| Year Ended June 30, As a % of Net Sales | | Change in
Sales in fiscal 20152018 were $2.75$3.1 billion, which was $291.7$479.5 million or 11.9%18.5% above the prior year, with sales from acquisitions accounting for $280.2$264.7 million or 11.4%. Unfavorable10.2% of the increase, and favorable foreign currency translation decreased sales by $43.3accounting for an increase of $16.0 million or 1.8%0.6%. There were 251.5 selling days in fiscal 2018 and 252.5 selling days in fiscal 2017. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, sales were up $54.8$198.8 million or 2.3%7.7% during the year. We had 252.5 selling daysyear, of which 5.9% is from the Service Center Based Distribution segment and 2.1% is from the Fluid Power & Flow Control segment, offset by a 0.3% decrease due to one less sales day. The following table shows changes in both fiscal 2015 and fiscal 2014.sales by reportable segment. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Reportable Segment | 2018 |
| 2017 |
| Service Center Based Distribution | $ | 2,346.4 |
| $ | 2,180.4 |
| $ | 166.0 |
| $ | 3.6 |
| $ | 16.0 |
| $ | 146.4 |
| Fluid Power & Flow Control | 726.9 |
| 413.4 |
| 313.5 |
| 261.1 |
| — |
| 52.4 |
| Total | $ | 3,073.3 |
| $ | 2,593.8 |
| $ | 479.5 |
| $ | 264.7 |
| $ | 16.0 |
| $ | 198.8 |
|
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $281.4$166.0 million, or 14.3%7.6%. Acquisitions within this segment increased sales by $280.2$3.6 million or 14.2%0.2%, and favorable foreign currency translation increased sales by $16.0 million or 0.7%. UnfavorableExcluding the impact of businesses acquired and the impact of foreign currency translation, sales increased $146.4 million or 6.7%, driven by an increase of 7.0% from operations, offset by a 0.3% decrease due to one less sales day. Sales of our Fluid Power & Flow Control segment increased $313.5 million or 75.8%. Acquisitions within this segment increased sales $261.1 million or 63.2%. Excluding the impact of businesses acquired, sales increased $52.4 million or 12.7%, driven by an increase of 13.1% from operations, offset by a 0.4% decrease due to one less sales day.
The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Geographic Area | 2018 |
| 2017 |
| United States | $ | 2,615.1 |
| $ | 2,182.6 |
| $ | 432.5 |
| $ | 261.1 |
| $ | — |
| $ | 171.4 |
| Canada | 273.6 |
| 252.0 |
| 21.6 |
| — |
| 11.3 |
| 10.3 |
| Other countries | 184.6 |
| 159.2 |
| 25.4 |
| 3.6 |
| 4.7 |
| 17.1 |
| Total | $ | 3,073.3 |
| $ | 2,593.8 |
| $ | 479.5 |
| $ | 264.7 |
| $ | 16.0 |
| $ | 198.8 |
|
Sales in our U.S. operations increased $432.5 million or 19.8%, with acquisitions adding $261.1 million or 12.0%. Excluding the impact of businesses acquired, U.S. sales were up $171.4 million or 7.8%, of which 8.2% is growth from operations, offset by a 0.4% decrease due to one less sales day. Sales from our Canadian operations increased $21.6 million or 8.6%, and favorable foreign currency translation increased Canadian sales by $11.3 million or 4.5%. Excluding the impact of foreign currency translation, Canadian sales were up $10.3 million or 4.1%, of which 3.7% is growth from operations, and the remaining 0.4% increase is due to one additional sales day. Consolidated sales from our other country operations increased $25.4 million or 16.0% compared to the prior year. Acquisitions added sales of $3.6 million or 2.3% and favorable foreign currency translation increased other country sales by $4.7 million or 2.9%. Excluding the impact of businesses acquired and the impact of foreign currency translation, other country sales were up $17.1 million or 10.8% compared to the prior year, driven by an increase from operations of 11.0%, offset by a decrease of 0.2% due to one less sales day in Australia, New Zealand, and Singapore. The sales product mix for fiscal 2018 was 67.9% industrial products and 32.1% fluid power/flow control products compared to 71.5% and 28.5%, respectively, in the prior year. Our gross profit margin increased to 28.8% in fiscal 2018 compared to 28.4% in fiscal 2017 due to the acquisition of FCX, which favorably impacted the gross profit margin by 38 basis points in fiscal 2018. The following table shows the changes in SD&A. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | SD&A Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | 2018 |
| 2017 |
| SD&A | $ | 658.2 |
| $ | 562.3 |
| $ | 95.9 |
| $ | 74.7 |
| $ | 3.9 |
| $ | 17.3 |
|
Selling, distribution and administrative expense (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, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $95.9 million or 17.0% during fiscal 2018 compared to the prior year, and as a percent of sales decreased to 21.4% from 21.7% in fiscal 2017. Changes in foreign currency exchange rates had the effect of increasing SD&A by $3.9 million or 0.7% compared to the prior year. SD&A from businesses acquired added $74.7 million or 13.3% of SD&A expenses, including $6.1 million of one-time costs and $9.6 million of intangibles amortization related to the FCX acquisition. Excluding the impact of businesses acquired and the unfavorable impact from foreign currency translation, SD&A increased $17.3 million or 3.0% during fiscal 2018 compared to fiscal 2017. Excluding the impact of acquisitions, total compensation increased $20.1 million during fiscal 2018 compared to the prior fiscal year as a result of merit increases and improved Company performance. All other expenses within SD&A were down $2.8 million. Operating income increased $50.4 million, or 28.8%, to $225.8 million during fiscal 2018 from $175.4 million during fiscal 2017, and as a percent of sales, increased to 7.3% from 6.8% due to growth from operations and the acquisition of FCX. Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 5.8% in fiscal 2018 from 5.3% in fiscal 2017. Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 11.4% in fiscal 2018 from 11.3% in fiscal 2017. These increases are due to the positive leveraging impact from the increase in sales in the current year.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense. Other (income) expense, net, represents certain non-operating items of income and expense. This was $2.4 million of income in fiscal 2018 compared to $0.1 million of income in fiscal 2017. Current year income primarily consists of life insurance income of $1.6 million, unrealized gains on investments held by non-qualified deferredcompensation trusts of $0.8 million, and foreign currency transaction gains of $0.2 million, offset by net other periodic post-employment costs of $0.2 million. Fiscal 2017 income consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.2 million, offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.2 million, and life insurance expense of $0.1 million. The effective income tax rate was 30.8% for fiscal 2018 compared to 19.8% for fiscal 2017. The fiscal 2018 effective tax rate was favorably impacted by the enactment of the Tax Cuts and Jobs Act (the "Act") in December 2017, which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. This resulted in a blended statutory rate for the Company for fiscal 2018 of 28.06%. Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018. The corporate income tax rate change had a favorable impact to the Company of $12.1 million, which was offset by income tax expense of $3.9 million accounting for the one-time transition tax related to the Company's undistributed foreign earnings and expense of $2.4 million related to the re-measurement of deferred tax balances. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit, pertaining to a worthless stock tax deduction which decreased the effective tax rate by 13.3%. The tax benefit was net of a $1.0 million valuation allowance applicable to the related state deferred income tax asset. This deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2017 effective tax rate was favorably impacted further by $2.4 million of net excess tax benefits, resulting from stock-based compensation awards vesting and exercises, that were recognized as a reduction of income tax expense and decreased the effective income tax rate for fiscal 2017 by 1.4%. We expect our income tax rate for fiscal 2019 to be in the range of 24.0% to 26.0%. As a result of the factors addressed above, net income for fiscal 2018 increased $7.7 million from the prior year. Net income per share was $3.61 per share for fiscal 2018 compared to $3.40 for fiscal 2017. Current year results were favorably impacted by organic growth, as well as positive impacts on earnings per share of $0.15 per share related to tax reform and $0.05 per share related to the results of FCX, offset by a negative impact of $0.13 per share for one-time costs related to the acquisition of FCX. The prior year results include a positive impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Net income per share was favorably impacted by lower weighted average common shares outstanding in fiscal 2018 as a result of our share repurchase program. At June 30, 2018, we had a total of 610 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore, versus 552 at June 30, 2017. The number of Company employees was 6,634 at June 30, 2018 and 5,554 at June 30, 2017. YEAR ENDED JUNE 30, 2017 vs. 2016 The following table is included to aid in review of Applied’s statements of consolidated income. | | | | | | | | | | | Year Ended June 30, As a % of Net Sales | | Change in $'s Versus Prior Period |
| | 2017 |
| | 2016 |
| | % Change |
