With more than 6,000 employees acrossNorth America ,Australia ,New Zealand , andSingapore ,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 inCleveland, Ohio . During the second quarter of fiscal 2022, business was conducted inthe United States ,Puerto Rico ,Canada ,Mexico ,Australia ,New Zealand , andSingapore from 569 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 endedDecember 31, 2021 increased$125.6 million or 16.7% compared to the prior year quarter, with acquisitions increasing sales by$12.1 million or 1.6% and favorable foreign currency translation of$1.9 million increasing sales by 0.3%. The Company had operating income of$78.2 million , or operating margin of 8.9% of sales for the quarter endedDecember 31, 2021 compared to an operating loss of$2.4 million , or negative operating margin of 0.3% of sales for the same quarter in the prior year. The prior year quarter included a$49.5 million pre-tax non-cash charge related to the impairment of certain intangible, lease, and fixed assets, as well as non-routine costs of$7.8 million pre-tax within the Service Center Based Distribution segment. The quarter endedDecember 31, 2021 had net income of$57.0 million compared to a net loss of$5.3 million in the prior year quarter. The current ratio was 2.9 to 1 atDecember 31, 2021 and 2.8 to 1 atJune 30, 2021 . Applied monitors several economic indices that have been key indicators for industrial economic activity inthe United States . These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by theFederal Reserve Board and the Purchasing Managers Index (PMI) published by theInstitute 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 have increased sinceJune 2021 . The MCU forDecember 2021 was 76.5, which is up from the September and June revised readings of 75.2 and 75.7, respectively. The ISM PMI registered 58.7 in December, down from the September andJune 2021 readings of 61.1 and 60.6, respectively. The indices for the months during the current quarter, along with the indices for the prior fiscal year end and prior quarter end, were as follows: Index Reading Month MCU PMI IP December 2021 76.5 58.7 100.2 November 2021 76.6 61.1 100.5 October 2021 76.1 60.8 99.9 September 2021 75.2 61.1 98.5 June 2021 75.7 60.6 98.2
The number of Company employees was 6,007 at
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Table of Contents APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months EndedDecember 31, 2021 and 2020 The following table is included to aid in review of Applied's condensed statements of consolidated income. Three Months Ended December 31, Change in $'s Versus As a Percent of Net Sales Prior Period - 2021 2020 % Increase Net sales 100.0 % 100.0 % 16.7 % Gross profit 29.4 % 27.9 % 23.0 % Selling, distribution & administrative expense 20.5 % 21.6 % 10.5 % Operating income (loss) 8.9 % (0.3) % N/M Net income (loss) 6.5 % (0.7) % N/M During the quarter endedDecember 31, 2021 , sales increased$125.6 million or 16.7% compared to the prior year quarter, with sales from acquisitions adding$12.1 million or 1.6% and favorable foreign currency translation accounting for an increase of$1.9 million or 0.3%. There were 61 selling days in the quarter endedDecember 31, 2021 and 62 selling days in the quarter endedDecember 31, 2020 . Excluding the impact of businesses acquired and foreign currency translation, sales were up$111.6 million or 14.8% during the quarter, driven by an increase from operations of 16.4% reflecting positive industrial activity, offset by 1.6% due to one less sales day. The following table shows changes in sales by reportable segment. Three Months Ended Amount of change due to December 31, Sales by Reportable Segment 2021 2020 Sales
Increase Acquisitions Foreign Currency Organic Change Service Center Based Distribution
$ 587.2 $ 515.7 $ 71.5 $ - $ 1.9 $ 69.6 Fluid Power & Flow Control 289.7 235.6 54.1 12.1 - 42.0 Total$ 876.9 $ 751.3 $ 125.6 $ 12.1 $ 1.9$ 111.6 Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased$71.5 million or 13.9%. Favorable foreign currency translation increased sales by$1.9 million or 0.4%. Excluding the impact of foreign currency translation, sales increased$69.6 million or 13.5%, driven by an increase of 15.1% from operations due to benefits from firm break-fix MRO activity, stronger local account growth, sales process initiatives, and a greater recovery across heavy industries, offset by 1.6% due to one less sales day. Sales from ourFluid Power & Flow Control segment increased$54.1 million or 22.9%. Acquisitions within this segment increased sales by$12.1 million or 5.2%. Excluding the impact of businesses acquired, sales increased$41.9 million or 17.7%, driven by an increase of 19.3% from operations due to strong demand within the technology end market, as well as ongoing recovery across off-highway mobile, life sciences, chemical, and industrial industries, offset by 1.6% due to one less sales day. 21
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Table of ContentsAPPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows changes in sales by geographic area. Other countries
includes
