsher
President & Chief Executive Officer
Date:October 27, 2023
By: /s/ David K. Wells
David K. Wells
Vice President-Chief Financial Officer, Treasurer, &
Principal Accounting Officer

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