| Net Sales | 100.0 | % | | 100.0 | % | | 2.9 | % | Gross Profit Margin | 28.4 | % | | 28.1 | % | | 4.3 | % | Selling, Distribution & Administrative | 21.7 | % | | 22.0 | % | | 1.7 | % | Operating Income | 6.8 | % | | 3.6 | % | | 95.3 | % | Net Income | 5.2 | % | | 1.2 | % | | 352.8 | % |
Sales in fiscal 2017 were $2.6 billion, which was $74.3 million or 2.9% above fiscal 2016, with sales from acquisitions accounting for $31.1 million or 1.2% of the increase, offset by a decrease due to unfavorable foreign currency translation of $1.1 million or 0.1%. There were 252.5 selling days in fiscal 2017 and 253.5 selling days in
fiscal 2016. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, sales were up $44.3 million or 1.8% during fiscal 2017, driven by an increase of 1.6% from our traditional core operations in addition to an increase of 0.6% from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day. The following table shows changes in sales by reportable segment. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Reportable Segment | 2017 |
| 2016 |
| Service Center Based Distribution | $ | 2,180.4 |
| $ | 2,150.5 |
| $ | 29.9 |
| $ | 19.8 |
| $ | (1.1 | ) | $ | 11.2 |
| Fluid Power & Flow Control | 413.4 |
| 369.0 |
| 44.4 |
| 11.3 |
| — |
| 33.1 |
| Total | $ | 2,593.8 |
| $ | 2,519.5 |
| $ | 74.3 |
| $ | 31.1 |
| $ | (1.1 | ) | $ | 44.3 |
|
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $29.9 million, or 1.4%. Acquisitions within this segment increased sales by $19.8 million or 0.9%, while unfavorable foreign currency translation decreased sales by $36.5$1.1 million or 1.8%0.1%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $37.7$11.2 million or 1.9%.0.6%, driven by an increase of 0.7% from our upstream oil and gas-focused subsidiaries and an increase of 0.3% from within our traditional core operations, offset by a 0.4% decrease due to one less sales day. Sales of our Fluid Power Businesses& Flow Control segment which operatesincreased $44.4 million or 12.0%. Acquisitions within this segment increased sales $11.3 million or 3.1%. Excluding the impact of businesses acquired, sales increased $33.1 million or 8.9%, driven by an increase from operations, primarily in OEM markets, increased $10.3 million or 2.1%the U.S., primarily attributedof 9.3%, offset by a decrease of 0.4% due to strongone less sales growth at several of our U.S. based Fluid Power businesses which added $17.1 million or 3.5%, while unfavorable foreign currency translation decreasedday. The following table shows changes in sales by $6.8 million or 1.4%.geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Geographic Area | 2017 |
| 2016 |
| United States | $ | 2,182.6 |
| $ | 2,117.5 |
| $ | 65.1 |
| $ | 25.1 |
| $ | — |
| $ | 40.0 |
| Canada | 252.0 |
| 257.8 |
| (5.8 | ) | 6.0 |
| (0.2 | ) | (11.6 | ) | Other countries | 159.2 |
| 144.2 |
| 15.0 |
| — |
| (0.9 | ) | 15.9 |
| Total | $ | 2,593.8 |
| $ | 2,519.5 |
| $ | 74.3 |
| $ | 31.1 |
| $ | (1.1 | ) | $ | 44.3 |
|
Sales in our U.S. operations were up $207.1increased $65.1 million or 10.2%3.1%, with acquisitions adding $175.8$25.1 million or 8.7%1.2%. Excluding the impact of businesses acquired, U.S. sales were up $40.0 million or 1.9%, of which 1.4% was from our traditional core operations and 0.9% was from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day. Sales from our Canadian operations increased $67.5decreased $5.8 million or 23.2%2.2%, with acquisitions adding $86.4 million or 29.7%. Unfavorableunfavorable foreign currency translation decreaseddecreasing Canadian sales by $30.4$0.2 million or 10.4%0.1%. Acquisitions added $6.0 million, or 2.3%. Excluding the impact of businesses acquired and priorunfavorable foreign currency translation impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% related to the impact of currency translation,upstream oil and gas-focused subsidiaries, 2.0% was from the traditional core operations, and the remaining 0.4% decrease due to one less sales were up $11.5 million or 3.9% during the year.day. Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, were $17.1and Singapore, increased $15.0 million or 12.4% above the prior year, with acquisitions adding sales of $18.0 million or 13.1%.10.4% compared to fiscal 2016. Unfavorable foreign currency translation decreased other country sales by $12.9$0.9 million or 9.4%0.7%. Excluding the impact of businesses acquired and priorPrior to the impact of currency translation, other country sales were up $12.0$15.9 million or 8.7% during11.1% compared to the year.fiscal 2016, driven by an increase from operations of 13.0%, primarily in Australia and Singapore, offset by a decrease of 1.9% due to fewer sales days. The sales product mix for fiscal 20152017 was 73.2%71.5% industrial products and 26.8%28.5% fluid power products compared to 70.7%72.9% industrial and 29.3%27.1% fluid power in the prior year. These changes in product mix relate entirely to the product mix of our recent acquisitions being primarily industrial products.fiscal 2016. Our gross profit margin was 28.0%increased to 28.4% in fiscal 2015 versus 27.9%2017 compared to 28.1% in fiscal 2014.2016. The increase was primarily due to recording a more favorable impact from LIFO layer liquidations which increased margins areattributablegross profit by $9.4 million in fiscal 2017 and $2.1 million in fiscal 2016, offset by a $4.8 million increase in scrap expense in fiscal 2017 compared to fiscal 2016. Further, the impactgross profit margin for fiscal 2016 was negatively impacted by $3.6 million of relatively higher gross margins from acquired
restructuring expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for the upstream oil and gas-focused operations. The following table shows the changes in SD&A. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | SD&A Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | 2017 |
| 2016 |
| SD&A | $ | 562.3 |
| $ | 552.8 |
| $ | 9.5 |
| $ | 8.2 |
| $ | 0.1 |
| $ | 1.2 |
|
Selling, distribution and administrative expenses (SD&A) consist 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, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $62.6$9.5 million or 12.0%1.7% during fiscal 20152017 compared to fiscal 2016, and as a percent of sales decreased to 21.7% from 21.9% in fiscal 2016. Changes in foreign currency exchange rates had the prior year,effect of increasing SD&A by $0.1 million or less than 0.1% compared to fiscal 2016. Additional SD&A from businesses acquired in fiscal 2017 added $8.2 million or 1.5% of SD&A expenses including $1.0 million associated with intangibles amortization. Excluding the impact of businesses acquired and the unfavorable impact from foreign currency translation, SD&A increased $1.2 million or 0.2% during fiscal 2017 compared to fiscal 2016. Excluding the impact of acquisitions, total compensation increased $12.9 million during fiscal 2017 compared to fiscal 2016 as a result of merit increases, improved Company performance, and increased costs related to health care claims. These increases were offset by severance expense and other restructuring charges related to consolidating facilities of $5.2 million of SD&A included in fiscal 2016 that did not reoccur during fiscal 2017. Also, excluding the impact of acquisitions, bad debt expense decreased $2.3 million during fiscal 2017 compared to fiscal 2016, due to improvement in aged receivables. Further, the Company recorded a gain of $1.6 million in fiscal 2017 related to the sale of five buildings during the year. All other expenses within SD&A were down $2.6 million. During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test. As a result of this test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center Based Distribution reporting unit was impaired as of January 1, 2016. This impairment was the result of the decline in the mining and extraction industries in Australia and the resulting reduced customer spending due to a decline in demand throughout Asia. Further, due to a sustained decline in oil prices and reduced customer spending in Canada, the Company determined that a portion of the goodwill associated with the Canada Service Center Based Distribution reporting unit was also impaired as of January 1, 2016. Accordingly, the Company recognized a combined non-cash impairment charge of $64.8 million for goodwill during fiscal 2016, which decreased net income by $63.8 million and earnings per share by $1.62. Changes in future results, assumptions, and estimates used in calculating the goodwill impairment test could result in additional impairment charges in future periods. Operating income increased $85.6 million, or 95.3%, to $175.4 million during fiscal 2017 from $89.8 million during fiscal 2016, and as a percent of sales, increased to 21.3%6.8% from 21.2% in fiscal 2014. The acquired businesses added an incremental $69.4 million of SD&A expenses, which includes an additional $13.4 million associated with acquired identifiable intangibles amortization. Excluding the $11.0 million decline in SD&A from foreign currency translation, the remaining SD&A amounts3.6%. These increases were similarprimarily due to the prior year. The increase in SD&A asCompany recognizing a percentagenon-cash goodwill impairment charge of sales, was driven by additional intangible asset amortization from businesses acquired. Operating income increased $20.3$64.8 million or 12.3%, to $184.6and restructuring charges of $8.8 million during fiscal 2015 from $164.4 million2016 that did not reoccur during 2014, andfiscal 2017, as a percent ofwell as higher sales remained stable at 6.7%. The increasevolume in operating income dollars is primarily attributable to our acquired businesses.fiscal 2017.
Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.2%was 5.3% in fiscal 2015 from 6.0% in2017 and fiscal 2014. This increase is primarily attributable to an increase in gross profit as a percentage of sales, as a result of our recent acquisitions which operate at higher gross profit margins, representing an increase of 0.1%, along with a decrease in SD&A as a percentage of sales of 0.1%.2016, before the goodwill impairment charge. Operating income as a percentage of sales for the Fluid Power Businesses& Flow Control segment increased to 9.8%11.3% in fiscal 20152017 from 9.2%10.1% in fiscal 2014.2016. This increase is primarily attributablewas due to the positive leveraging of organicimpact from the increase in sales, growth inprimarily from our U.S. based Fluid Power Businesses, without a commensurate increaseoperations in SD&A expenses.this segment, in fiscal 2017. Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense. InterestOther (income) expense, net, increased to $7.9 million in fiscal 2015 entirely due to acquisition related borrowing.
Other expense (income), net, represents certain non-operating items of income and expense. This was $0.9$0.1 million of income in fiscal 2017 compared to $2.0 million of expense in fiscal 2015 compared to $2.2 million of2016. Fiscal 2017 income in fiscal 2014. Current year expense primarily consists of foreign currency transaction losses of $1.3 million offset by unrealized gains on investments held by non-qualified
deferred compensation trusts of $0.4 million. Fiscal 2014 consisted primarily of unrealized gains on investments held by non-qualified deferredcompensation trusts of $1.7$1.2 million, as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.8$0.2 million, and life
insurance expense of $0.1 million. Fiscal 2016 expense consisted primarily of foreign currency transaction losses of $1.0 million and net other periodic post-employment costs of $1.0 million. IncomeThe effective income tax expense as a percent of income before taxesrate was 34.3%19.8% for fiscal 2015 and 32.1%2017 compared to 62.6% for fiscal 2014.2016. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit pertaining to a worthless stock tax deduction, which decreased the effective tax rate by 13.3%. The tax benefit was net of a $1.0 million valuation allowance applicable to the related state deferred income tax asset. This increasededuction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2016 effective tax rate was unfavorably impacted due to the recording of $64.8 million of goodwill impairment during fiscal 2016, of which $61.3 million was not tax deductible. The goodwill impairment increased the effective tax rate for fiscal 2016 by 27.1%. The remaining decrease in the effective tax rate iswas primarily due to recordingthe adoption of valuation allowances against certain deferredASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax assets for foreign jurisdictions in fiscal 2015 as well as the non-recurrence of a one-time favorable tax benefit in fiscal 2014 in accounting for undistributed earnings of non-U.S. subsidiaries. All undistributed earnings of our foreign subsidiaries are consideredbenefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be permanently reinvested at June 30, 2015 and 2014.
We expect ourrecognized in the income statement. During fiscal 2017, $2.4 million of net excess tax benefits were recognized as a reduction of income tax expense, which decreased the effective income tax rate for fiscal 2016 to be in the range of 34.0% to 34.5%.
As a result of the factors addressed above, net income for fiscal 2015 increased $2.7 million or 2.4% from the prior year. Net income per share increased at a slightly higher rate of 4.9% due to lower weighted-average shares outstanding in fiscal 2015.
At June 30, 2015, we had a total of 565 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia and New Zealand, versus 538 at June 30, 2014.
The number of Company employees was 5,839 at June 30, 2015 and 5,472 at June 30, 2014.
YEAR ENDED JUNE 30, 2014 vs. 2013
The following table is included to aid in review of Applied’s statements of consolidated income.
| | | | | | | | | | | Year Ended June 30, As a % of Net Sales | | Change in $'s Versus Prior Period |
| | 2014 |
| | 2013 |
| | % Increase |
| Net Sales | 100.0 | % | | 100.0 | % | | (0.1 | )% | Gross Profit Margin | 27.9 | % | | 27.7 | % | | 0.6 | % | Selling, Distribution & Administrative | 21.2 | % | | 20.6 | % | | 3.2 | % | Operating Income | 6.7 | % | | 7.2 | % | | (6.8 | )% | Net Income | 4.6 | % | | 4.8 | % | | (4.5 | )% |
Sales in fiscal 2014 were $2.46 billion, which was $2.3 million or 0.1% below the 2013 fiscal year. We experienced overall declines in sales from our businesses not acquired in fiscal year 2014 of approximately $34.3 million or2017 by 1.4%. There was one additional selling day in fiscal 2014 as compared to fiscal 2013. Currency translation decreased fiscal year sales by approximately $26.2 million or 1.1%. Incremental sales from companies acquired since the 2013 fiscal year contributed $58.2 million or 2.4%.
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $30.1 million, or 1.5%. This decline was due to decreases in sales from businesses not acquired in fiscal year 2014 of $62.5 million or 3.1% coupled with an unfavorable impact of foreign currency translation of $23.1 million or 1.2%. Offseting these decreases was acquisitions, which added $55.5 million or 2.8%.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, increased $27.8 million or 6.1%. We experienced sales growth at several of our Fluid Power businesses which added $29.9 million or 6.6% along with acquisitions within this segment which added $2.8 million or 0.6%, while unfavorable foreign currency translation losses decreased sales by $4.9 million or 1.1%.
Sales in our U.S. operations were up $14.0 million or 0.7% with acquisitions adding $32.8 million or 1.6% offsetting declines in sales from our businesses not acquired in fiscal year 2014 of $18.8 million or 0.9%. Sales from our Canadian operations decreased $7.2 million or 2.4%. Acquisitions added $19.3 million or 6.5%, offset by unfavorable foreign currency translation losses which reduced sales by $17.5 million or 5.9% coupled with declines in sales from our businesses not acquired in fiscal year 2014 of $9.0 million or 3.0%, mostly as a result of weakness within the Canadian mining sector. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $9.1 million or 6.2% below the 2013 fiscal year. This decrease is primarily the result of unfavorable foreign currency translation losses of $8.7 million or 5.9%, coupled with declines in sales of $6.5 million or 4.4%, mostly within the mining sector, from our businesses not acquired in fiscal year 2014, while acquisitions added $6.1 million or 4.2% in fiscal 2014.
The sales product mix for fiscal 2014 was 70.7% industrial products and 29.3% fluid power products compared to 72.1% industrial and 27.9% fluid power in fiscal year 2013. The change in our product mix in fiscal year 2014 was due to sales growth within our Fluid Power Businesses segment coupled with sales declines in our Service Center Based Distribution segment.
Our gross profit margin was 27.9% in fiscal 2014 versus 27.7% in fiscal 2013. The increased margins wereattributable to the impact of relatively higher gross margins from acquired operations.
Selling, distribution and administrative expenses (SD&A) consist 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, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $16.0 million or 3.2% during fiscal 2014 compared to fiscal 2013, and as a percent of sales increased to 21.2% from 20.6% in fiscal 2013. The acquired businesses added $19.3 million of SD&A expenses, which included an additional $2.5 million associated with acquired identifiable intangibles amortization. The increase in SD&A as a percentage of sales, was driven by relatively higher SD&A levels from businesses acquired in fiscal year 2014.
Operating income decreased $12.0 million, or 6.8%, to $164.4 million during fiscal 2014 from $176.4 million during 2013. As a percent of sales, operating income decreased to 6.7% in fiscal 2014 from 7.2% in 2013. The decrease in operating income was primarily attributable to relatively flat gross profit levels coupled with added levels of SD&A from businesses acquired in the 2014 fiscal year. The decrease in operating margin percentage was driven by the negative leverage resulting from decreasing sales from businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales to 21.2% from 20.6% in fiscal year 2013, slightly offset by an increase in gross profit as a percentage of sales to 27.9% from 27.7%.
Operating income as a percentage of sales for the Service Center Based Distribution segment decreased to 6.0% in fiscal 2014 from 6.9% in fiscal 2013. This decrease was attributable to the negative leverage resulting from decreasing sales in businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales. In addition, SD&A for acquisitions in fiscal year 2014 operated at a relatively higher SD&A level. The SD&A impacts represented an approximate 1.0% reduction in operating income as a percentage of sales and were slightly offset by an increase in gross profit margins also due to acquisitions in fiscal year 2014 (representing an increase of approximately 0.1%) representing the total net change in operating income as a percentage of sales.
Operating income as a percentage of sales for the Fluid Power Businesses segment increased to 9.2% in fiscal 2014 from 9.0% in fiscal 2013. This increase was due to the positive leverage provided by an increase in sales without a commensurate increase in SD&A levels at several of our Fluid Power Businesses (representing a 0.5% increase in operating income as a percentage of sales), offset by a slight decrease in gross profit margins (representing a 0.3 decrease in operating income as a percentage of sales).
Segment operating income was impacted by changes in the amounts and levels of expenses allocated to the segments. The expense allocations included corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Interest expense, net, remained relatively stable as compared to fiscal year 2013.
Other expense (income), net, represented certain non-operating items of income and expense. This was $2.2 million of income in fiscal 2014 compared to $1.4 million of income in fiscal 2013. Fiscal year 2014 income primarily consisted of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.7 million as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by foreign currency transaction losses of $0.8 million. Fiscal 2013 consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.3 million.