Three Months Ended Amount of change due to December 31, Sales by Geographic Area 2021 2020 Sales Increase Acquisitions Foreign Currency Organic Change United States$ 756.8 $ 647.8 $ 109.0 $ 12.1 $ - $ 96.9 Canada 66.3 57.8 8.5 - 2.0 6.5 Other countries 53.8 45.7 8.1 - (0.1) 8.2 Total$ 876.9 $ 751.3 $ 125.6 $ 12.1 $ 1.9$ 111.6 Sales in ourU.S. operations were up$109.0 million or 16.8%, as acquisitions added$12.1 million or 1.9%. Excluding the impact of businesses acquired,U.S. sales were up$96.9 million or 14.9%, driven by a 16.5% increase in operations, offset by 1.6% due to one less sales day. Sales from our Canadian operations increased$8.5 million or 14.6%. Favorable foreign currency translation increased Canadian sales by$2.0 million or 3.5%. Excluding the impact of foreign currency translation, Canadian sales increased$6.5 million or 11.1%. Consolidated sales from our other country operations, which includeMexico ,Australia ,New Zealand , andSingapore , increased$8.1 million or 17.9% from the prior year. Unfavorable foreign currency translation decreased other country sales by$0.1 million or 0.1%. Excluding the impact of currency translation, other country sales were up$8.2 million , or 18.0% during the quarter. Our gross profit margin was 29.4% in the quarter endedDecember 31, 2021 compared to 27.9% in the prior year quarter. The increase in gross profit margin reflects improving demand and ongoing margin initiatives. The gross profit margin for the prior quarter was negatively impacted by 98 basis points due to a$7.4 million of inventory reserve charge recorded within cost of sales related to closed locations. This change was offset by 44 basis points due to a$3.8 million increase in LIFO expense. Gross profit margins expanded year over year and sequentially primarily reflecting broad-based execution across the business and countermeasures in response to ongoing inflation and supply chain dynamics. The following table shows the changes in selling, distribution and administrative expense (SD&A). Three Months Ended Amount of change due to December 31, 2021 2020 SD&A Increase
Acquisitions Foreign Currency Organic Change SD&A
$ 179.4 $ 162.4 $ 17.0 $ 2.7 $ 0.5 $ 13.8 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 20.5% of sales in the quarter endedDecember 31, 2021 compared to 21.6% in the prior year quarter. SD&A increased$17.0 million or 10.5% compared to the prior year quarter. Changes in foreign currency exchange rates had the effect of increasing SD&A during the quarter endedDecember 31, 2021 by$0.5 million or 0.3% compared to the prior year quarter. SD&A from businesses acquired added$2.7 million or 1.6% of SD&A expenses, including$0.2 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased$13.8 million or 8.6% during the quarter endedDecember 31, 2021 compared to the prior year quarter. The Company incurred$0.4 million of non-routine expenses related to severance and closed facilities during the quarter endedDecember 31, 2020 . Excluding the impact of acquisitions and severance, total compensation increased$11.5 million during the quarter endedDecember 31, 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. All other expenses within SD&A were up$2.7 million . The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the prolonged economic downturn in these end markets, the Company determined during the second quarter of fiscal 2021 that certain carrying values may not be recoverable. The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows. The fair values of the long-lived assets were then 22
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Table of Contents APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of$45.0 million , which was recorded in the three months endedDecember 31, 2020 , as the fair value of the intangible assets was determined to be zero. 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. 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. The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of$2.0 million and$2.5 million , respectively, which were recorded in the three months endedDecember 31, 2020 . The Company had operating income of$78.2 million during the quarter endedDecember 31, 2021 , compared to an operating loss of$2.4 million in the prior year quarter, primarily due to the impairment charges of$49.5 million in the prior year quarter. Operating income, before impairment, as a percentage of sales for the Service Center Based Distribution segment increased to 11.5% in the current year quarter from 8.3% in the prior year quarter. Operating income, as a percentage of sales for theFluid Power & Flow Control segment increased to 12.6% in the current year quarter from 11.3% in the prior year quarter. Other (income) expense, net was income of$0.9 million for the quarter, which included unrealized gains on investments held by non-qualified deferred compensation trusts of$1.0 million and$0.1 million of income from other items, offset by net unfavorable foreign currency transaction losses of$0.2 million . During the prior year quarter, other (income) expense, net was expense of$0.1 million , which included net unfavorable foreign currency transaction losses of$1.8 million , offset by unrealized gains on investments held by