Income tax expense as a percent of income before taxes was 32.1% for fiscal 2014 and 33.5% for fiscal 2013. The impact of lower effective tax rates in foreign jurisdictions favorably reduced our rate when compared to the U.S. federal statutory rate by 2.6%. Further reducing our rate compared to the U.S. federal statutory rate by 1.6% was the reversal of a deferred tax liability recorded in the years prior to fiscal 2014 on a portion of the undistributed earnings in Canada. All undistributed earnings of our foreign subsidiaries were considered to be permanently reinvested at June 30, 2014. The effective tax rate for fiscal 2014 was further reduced by 1.1% due to a favorable permanent dividend deduction along with other items. These reductions compared to the U.S. federal statutory rate were offset by the impact of state2017 and local taxes which increased the rate by 2.4%.2016.
As a result of the factors addressed above, net income for fiscal 2014 decreased $5.32017 increased $104.3 million or 4.5% from fiscal year 2013.2016. Net income per share decreased atwas $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016. Fiscal 2017 results included a slightlypositive impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Fiscal 2016 results included negative impacts on earnings per share of $1.62 per share for goodwill impairment charges and $0.16 per share for restructuring charges. Net income per share was favorably impacted by lower rate of 4.0% due to lower weighted-averageweighted average common shares outstanding in fiscal 2014.2017 as a result of our share repurchase program. At June 30, 2014,2017, we had a total of 538552 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, and New Zealand, and Singapore, versus 522559 at June 30, 2013.2016. The number of Company employees was 5,4725,554 at June 30, 20142017 and 5,1095,569 at June 30, 2013.2016. LIQUIDITY AND CAPITAL RESOURCES Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At June 30, 20152018 we had total debt obligations outstanding of $321.0$966.1 million compared to $170.7$292.0 million at June 30, 2014.2017. Management expects that our existing cash, cash equivalents, funds available under the revolving credit and uncommitted shelf facilities, and cash provided from operations, and the use of operating leases will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, 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 holds, from time to time, relatively significant cash and cash equivalent balances outside of the United States of America. The following table shows the Company's total cash as of June 30, 2015 by geographic location; all amounts are in thousands.
| | | | | Country | Amount |
| United Sates | $ | 17,256 |
| Canada | 40,325 |
| Other Countries | 11,889 |
| Total | $ | 69,470 |
|
To the extent cash in foreign countries is distributed to the U.S., it could become subject to U.S. income taxes. Foreign tax credits may be available to offset all or a portion of such taxes. At June 30, 2015, all foreign earnings are considered permanently reinvested.
The Company’s working capital at June 30, 20152018 was $549.2$625.5 million compared to $545.2$572.8 million at June 30, 2014.2017. The current ratio was 2.4 to 1 at June 30, 2018 and 2.8 to 1 at June 30, 2015 and 2.9 to 1 at June 30, 2014.2017. Net Cash Flows The following table is included to aid in review of Applied’s statements of consolidated cash flows; all amounts are in thousands. | | | Year Ended June 30, | Year Ended June 30, | | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Net Cash Provided by (Used in): | | | | | | | | | | | Operating Activities | $ | 154,538 |
| | $ | 110,110 |
| | $ | 111,397 |
| $ | 147,304 |
| | $ | 164,619 |
| | $ | 162,014 |
| Investing Activities | (173,621 | ) | | (203,637 | ) | | (78,825 | ) | (797,906 | ) | | (16,894 | ) | | (75,031 | ) | Financing Activities | 24,689 |
| | 92,142 |
| | (38,025 | ) | 600,284 |
| | (103,349 | ) | | (93,007 | ) | Exchange Rate Effect | (7,325 | ) | | (590 | ) | | 175 |
| (589 | ) | | 820 |
| | (3,585 | ) | Decrease in Cash and Cash Equivalents | $ | (1,719 | ) | | $ | (1,975 | ) | | $ | (5,278 | ) | | Increase (Decrease) in Cash and Cash Equivalents | | $ | (50,907 | ) | | $ | 45,196 |
| | $ | (9,609 | ) |
The increasedecrease in cash provided by operating activities resulted fromduring fiscal 2018 is primarily due to increased working capital levels to support increased sales compared to the operationsprior year periods. The decrease in cash was further impacted by
increased interest payments, and the payment of newly acquired businesses along with$7.1 million of one-time costs, both related to the FCX acquisition. These decreases were partially offset by improved cash collections on accounts receivable within our U.S. based businesses.operating results, including the impact of the FCX acquisition. Net cash used in investing activities in fiscal 20152018 included $14.9 million for capital expenditures and $160.6$775.7 million used for acquisitions.the acquisitions of FCX and DICOFASA, and $23.2 million used for capital expenditures. Net cash used in investing activities in fiscal 20142017 included $20.2$17.0 million for capital expenditures $10.0and $2.8 million used for acquisitions. These were offset by $2.9 million of which wasproceeds received from the sale of five buildings during fiscal 2017. Net cash used for the purchase of our headquarters facility, and $184.3 million for acquisitions. Capital expenditures for fiscal 2014 included an insignificant amount related to the ERP project as the portion of that project pertaining to capital spending primarily endedin investing activities in fiscal 2013. Fiscal 2013 investing cash
activities2016 included the use of $12.2$13.1 million for capital expenditures ($5.6and $62.5 million related to the ERP project), and $67.6 millionused for acquisitions.
Net cash provided by financing activities in fiscal 20152018 included $170.0$780.0 million of cash from borrowings under long term debt facilities used for the financing of acquisitions, offset by $17.0new credit facility and $19.5 million of repaymentsnet borrowings under ourthe revolving credit facility, and $2.7offset by $125.4 million of long termlong-term debt repayments. Further uses of cash were $42.7$45.9 million for dividend payments, $76.5$22.8 million used to repurchase 1,740,100393,300 shares of treasury stock, and $7.7$3.3 million of acquisition holdback payments. Net cash provided by financing activities in fiscal 2014 included $100.0 million from borrowings under long term debt facilities as well as $69.0 million in borrowings under our revolving credit facility, both of which were utilizedused for the financingpayment of acquisitions. These sources of cash were offset by $40.4 million for dividend payments and $36.7 million used to repurchase 759,900 shares of treasury stock. debt issuance costs. Net cash used in financing activities in fiscal 20132017 included $37.2$3.4 million of long-term debt repayments and $33.0 million of net repayments under the revolving credit facility. Further uses of cash were $44.6 million for dividend payments, and $3.8$8.2 million relatedused to repurchase 162,500 shares of treasury stock, $11.3 million used for acquisition holdback payments, partiallyand $3.5 million used to pay taxes for shares withheld. Net cash used in financing activities in fiscal 2016 included $98.7 million of long-term debt repayments and $19.0 million of net repayments under the revolving credit facility, offset by $2.6$125.0 million of excess tax benefitscash from share-based compensation.borrowings under the credit facility. Further uses of cash were $43.3 million for dividend payments, $37.5 million used to repurchase 951,100 shares of treasury stock, and $18.9 million of acquisition holdback payments. The increase in dividends over the last three fiscal years is the result of regular increases in our dividend payout rates. We paid dividends of $1.04, $0.96$1.18, $1.14, and $0.88$1.10 per share in fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Capital Expenditures We expect capital expenditures for fiscal 20162019 to be in the $13.0$26.0 million to $15.0$28.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 20162019 is expected to be in the range of $16.0$21.0 million to $17.0 million.$22.0 million. ERP Project In fiscal 2011 Applied commenced its ERP (SAP) project to transform the Company's technology platforms and enhance its business information and technology systems for future growth. We havefirst deployed our solution in our Western Canadian operating locations and our traditional U.S. Service Center Based Businesses,Distribution businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the conversion to SAP of its related financial and accounting systems, including the receivables, payables, treasury, inventory, fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation process/system, have beenwere transitioned to SAP during fiscal 2015. TheAt the beginning of fiscal 2016 the Company expects to convertconverted to a new consolidation process and system atsystem. During the beginningfourth quarter of fiscal 2016.2017, operations in Eastern Canada transitioned onto SAP, and the majority of the Company's upstream oil and gas-focused operations transitioned onto SAP during fiscal 2018. The Company will continue to evaluate and determineconsider an appropriate deployment schedule for operations in Eastern Canada as well as other operations not on SAP. Share Repurchases The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. At June 30, 2015,2018, we had authorization to purchase an additional 1,247,3001,056,700 shares. In fiscal 2015, 20142018, 2017 and 2013,2016, we repurchased 1,740,100, 759,900393,300, 162,500, and 1,300951,100 shares of the Company’s common stock, respectively, at an average price per share of $43.97, $48.34$57.92, $50.72, and $40.96,$39.39, respectively. Borrowing Arrangements TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780.0 million unsecured borrowings of up to $150.0 million.term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR prime, or the bank’s cost of fundsprime at the Company's discretion. This agreement also enables the Company to refinance this debt on a long term basis. As ofAt June 30, 2015 and 2014,2018, the Company had $52.0$775.1 million and $69.0 million in borrowings outstanding under this credit facility, respectively.the term loan and $19.5 million outstanding under the revolver. Unused lines under this facility, at June 30, 2015, net of outstanding letters of credit of $3.8$3.6 million to secure certain insurance obligations, totaled $94.2$226.9 million at June 30, 2018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the revolving credit facility borrowingsterm loan as of June 30, 20152018 was 1.15%4.13%.
Additionally
The weighted average interest rate on the amount outstanding under the revolving credit facility as of June 30, 2018 was 3.93%. At June 30, 2017, the Company had $120.3 million outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2.4 million to secure certain insurance obligations, totaled $247.6 million at June 30, 2015,2017. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either revolving credit agreement, in the amount of $1.8$2.7 million as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations. In April 2014 the Company entered into a $100.0 million unsecured five-year term loan with a group of banks with a final maturity date in April 2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was 1.19%. The term loan had $96.9 million outstanding at June 30, 2015.
Also in April 2014, the Company assumed $2.4 million of debt as a part of the acquisition of our headquarters facility. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in May 2024. We had $2.1 million outstanding under this note at June 30, 2015.
At June 30, 20152018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million.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 have a principal amount of $120.0 million and carry a fixed interest rate of 3.19%; the principal is, and are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principal amount of $50.0 million, and carry a fixed interest rate of 3.21%; the principal is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $50.0 million in additional financing was available under this facility. 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, maturing in May 2024. At June 30, 2018 and 2017, $1.4 million and $1.7 million was outstanding, respectively. The revolvingnew credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 times consolidated income before interest, taxes, depreciation and amortization. At June 30, 2015,2018, the Company's indebtedness was less than two3.0 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at June 30, 2015 and expects to remain in compliance during the terms of the agreements.2018. Accounts Receivable Analysis The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable (all dollar amounts are in thousands): | | June 30, | 2015 |
| | 2014 |
| 2018 |
| | 2017 |
| Accounts receivable, gross | $ | 386,926 |
| | $ | 386,117 |
| $ | 562,377 |
| | $ | 400,559 |
| Allowance for doubtful accounts | 10,621 |
| | 10,385 |
| 13,566 |
| | 9,628 |
| Accounts receivable, net | $ | 376,305 |
| | $ | 375,732 |
| $ | 548,811 |
| | $ | 390,931 |
| Allowance for doubtful accounts, % of gross receivables | 2.7 | % | | 2.7 | % | 2.4 | % | | 2.4 | % | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| 2018 |
| | 2017 |
| Provision for losses on accounts receivable | $ | 2,597 |
| | $ | 3,970 |
| $ | 2,803 |
| | $ | 2,071 |
| Provision as a % of net sales | 0.09 | % | | 0.16 | % | 0.09 | % | | 0.08 | % |
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 50.055.0 at June 30, 20152018 versus 51.451.6 at June 30, 2014.2017. The inclusion of FCX had no impact on the Company's DSO at June 30, 2018. Accounts receivable increased 0.2%40.4% this year, comparedof which 20.7% is accounts receivable for FCX. The remaining increase is due to an increase of 11.9%in sales inexcluding FCX for the twelve months ended June 30, 2015. Acquisitions added $29.3 million, or 7.8%, of accounts receivable, changes in foreign currency rates decreased receivables by $15.6 million and improved collections led to a decrease in receivables of $13.1 million. We primarily attribute the decrease in DSO to the improved timing of collections within our traditional U.S. Service Center Based Distribution Businesses. DSO and past due balances have declined now that all traditional U.S. Service Center Based Distribution Businesses have been fully operational on the new ERP system for all of fiscal 2015.2018. Approximately 4.2%2.4% of our accounts receivable balances are more than 90 days past due at June 30, 20152018 compared to 5.7%1.7% at June 30, 2014.2017. This improvementincrease primarily relates to our U.S. Service Center Based Businesses.Distribution businesses. On an overall basis, our provision for losses from uncollected receivables represents 0.09% of our sales in the year ended June 30, 2015.2018. Historically, this percentage is around 0.10% to 0.15%. Our experience with losses on accounts which have uncollected receivables was better than our historical averages in fiscal 2015. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels, and that past due balances will continue to decline in fiscal 2016.levels.
Inventory Analysis Inventories are valued at the average cost method, 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 uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 2015 2018 was 4.0 versus 3.7 versus 3.8 at June 30, 2014. This decrease is due to the impact of recent acquisitions which historically have had lower inventory turnover rates, coupled with strategic inventory investments that we believe will assist with future sales growth.2017. We believe our inventory turnover ratio in fiscal 20162019 will be slightly better than our fiscal 20152018 levels.
CONTRACTUAL OBLIGATIONS The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20152018 (in thousands): | | | Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| Operating leases | $ | 82,400 |
| | $ | 24,900 |
| | $ | 34,300 |
| | $ | 16,700 |
| | $ | 6,500 |
| | | $ | 111,400 |
| | $ | 38,100 |
| | $ | 45,300 |
| | $ | 17,000 |
| | $ | 11,000 |
| | — |
| Planned funding of post-retirement obligations | 27,200 |
| | 5,400 |
| | 3,800 |
| | 6,700 |
| | 11,300 |
| | | 16,300 |
| | 3,500 |
| | 4,400 |
| | 1,800 |
| | 6,600 |
| | — |
| Unrecognized income tax benefit liabilities, including interest and penalties | 3,100 |
| | | | | | | | | | 3,100 |
| 4,700 |
| | — |
| | — |
| | — |
| | — |
| | 4,700 |
| Long term debt obligations | 321,000 |
| | 3,300 |
| | 63,100 |
| | 108,600 |
| | 146,000 |
| | | | Interest on long term debt obligations (1) | 37,100 |
| | 6,600 |
| | 13,000 |
| | 11,000 |
| | 6,500 |
| | | | Long-term debt obligations | | 966,100 |
| | 19,700 |
| | 128,900 |
| | 792,300 |
| | 25,200 |
| | — |
| Interest on long-term debt obligations (1) | | 84,300 |
| | 18,300 |
| | 40,800 |
| | 25,000 |
| | 200 |
| | — |
| Acquisition holdback payments | 29,600 |
| | 19,200 |
| | 10,400 |
| | | | | | | 3,365 |
| | 2,592 |
| | 698 |
| | — |
| | 75 |
| | — |
| Total Contractual Cash Obligations | $ | 500,400 |
| | $ | 59,400 |
| | $ | 124,600 |
| | $ | 143,000 |
| | $ | 170,300 |
| | $ | 3,100 |
| $ | 1,186,165 |
| | $ | 82,192 |
| | $ | 220,098 |
| | $ | 836,100 |
| | $ | 43,075 |
| | $ | 4,700 |
|
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in effect as of June 30, 20152018 are used for variable rate debt. Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including interest and penalties as well as the balance outstanding under our revolving credit facility in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities or lenders. SUBSEQUENT EVENTS
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12.5 million. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.authorities.
CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. LIFO Inventory Valuation and Methodology Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in fiscal 1974. Approximately 22.1%16.8% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $151.8$139.2 million as reflected in our consolidated balance sheet at June 30, 2015.2018. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data," for further information.
Allowances for Slow-Moving and Obsolete Inventories We evaluate the recoverability of our slow-moving or obsoleteand inactive inventories at least quarterly. We estimate the recoverable cost of such inventory by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. A significant portion of the products we hold in inventory have long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various supplier return programs. As of June 30, 2018 and 2017, the Company's reserve for slow-moving or obsolete inventories was $38.1 million and $28.8 million, respectively, recorded in inventories in the consolidated balance sheets. The increase is primarily due to a $6.8 million reserve related to the inventory acquired with FCX. Allowances for Doubtful Accounts We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur. As of June 30, 20152018 and 2014,2017, our allowance for doubtful accounts was 2.7%2.4% of gross receivables, for each period.receivables. Our provision for losses on accounts receivable was $2.6$2.8 million, $4.0$2.1 million and $2.3$4.3 million in fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Goodwill and Intangibles Goodwill is recognized as the amount by which the cost of an acquired entity exceeds the net amount assigned to assets acquired and liabilities assumed. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we also recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names, and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable. We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a two-stepone-step approach. Step one compares theThe fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired, and the second step of goodwill impairment test is unnecessary.impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwillan impairment test is performed to measurecharge would be recognized for the amount of impairment loss (if any). Step two compares the implied fair value of the reporting unit goodwill withby which the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, meaning,exceeds the reporting unit's fair value, isnot to exceed the total amount of goodwill allocated to all the assets and liabilities of thethat reporting unit (including unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit is the price paid to acquire the reporting unit. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. Goodwill on our consolidated financial statements is relatedrelates to both the Service Center Based Distribution segment and the Fluid Power Businesses& Flow Control segment. The Company has sevensix reporting units for which are U.S. Service Centers, MSS, Canada Service Centers, Mexico Service Centers, Australia and New Zealand, Puerto Rico, and Fluid Power. Foran annual goodwill impairment assessment was performed as of January 1, 2018. The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts by at least 30% as of January 1, 2018. However, for one of our reporting units with goodwill of approximately $28.0 million, if we do not achieve our forecasted margin improvements goodwill could be impaired. The fair values of the reporting units in accordance with the goodwill impairment test as of January 1, 2015,were determined using the Company performed a quantitative analysisIncome and estimated the fair value of each of the reporting units using a combination of the incomeMarket approaches. The Income approach (also known asemploys the discounted cash flow ("DCF") method which utilizes the presentreflecting
projected cash flows expected to be generated by market participants and then adjusted for time value of cash flows to estimate fair value) and the marketmoney factors. The Market approach which measures fair value through theutilizes an analysis of comparable publicly traded companies ("guideline company analysis"), giving equal weight to both methods. The Company concluded that five of the reporting units had material excesses of fair value compared to their carrying amounts. The Company concluded that two reportingcompanies.
units (Canada service center and Australia / New Zealand) had excess fair value of approximately $39.0 million and $4.0 million, or fifteen and fourteen percent, respectively when compared to the carrying amounts of approximately $258.0 million and $28.0 million, respectively. The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions forecast at the assessmentmeasurement date. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date. The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years. Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth. A number of benchmarks from independent industry and other economic publications were also used. Changes in future actual results, assumptions, and estimates after the assessmentmeasurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.