non-qualified deferred compensation trusts of$1.6 million and$0.1 million of income from other items. The effective income tax rate was 20.8% for the quarter endedDecember 31, 2021 compared to 47.5% for the quarter endedDecember 31, 2020 . The decrease in the effective tax rate is due to changes in compensation-related deductions and uncertain tax positions during the quarter endedDecember 31, 2021 compared to the prior year quarter. As a result of the factors addressed above, the Company had net income of$57.0 million during the quarter endedDecember 31, 2021 , compared to a net loss of$5.3 million in the prior year quarter. Net income per share was$1.46 per share for the quarter endedDecember 31, 2021 compared to net loss per share of$0.14 per share in the prior year quarter. Results of Operations Six Months EndedDecember 31, 2021 and 2020 The following table is included to aid in review of Applied's condensed statements of consolidated income. Six Months Ended December 31, 2021 Change in $'s Versus As a Percent of Net Sales Prior Period - 2021 2020 % Increase Net sales 100.0 % 100.0 % 18.0 % Gross profit 29.0 % 28.4 % 20.6 % Selling, distribution & administrative expense 20.4 % 21.7 % 10.5 % Operating income 8.6 % 3.3 % N/M Net income 6.2 % 2.0 % N/M During the six months endedDecember 31, 2021 , sales increased$269.5 million or 18.0% compared to the prior year period, with sales from acquisitions adding$27.6 million or 1.8% and favorable foreign currency translation accounting for an increase of$8.0 million or 0.5%. There were 125 selling days in the six months endedDecember 31, 2021 and 126 selling days in the six months endedDecember 31, 2020 . Excluding the impact of businesses acquired and foreign currency translation, sales were up$233.9 million or 15.7% during the period, driven by an increase from operations of 16.5% due to increased demand across key end markets, offset by 0.8% due to one less sales day. 23
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Table of ContentsAPPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows changes in sales by reportable segment.
Six Months Ended Amount of change due toDecember 31 ,
Sales by Reportable Segment 2021 2020 Sales Increase
Acquisitions Foreign Currency Organic Change Service Center Based Distribution$ 1,188.1 $ 1,029.0 $ 159.1 $ - $ 8.0$ 151.1 Fluid Power & Flow Control 580.5 470.1 110.4 27.6 - 82.8 Total$ 1,768.6 $ 1,499.1 $ 269.5 $ 27.6 $ 8.0$ 233.9 Sales from our Service Center Based Distribution segment, which operates primarily in MRO markets, increased$159.1 million or 15.5%. Favorable foreign currency translation increased sales by$8.0 million or 0.8%. Excluding the impact of foreign currency translation, sales increased$151.1 million or 14.7%, driven by an increase of 15.5% from operations due to benefits from firm break-fix MRO activity, stronger local account growth, sales process initiatives, and a greater recovery across heavy industries, offset by 0.8% due to one less sales day. Sales from ourFluid Power & Flow Control segment increased$110.4 million or 23.5%. Acquisitions within this segment increased sales by$27.6 million or 5.9%. Excluding the impact of businesses acquired, sales increased$82.8 million or 17.6%, driven by an increase of 18.4% from operations due to strong demand within the technology end market, as well as ongoing recovery across off-highway mobile, life sciences, chemical, and industrial industries, offset by 0.8% due to one less sales day. The following table shows changes in sales by geographic area. Other countries includesMexico ,Australia ,New Zealand , andSingapore . Six Months Ended Amount of change due to December 31, Sales by Geographic Area 2021 2020 Sales Increase Acquisitions Foreign Currency Organic Change United States$ 1,521.0 $ 1,291.9 $ 229.1 $ 27.6 $ -$ 201.5 Canada 140.8 114.7 26.1 - 5.4 20.7 Other countries 106.8 92.5 14.3 - 2.6 11.7 Total$ 1,768.6 $ 1,499.1 $ 269.5 $ 27.6 $ 8.0$ 233.9 Sales in ourU.S. operations were up$229.1 million or 17.7%, as acquisitions added$27.6 million or 2.1%. Excluding the impact of businesses acquired,U.S. sales were up$201.5 million or 15.6%, driven by a 16.4% increase in operations, offset by 0.8% due to one less sales day. Sales from our Canadian operations increased$26.1 million or 22.8%. Favorable foreign currency translation increased Canadian sales by$5.4 million or 4.7%. Excluding the impact of foreign currency translation, Canadian sales were up$20.7 million or 18.1%. Consolidated sales from our other country operations, which includeMexico ,Australia ,New Zealand , andSingapore , increased$14.3 million or 15.4% from the prior year. Favorable foreign currency translation increased other country sales by$2.6 million or 2.8%. Excluding the impact of currency translation, other country sales were up$11.7 million , or 12.6%, during the period. Our gross profit margin was 29.0% in the six months endedDecember 31, 2021 compared to 28.4% in the prior year period. The increase in gross profit margin reflects improving demand and ongoing margin initiatives. The gross profit margin for the prior year period was negatively impacted by 49 basis points due to$7.4 million of non-routine costs from ongoing business alignment initiatives and cost actions recorded in the six months endedDecember 31, 2020 . This was offset by 36 basis points due to a$6.3 million increase in LIFO expense over the prior year period. Gross profit margins expanded year over year and sequentially primarily reflecting broad-based execution across the business and countermeasures in response to ongoing inflation and supply chain dynamics. 24