Self-Insurance Liabilities
We maintain business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. We accrue estimated losses using actuarial calculations, models and assumptions based on historical loss experience. We also maintain a partially self-insured health benefits plan, which provides medical benefits to U.S. based employees electing coverage. We maintain a reserve for all unpaid medical claims including those incurred but not reported based on historical experience and other assumptions. Although management believes that the estimated liabilities for self-insurance are adequate, the estimates described above may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate self-insurance liabilities are based on numerous assumptions, some of which are subjective. We will continue to adjust our estimated liabilities for self-insurance, as deemed necessary, in the event that future loss experience differs from historical loss patterns.
Pension and Other Post-employment Benefit Plans
The measurement of liabilities related to pension plans and other post-employment benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, and health care cost trend rates. We evaluate these assumptions and adjust them as necessary. Changes to these assumptions Further, continued adverse market conditions could result in a material change to the Company’s pension obligation causing a related increase or decrease in reported net operating results inrecognition of additional impairment if the periodCompany determines that the fair values of change in the estimate. At June 30, 2015, a 1% point change wouldits reporting units have the following effects (in thousands):
| | | | | | | | | | One-Percentage Point | Effect of change in: | Increase |
| | Decrease |
| Discount rate on liability | $ | (1,803 | ) | | $ | 2,172 |
| Discount rate on net periodic benefit cost | (86 | ) | | 102 |
|
A 1% change in the return on assets is not material as most of the plans are non-qualified and unfunded.fallen below their carrying values.
Income Taxes Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30, 2015,2018, the Company had recognized $6.8$56.1 million of net deferred tax liabilities. Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets.assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amountmanagement believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels. Income taxes on undistributed earnings of non-U.S. subsidiaries are not accrued for the portion of such earnings that management considers to be permanently reinvested. At June 30, 2015, management considered all undistributed earnings of non-U.S. subsidiaries to be permanently reinvested. Undistributed earnings of non-U.S. subsidiaries totaled $139.0 million for which no provision for U.S. income tax had been made.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This Form 10-K, including 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; 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, or changes in supplier distribution programs; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems;systems and risks relating to 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; the volatility of our stock price and the resulting impact on our consolidated financial statements; risks related to legal proceedings to which we are a party; potentially adverse government regulation, and legislation, or policies, both enacted and under consideration, including with respect to health care and federal tax policy, (e.g., affecting the use of the LIFO inventory accounting method and the taxation of foreign-sourced income);international trade, such as recent tariffs and proposed tariffs on imports; and the occurrence of extraordinary events (including prolonged labor disputes, power outages,telecommunication outages, terrorist acts, 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. We discuss certain of these matters and other risk factors more fully throughout our Form 10-K, as well as other of our filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates. We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. We doAs of June 30, 2018, we did not currently have any outstanding derivative instruments. Foreign Currency Exchange Rate Risk Because we operate throughout North America, Australia and New Zealand and approximately 18.7%14.9% of our fiscal year 20152018 net sales were generated outside the United States, foreign currency exchange rates can impact our financial position, results of operations and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive income (loss) as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the statements of consolidated income as a component of other (income) expense, (income), net. Applied does not currently hedge the net investments in our foreign operations. During the course of the fiscal year, the Canadian, Mexican, Australian, Mexican and New Zealand foreigncurrency exchange rates decreased in relation to the U.S. dollar by 13.7%2.0%, 18.9%9.2%, 17.0%4.1%, and 22.3%7.4%, respectively. In the twelve months ended June 30, 2015,2018, we experienced net foreign currency translation losses totaling $58.2$8.9 million, which were included in other comprehensive income (loss). We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. A 10% strengthening from the levels experienced during the year ended June 30, 2015 of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2018 would have resulted in a $1.4$0.9 million decrease in net income for the year ended June 30, 2015.2018. A 10% weakening from the levels experienced during the year ended June 30, 2015 of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2018 would have resulted in a $1.4$0.9 million increase in net income for the year ended June 30, 2015.2018. Interest Rate Risk Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market interest rates. Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving credit facility with a capacity of up to $150.0$250.0 million in borrowings and $52.0$19.5 million outstanding at June 30, 2015, our $100.02018, and a $780.0 million five year term loan, facility, $96.9 million of which $775.1 million was outstanding at June 30, 2015,2018. Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $2.1$1.4 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $191.4$431.7 million during fiscal 2015.2018. The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings would have resulted in a $1.9$4.3 million increase in interest expense. Changes in market interest rates would also impact interest rates on these facilities. We monitor depository institutions that hold our cash and cash equivalents, primarily for safety of principal and secondarily for maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any of these entities.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc. Cleveland, Ohio
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the "Company"“Company”) as of June 30, 20152018 and 2014, and2017, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2015. Our audits also included2018, and the financial statementrelated notes and the schedule listed in the Index at Item 15. 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2018, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 17, 2018 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight BoardPCAOB (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of theCompany at June 30, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 26, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP Cleveland, Ohio
August 26, 201517, 2018
We have served as the Company's auditor since 1966. 26
STATEMENTS OF CONSOLIDATED INCOME (In thousands, except per share amounts)
| | Year Ended June 30, | | 2015 |
| | 2014 |
| | 2013 |
| | 2018 |
| | 2017 |
| | 2016 |
| Net Sales | | $ | 2,751,561 |
| | $ | 2,459,878 |
| | $ | 2,462,171 |
| | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
| Cost of Sales | | 1,981,747 |
| | 1,772,952 |
| | 1,779,209 |
| | 2,189,279 |
| | 1,856,051 |
| | 1,812,006 |
| Gross Profit | | 769,814 |
| | 686,926 |
| | 682,962 |
| | 883,995 |
| | 737,695 |
| | 707,422 |
| Selling, Distribution and Administrative, including depreciation | | 585,195 |
| | 522,568 |
| | 506,563 |
| | 658,168 |
| | 562,309 |
| | 552,846 |
| Goodwill Impairment | | | — |
| | — |
| | 64,794 |
| Operating Income | | 184,619 |
| | 164,358 |
| | 176,399 |
| | 225,827 |
| | 175,386 |
| | 89,782 |
| Interest Expense | | 8,121 |
| | 900 |
| | 621 |
| | 24,142 |
| | 8,831 |
| | 9,004 |
| Interest Income | | (252 | ) | | (651 | ) | | (456 | ) | | (657 | ) | | (290 | ) | | (241 | ) | Other Expense (Income), net | | 879 |
| | (2,153 | ) | | (1,431 | ) | | Other (Income) Expense, net | | | (2,376 | ) | | (121 | ) | | 2,041 |
| Income Before Income Taxes | | 175,871 |
| | 166,262 |
| | 177,665 |
| | 204,718 |
| | 166,966 |
| | 78,978 |
| Income Tax Expense | | 60,387 |
| | 53,441 |
| | 59,516 |
| | 63,093 |
| | 33,056 |
| | 49,401 |
| Net Income | | $ | 115,484 |
| | $ | 112,821 |
| | $ | 118,149 |
| | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| Net Income Per Share — Basic | | $ | 2.82 |
| | $ | 2.69 |
| | $ | 2.81 |
| | $ | 3.65 |
| | $ | 3.43 |
| | $ | 0.75 |
| Net Income Per Share — Diluted | | $ | 2.80 |
| | $ | 2.67 |
| | $ | 2.78 |
| | $ | 3.61 |
| | $ | 3.40 |
| | $ | 0.75 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (In thousands)
| | Year Ended June 30, | | 2015 |
| | 2014 |
| | 2013 |
| | 2018 |
| | 2017 |
| | 2016 |
| Net income per the statements of consolidated income | | $ | 115,484 |
| | $ | 112,821 |
| | $ | 118,149 |
| | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | | | | | | | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | | | | | | | Foreign currency translation adjustments | | (58,233 | ) | | 629 |
| | (1,358 | ) | | (8,875 | ) | | 2,238 |
| | (24,441 | ) | Postemployment benefits: | | | | | | | | Actuarial (loss) gain on remeasurement | | (776 | ) | | 1,402 |
| | 3,153 |
| | Post-employment benefits: | | | | | | | | Actuarial gain (loss) on re-measurement | | | 709 |
| | 2,038 |
| | (1,998 | ) | Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | | 286 |
| | 382 |
| | 872 |
| | (73 | ) | | 506 |
| | 518 |
| Unrealized (loss) gain on investment securities available for sale | | (38 | ) | | 112 |
| | 10 |
| | Unrealized gain (loss) on investment securities available for sale | | | 37 |
| | 91 |
| | (52 | ) | Total other comprehensive (loss) income, before tax | | (58,761 | ) | | 2,525 |
| | 2,677 |
| | (8,202 | ) | | 4,873 |
| | (25,973 | ) | Income tax (benefit) expense related to items of other comprehensive income (loss) | | (205 | ) | | 719 |
| | 1,529 |
| | Income tax expense (benefit) related to items of other comprehensive income (loss) | | | 319 |
| | 1,029 |
| | (598 | ) | Other comprehensive (loss) income, net of tax | | (58,556 | ) | | 1,806 |
| | 1,148 |
| | (8,521 | ) | | 3,844 |
| | (25,375 | ) | Comprehensive income | | $ | 56,928 |
| | $ | 114,627 |
| | $ | 119,297 |
| | $ | 133,104 |
| | $ | 137,754 |
| | $ | 4,202 |
|
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (In thousands)
| | June 30, | | 2015 |
| | 2014 |
| | 2018 |
| | 2017 |
| Assets | | | | | | | | | Current assets | | | | | | | | | Cash and cash equivalents | | $ | 69,470 |
| | $ | 71,189 |
| | $ | 54,150 |
| | $ | 105,057 |
| Accounts receivable, less allowances of $10,621 and $10,385 | | 376,305 |
| | 375,732 |
| | Accounts receivable, less allowances of $13,566 and $9,628 | | | 548,811 |
| | 390,931 |
| Inventories | | 362,419 |
| | 335,747 |
| | 422,069 |
| | 345,145 |
| Other current assets | | 51,111 |
| | 53,480 |
| | 32,990 |
| | 41,409 |
| Total current assets | | 859,305 |
| | 836,148 |
| | 1,058,020 |
| | 882,542 |
| Property — at cost | | | | | | | | | Land | | 12,950 |
| | 13,212 |
| | 14,411 |
| | 14,250 |
| Buildings | | 89,325 |
| | 89,886 |
| | 104,419 |
| | 97,529 |
| Equipment, including computers and software | | 166,515 |
| | 157,370 |
| | 177,813 |
| | 162,432 |
| Total property — at cost | | 268,790 |
| | 260,468 |
| | 296,643 |
| | 274,211 |
| Less accumulated depreciation | | 164,343 |
| | 156,872 |
| | 175,300 |
| | 166,143 |
| Property — net | | 104,447 |
| | 103,596 |
| | 121,343 |
| | 108,068 |
| Identifiable intangibles, net | | 198,828 |
| | 159,508 |
| | 435,947 |
| | 163,562 |
| Goodwill | | 254,406 |
| | 193,494 |
| | 646,643 |
| | 206,135 |
| Deferred tax assets | | 97 |
| | 21,166 |
| | Other assets | | 17,885 |
| | 20,257 |
| | 23,788 |
| | 27,288 |
| Total Assets | | $ | 1,434,968 |
| | $ | 1,334,169 |
| | $ | 2,285,741 |
| | $ | 1,387,595 |
| Liabilities | | | | | | | | | Current liabilities | | | | | | | | | Accounts payable | | $ | 179,825 |
| | $ | 172,401 |
| | $ | 256,886 |
| | $ | 180,614 |
| Current portion of long term debt | | 3,349 |
| | 2,720 |
| | Current portion of long-term debt | | | 19,183 |
| | 4,814 |
| Compensation and related benefits | | 63,780 |
| | 55,760 |
| | 73,370 |
| | 58,785 |
| Other current liabilities | | 63,118 |
| | 60,074 |
| | 83,112 |
| | 65,540 |
| Total current liabilities | | 310,072 |
| | 290,955 |
| | 432,551 |
| | 309,753 |
| Long-term debt | | 317,646 |
| | 167,992 |
| | 944,522 |
| | 286,769 |
| Post-employment benefits | | 19,627 |
| | 23,611 |
| | 11,985 |
| | 16,715 |
| Other liabilities | | 46,295 |
| | 51,303 |
| | 81,720 |
| | 29,102 |
| Total Liabilities | | 693,640 |
| | 533,861 |
| | 1,470,778 |
| | 642,339 |
| 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 |
| | Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,703 and 39,041 shares outstanding, respectively | | | 10,000 |
| | 10,000 |
| Additional paid-in capital | | 160,072 |
| | 156,999 |
| | 169,383 |
| | 164,655 |
| Retained earnings | | 969,548 |
| | 896,776 |
| | 1,129,678 |
| | 1,033,751 |
| Treasury shares — at cost (14,308 and 12,650 shares) | | (338,121 | ) | | (261,852 | ) | | Accumulated other comprehensive income (loss) | | (60,171 | ) | | (1,615 | ) | | Treasury shares — at cost (15,510 and 15,172 shares), respectively | | | (403,875 | ) | | (381,448 | ) | Accumulated other comprehensive loss | | | (90,223 | ) | | (81,702 | ) | Total Shareholders’ Equity | | 741,328 |
| | 800,308 |
| | 814,963 |
| | 745,256 |
| Total Liabilities and Shareholders’ Equity | | $ | 1,434,968 |
| | $ | 1,334,169 |
| | $ | 2,285,741 |
| | $ | 1,387,595 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands)
| | Year Ended June 30, | | 2015 |
| | 2014 |
| | 2013 |
| | 2018 |
| | 2017 |
| | 2016 |
| Cash Flows from Operating Activities | | | | | | | | | | | | | Net income | | $ | 115,484 |
| | $ | 112,821 |
| | $ | 118,149 |
| | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Goodwill impairment | | | — |
| | — |
| | 64,794 |
| Depreciation and amortization of property | | 16,578 |
| | 13,977 |
| | 12,501 |
| | 17,798 |
| | 15,306 |
| | 15,966 |
| Amortization of intangibles | | 25,797 |
| | 14,023 |
| | 13,233 |
| | 32,065 |
| | 24,371 |
| | 25,580 |
| Amortization of stock appreciation rights and options | | 1,610 |
| | 1,808 |
| | 2,317 |
| | 1,961 |
| | 1,891 |
| | 1,543 |
| Deferred income taxes | | (4,961 | ) | | (8,209 | ) | | 10,179 |
| | 1,615 |
| | (2,852 | ) | | (6,581 | ) | Provision for losses on accounts receivable | | 2,597 |
| | 3,970 |
| | 2,267 |
| | 2,803 |
| | 2,071 |
| | 4,303 |
| Unrealized foreign exchange transaction losses (gains) | | (727 | ) | | 204 |
| | (1,410 | ) | | Unrealized foreign exchange transaction (gains) losses | | | (667 | ) | | (333 | ) | | 61 |
| Other share-based compensation expense | | 2,851 |
| | 2,703 |
| | 3,444 |
| | 4,666 |
| | 3,629 |
| | 2,524 |
| Shares issued for deferred compensation plans | | 45 |
| | 161 |
| | 241 |
| | Gain on sale of property | | (1,291 | ) | | (53 | ) | | (321 | ) | | (Gain) loss on sale of property | | | (335 | ) | | (1,541 | ) | | 337 |
| Other | | | — |
| | 103 |
| | — |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | | Accounts receivable | | 13,129 |