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Table of ContentsAPPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows the changes in selling, distribution and administrative expense (SD&A).
Six Months Ended Amount of change due to December 31, 2021 2020 SD&A Increase Acquisitions Foreign Currency Organic Change SD&A$ 360.2 $ 325.9 $ 34.3 $ 7.2 $ 2.0 $ 25.1 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 20.4% of sales in the six months endedDecember 31, 2021 compared to 21.7% in the prior year period. SD&A increased$34.3 million or 10.5% compared to the prior year period. Changes in foreign currency exchange rates had the effect of increasing SD&A during the six months endedDecember 31, 2021 by$2.0 million or 0.6% compared to the prior year period. SD&A from businesses acquired added$7.2 million or 2.2% of SD&A expenses, including$0.6 million of intangibles amortization related to acquisitions. Excluding the impact of businesses acquired and the unfavorable currency translation impact, SD&A increased$25.1 million or 7.7% during the six months endedDecember 31, 2021 compared to the prior year period. The Company incurred$0.4 million of non-routine expenses related to severance and closed facilities during the six months endedDecember 31, 2021 . Excluding the impact of acquisitions and severance, total compensation increased$29.3 million during the six months endedDecember 31, 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. All other expenses within SD&A were down$3.8 million . The Company has three asset groups that have significant exposure to oil and gas end markets. Due to the prolonged economic downturn in these end markets, the Company determined during the second quarter of fiscal 2021 that certain carrying values may not be recoverable. The Company determined that an impairment existed in two of the three asset groups as the asset groups' carrying values exceeded the sum of the undiscounted cash flows. The fair values of the long-lived assets were then determined using the income approach, and the analyses resulted in the measurement of an intangible asset impairment loss of$45.0 million , which was recorded in the three months endedDecember 31, 2020 , as the fair value of the intangible assets was determined to be zero. 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. 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. The analyses of these asset groups also resulted in a fixed asset impairment loss and leased asset impairment loss of$2.0 million and$2.5 million , respectively, which were recorded in the three months endedDecember 31, 2020 . Operating income increased$102.9 million , and as a percent of sales increased to 8.6% from 3.3% during the prior year period, primarily due to non-cash impairment charges of$49.5 million in the prior year period. Operating income, before impairment, as a percentage of sales for the Service Center Based Distribution segment increased to 11.1% in the current year period from 9.0% in the prior year period. Operating income, as a percentage of sales for theFluid Power & Flow Control segment increased to 12.3% in the current year period from 11.2% in the prior year period. Other (income) expense, net was income of$1.2 million for the six months endedDecember 31, 2021 , which included unrealized gains on investments held by non-qualified deferred compensation trusts of$0.9 million , net favorable foreign currency transaction gains of$0.4 million , and other income of$0.2 million , offset by other periodic post-employment costs of$0.3 million . During the prior year period, other (income) expense, net was income of$0.1 million and included unrealized gains on investments held by non-qualified deferred compensation trusts of$2.5 million , offset by net unfavorable foreign currency transaction losses of$2.2 million and other expense of$0.2 million . The effective income tax rate was 21.2% for the six months endedDecember 31, 2021 compared to 15.0% for the six months endedDecember 31, 2020 . The increase in the effective tax rate is due to changes in compensation-related deductions and uncertain tax positions during the six months endedDecember 31, 2021 compared to the prior year period. We expect our full year tax rate for fiscal 2022 to be in the 22.0% to 23.0% range. 25
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Table of Contents APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES 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 six months endedDecember 31, 2021 increased$80.5 million compared to the prior year period. Net income was$2.81 per share for the six months endedDecember 31, 2021 compared to$0.75 per share in the prior year period. 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. AtDecember 31, 2021 , we had total debt obligations outstanding of$721.6 million compared to$829.4 million atJune 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 atDecember 31, 2021 was$743.8 million , compared to$768.9 million atJune 30, 2021 . The current ratio was 2.9 to 1 atDecember 31, 2021 and 2.8 to 1 atJune 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. Six Months Ended December 31, Net Cash Provided by (Used in): 2021 2020 Operating Activities $ 81,264$ 159,356 Investing Activities (28,877) (39,235) Financing Activities (153,443) (104,254) Exchange Rate Effect (1,846) 4,357 (Decrease) Increase in Cash and Cash Equivalents $
(102,902)
The decrease in cash provided by operating activities during the six months endedDecember 31, 2021 is driven by changes in working capital for the period partially offset by increased operating results. Changes in cash flows between periods related to working capital were driven by: Accounts receivable$ (18,495) Inventories$ (78,883) Other operating assets$ (12,594) Net cash used in investing activities during the six months endedDecember 31, 2021 decreased from the prior period primarily due to$7.0 million used for the acquisition ofR.R. Floody in the current year compared to$31.1 million used for the acquisitions of Gibson Engineering and Advanced Control Solutions in the prior year period, offset by$14.8 million in cash payments for loans on company-owned life insurance in the current year. Net cash used in financing activities during the six months endedDecember 31, 2021 increased from the prior year period primarily due to a change in net debt activity, as there was$107.8 million of net debt payments in the current year period compared to$72.3 million of debt payments in the prior year period. Further, the Company used$10.1 million of cash for the purchase of treasury shares during the six months endedDecember 31, 2021 , while no shares were purchased 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 35,000 shares of treasury stock on the open market in the three months endedDecember 31, 2021 for$3.5 million . During the six months endedDecember 31, 2021 , we acquired 111,658 shares of treasury stock for$10.1 million . During the six months endedDecember 31, 2020 , the Company did not acquire any shares of treasury stock on the open market. AtDecember 31, 2021 , we had authorization to repurchase 352,960 shares. 26
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Table of Contents APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES 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): December 31, 2021 June 30, 2021 Revolving credit facility $ 442,592 $ - Term Loan - 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 725 846 Total debt $ 721,617$ 829,396 Less: unamortized debt issuance costs 169 1,016 $ 721,448$ 828,380 Revolving Credit Facility & Term Loan InDecember 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. This agreement 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 . Borrowings under this agreement bear interest, at the Company's election, at either the base rate plus a margin that ranges from 0 to 55 basis points based on net leverage ratio or LIBOR plus a margin that ranges from 80 to 155 basis points based on the net leverage ratio. Unused lines under this facility, net of outstanding letters of credit of$0.2 million to secure certain insurance obligations, totaled$457.2 million atDecember 31, 2021 , and were available to fund future acquisitions or other capital and operating requirements. The interest rate on the revolving credit facility was 1.2% as ofDecember 31, 2021 . The new credit facility replaced the Company's previous credit facility agreement. The Company used its initial borrowings on the new revolving credit facility along with cash on hand of$98.2 million to extinguish the term loan balance outstanding under the previous credit facility of$540.5 million . The Company had no amount outstanding under the revolver atJune 30, 2021 . Unused lines under the previous facility, net of outstanding letters of credit of$0.2 million to secure certain insurance obligations, totaled$249.8 million atJune 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 ofJune 30, 2021 . The Company paid$1.8 million of debt issuance costs related to the new revolving credit facility in the three months endedDecember 31, 2021 , which are included in other current assets and other assets on the condensed consolidated balance sheet as ofDecember 31, 2021 and will be amortized over the five-year term of the new credit facility. The Company analyzed the unamortized debt issuance costs related to the previous credit facility under Accounting Standards Codification (ASC) Topic 470 - Debt. As a result of this analysis,$0.1 million of unamortized debt issuance costs were expensed and included within interest expense, net on the condensed statements of consolidated income in the three months endedDecember 31, 2021 , and$0.5 million of unamortized debt issuance costs were rolled forward into the new credit facility and were reclassified from the current portion of long-term debt and long term debt into other current assets and other assets on the condensed consolidated balance sheet as ofDecember 31, 2021 , and will be amortized over the five-year term of the new credit facility. 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 ofDecember 31, 2021 andJune 30, 2021 , respectively, in order to secure certain insurance obligations. Trade Receivable Securitization Facility InAugust 2018 , the Company established a trade receivable securitization facility (the "AR Securitization Facility"). OnMarch 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 27
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Table of ContentsAPPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 theU.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 ofDecember 31, 2021 andJune 30, 2021 was 1.07% and 1.20%, respectively. The termination date of the AR Securitization isMarch 26, 2024 . Unsecured Shelf Facility AtDecember 31, 2021 andJune 30, 2021 , the Company had borrowings outstanding under its unsecured shelf facility agreement withPrudential Investment Management of$90.0 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 C" notes had an original principal amount of$120.0 million , carry a fixed interest rate of 3.19%, and the remaining principal balance is due inJuly 2022 . The "Series D" notes had an original principal amount of$50.0 million , carry a fixed interest rate of 3.21%, and the remaining principal balance is due inOctober 2023 . The "Series E" notes have a principal amount of$25.0 million , carry a fixed interest rate of 3.08%, and are due inOctober 2024 . 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 theState of Ohio Development Services Agency , and matures inMay 2024 . The Company entered into an interest rate swap which mitigates variability in forecasted interest payments on$409.0 million of the Company'sU.S. dollar-denominated unsecured variable rate debt. For more information, see note 6, Derivatives, to the consolidated financial statements, included in Item 1 under the caption "Notes to Condensed Consolidated Financial Statements." The credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. AtDecember 31, 2021 , the most restrictive of these covenants required that the Company have net indebtedness less than 3.75 times consolidated income before interest, taxes, depreciation and amortization (as defined). AtDecember 31, 2021 , the Company's net indebtedness was below 1.65 times consolidated income before interest, taxes, depreciation and amortization (as defined). The Company was in compliance with all financial covenants atDecember 31, 2021 . Accounts Receivable Analysis The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable:
2021 2021 Accounts receivable, gross$ 536,847 $ 532,777 Allowance for doubtful accounts 16,713 16,455 Accounts receivable, net$ 520,134 $ 516,322 Allowance for doubtful accounts, % of gross receivables 3.1 % 3.1 % Three Months Ended December 31, Six Months Ended December 31, 2021 2020 2021 2020 Provision for losses on accounts receivable $ 531 $ 697 $ 1,328$ 5,795 Provision as a % of net sales 0.06 % 0.09 % 0.08 % 0.39 % 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 53.4 atDecember 31, 2021 compared to 51.9 atJune 30, 2021 . As ofDecember 31, 2021 , approximately 4.3% of our accounts receivable balances are more than 90 days past due, compared to 3.0% atJune 30, 2021 . On an overall basis, our provision for losses on accounts receivable represents 0.06% of our sales in 28
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Table of ContentsAPPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the three months endedDecember 31, 2021 , compared to 0.09% of sales for the three months endedDecember 31, 2020 , and 0.08% of sales for the six months endedDecember 31, 2021 compared to 0.39% of sales for the six months endedDecember 31, 2020 . The decrease primarily relates to provisions recorded in the prior year for customer credit deterioration and bankruptcies primarily in theU.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 accounts receivable are at reasonable levels. Inventory Analysis Inventories are valued using the last-in, first-out (LIFO) method forU.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 was 4.6 for the period endedDecember 31, 2021 and 4.3 for the period endedJune 30, 2021 . We believe our inventory turnover ratio at the end of the year will be similar or slightly better than the ratio atDecember 31, 2021 . 29
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Table of ContentsAPPLIED 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 theSecurities 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 (such as due to supply chain strains), changes in supplier distribution programs, inability of suppliers to perform, and transportation disruptions; inflationary or deflationary trends in the cost of products, energy, labor 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 theSecurities and Exchange Commission , including our Annual Report on Form 10-K for the year endedJune 30, 2021 . 30 --------------------------------------------------------------------------------APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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