| | (29,089 | ) | | (15,721 | ) | | (83,103 | ) | | (42,267 | ) | | 26,414 |
| Inventories | | (15,704 | ) | | (29,171 | ) | | (26,745 | ) | | (33,436 | ) | | (3,624 | ) | | 25,081 |
| Other operating assets | | 797 |
| | 17,966 |
| | (7,857 | ) | | 6,947 |
| | (6,162 | ) | | 2,964 |
| Accounts payable | | 1,040 |
| | 21,369 |
| | 12,206 |
| | 50,345 |
| | 32,076 |
| | (28,644 | ) | Other operating liabilities | | (2,707 | ) | | (12,370 | ) | | (11,086 | ) | | 5,020 |
| | 8,041 |
| | (1,905 | ) | Cash provided by Operating Activities | | 154,538 |
| | 110,110 |
| | 111,397 |
| | 147,304 |
| | 164,619 |
| | 162,014 |
| Cash Flows from Investing Activities | | | | | | | | | | | | | Property purchases | | (14,933 | ) | | (20,190 | ) | | (12,214 | ) | | (23,230 | ) | | (17,045 | ) | | (13,130 | ) | Proceeds from property sales | | 1,932 |
| | 877 |
| | 979 |
| | 978 |
| | 2,924 |
| | 603 |
| Net cash paid for acquisition of businesses, net of cash acquired of $0, $1,369, and $0 in 2015, 2014 and 2013, respectively | | (160,620 | ) | | (184,324 | ) | | (67,590 | ) | | Cash paid for acquisition of businesses, net of cash acquired | | | (775,654 | ) | | (2,773 | ) | | (62,504 | ) | Cash used in Investing Activities | | (173,621 | ) | | (203,637 | ) | | (78,825 | ) | | (797,906 | ) | | (16,894 | ) | | (75,031 | ) | Cash Flows from Financing Activities | | | | | | | | | | | | | Net (repayments) borrowings under revolving credit facility, classified as long term | | (17,000 | ) | | 69,000 |
| | — |
| | Borrowings under long term debt facilities | | 170,000 |
| | 100,000 |
| | — |
| | Long term debt repayments | | (2,717 | ) | | (647 | ) | | — |
| | Net borrowings (repayments) under revolving credit facility, classified as long term | | | 19,500 |
| | (33,000 | ) | | (19,000 | ) | Borrowings under long-term debt facilities | | | 780,000 |
| | — |
| | 125,000 |
| Long-term debt repayments | | | (125,420 | ) | | (3,353 | ) | | (98,662 | ) | Debt issuance costs | | | (3,298 | ) | | — |
| | (719 | ) | Purchases of treasury shares | | (76,515 | ) | | (36,732 | ) | | (53 | ) | | (22,778 | ) | | (8,242 | ) | | (37,465 | ) | Dividends paid | | (42,663 | ) | | (40,410 | ) | | (37,194 | ) | | (45,858 | ) | | (44,619 | ) | | (43,330 | ) | Excess tax benefits from share-based compensation | | 1,042 |
| | 2,674 |
| | 2,566 |
| | — |
| | — |
| | 208 |
| Acquisition holdback payments | | (7,693 | ) | | (1,839 | ) | | (3,843 | ) | | (319 | ) | | (11,307 | ) | | (18,913 | ) | Exercise of stock appreciation rights and options | | 235 |
| | 96 |
| | 499 |
| | 102 |
| | 656 |
| | 896 |
| Taxes paid for shares withheld | | | (1,645 | ) | | (3,484 | ) | | (1,022 | ) | Cash provided by (used in) Financing Activities | | 24,689 |
| | 92,142 |
| | (38,025 | ) | | 600,284 |
| | (103,349 | ) | | (93,007 | ) | Effect of exchange rate changes on cash | | (7,325 | ) | | (590 | ) | | 175 |
| | (589 | ) | | 820 |
| | (3,585 | ) | Decrease in cash and cash equivalents | | (1,719 | ) | | (1,975 | ) | | (5,278 | ) | | (Decrease) increase in cash and cash equivalents | | | (50,907 | ) | | 45,196 |
| | (9,609 | ) | Cash and cash equivalents at beginning of year | | 71,189 |
| | 73,164 |
| | 78,442 |
| | 105,057 |
| | 59,861 |
| | 69,470 |
| Cash and Cash Equivalents at End of Year | | $ | 69,470 |
| | $ | 71,189 |
| | $ | 73,164 |
| | $ | 54,150 |
| | $ | 105,057 |
| | $ | 59,861 |
| | | | | | | | | | | | | | Supplemental Cash Flow Information | | | | | | | | | | | | | Cash paid during the year for: | | | | | | | | | | | | | Income taxes | | $ | 69,272 |
| | $ | 51,548 |
| | $ | 51,816 |
| | 41,724 |
| | 38,772 |
| | 54,749 |
| Interest | | 5,851 |
| | 1,026 |
| | 501 |
| | 25,560 |
| | 8,561 |
| | 9,497 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands)
| | For the Years Ended June 30, 2015, 2014 and 2013 | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Income (Loss) |
| | Total Shareholders' Equity |
| | Balance at July 1, 2012 | | 41,967 |
| | $ | 10,000 |
| | $ | 150,070 |
| | $ | 743,360 |
| | $ | (226,730 | ) | | $ | (4,569 | ) | | $ | 672,131 |
| | For the Years Ended June 30, 2018, 2017 and 2016 | | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Income (Loss) |
| | Total Shareholders' Equity |
| Balance at July 1, 2015 | | | 39,905 |
| | $ | 10,000 |
| | $ | 160,072 |
| | $ | 969,548 |
| | $ | (338,121 | ) | | $ | (60,171 | ) | | $ | 741,328 |
| Net income | | | | | | | | 118,149 |
| | | | | | 118,149 |
| | | | | | | | 29,577 |
| | | | | | 29,577 |
| Other comprehensive income (loss) | | | | | | | | | | | | 1,148 |
| | 1,148 |
| | | | | | | | | | | | (25,375 | ) | | (25,375 | ) | Cash dividends — $0.88 per share | | | | | | | | (37,194 | ) | | | | | | (37,194 | ) | | Purchases of common stock for treasury | | (1 | ) | | | | | | | | (53 | ) | | | | (53 | ) | | Treasury shares issued for: | | | | | | | | | | | | | |
| | Exercise of stock appreciation rights and options | | 129 |
| | | | (175 | ) | | | | 1,086 |
| | | | 911 |
| | Performance share awards | | 53 |
|
|
|
| (1,675 | ) |
|
|
| 74 |
|
|
|
| (1,601 | ) | | Deferred compensation plans | | 5 |
| | | | 131 |
| | | | 110 |
| | | | 241 |
| | Compensation expense — stock appreciation rights and options | | | | | | 2,317 |
| | | | | | | | 2,317 |
| | Other share-based compensation expense | | | | | | 3,444 |
| | | | | | | | 3,444 |
| | Other | | 16 |
| | | | (219 | ) | | 47 |
| | 294 |
| | | | 122 |
| | Balance at June 30, 2013 | | 42,169 |
| | 10,000 |
| | 153,893 |
| | 824,362 |
| | (225,219 | ) | | (3,421 | ) | | 759,615 |
| | Net income | | | | | | | | 112,821 |
| | | | | | 112,821 |
| | Other comprehensive income (loss) | | | | | | | | | | | | 1,806 |
| | 1,806 |
| | Cash dividends — $0.96 per share | | | | | | | | (40,410 | ) | | | | | | (40,410 | ) | | Cash dividends — $1.10 per share | | | | | | | | | (54,266 | ) | | | | | | (54,266 | ) | Purchases of common stock for treasury | | (760 | ) | | | | | | | | (36,732 | ) | | | | (36,732 | ) | | (951 | ) | | | | | | | | (37,465 | ) | | | | (37,465 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercise of stock appreciation rights and options | | 76 |
| | | | 849 |
| | | | 324 |
| | | | 1,173 |
| | 64 |
| | | | (391 | ) | | | | 1,000 |
| | | | 609 |
| Performance share awards | | 36 |
| | | | (1,062 | ) | | | | (21 | ) | | | | (1,083 | ) | | 8 |
| |
| | (308 | ) | |
| | 116 |
| |
| | (192 | ) | Restricted stock units | | 31 |
| | | | (1,110 | ) | | | | (247 | ) | | | | (1,357 | ) | | 15 |
| | | | (530 | ) | | | | 232 |
| | | | (298 | ) | Deferred compensation plans | | 3 |
| | | | 98 |
| | | | 63 |
| | | | 161 |
| | Compensation expense — stock appreciation rights and options | | | | | | 1,808 |
| | | |
| | | | 1,808 |
| |
| | | | 1,543 |
| | | |
| | | | 1,543 |
| Other share-based compensation expense | | | | | | 2,703 |
| | | | | | | | 2,703 |
| | | | | | 2,524 |
| | | | | | | | 2,524 |
| Other | | 8 |
| | | | (180 | ) | | 3 |
| | (20 | ) | | | | (197 | ) | | 16 |
| | | | (381 | ) | | (38 | ) | | 350 |
| | | | (69 | ) | Balance at June 30, 2014 | | 41,563 |
| | 10,000 |
| | 156,999 |
| | 896,776 |
| | (261,852 | ) | | (1,615 | ) | | 800,308 |
| | Balance at June 30, 2016 | | | 39,057 |
| | 10,000 |
| | 162,529 |
| | 944,821 |
| | (373,888 | ) | | (85,546 | ) | | 657,916 |
| Net income | | | | | | | | 115,484 |
| | | | | | 115,484 |
| | | | | | | | 133,910 |
| | | | | | 133,910 |
| Other comprehensive income (loss) | | | | | | | | | | | | (58,556 | ) | | (58,556 | ) | | | | | | | | | | | | 3,844 |
| | 3,844 |
| Cash dividends — $1.04 per share | | | | | | | | (42,663 | ) | | | | | | (42,663 | ) | | Cash dividends — $1.14 per share | | | | | | | | | (45,005 | ) | | | | | | (45,005 | ) | Purchases of common stock for treasury | | (1,740 | ) | | | | | | | | (76,515 | ) | | | | (76,515 | ) | | (163 | ) | | | | | | | | (8,242 | ) | | | | (8,242 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 34 |
| | | | 552 |
| | | | 415 |
| | | | 967 |
| | 111 |
| | | | (2,218 | ) | | | | 105 |
| | | | (2,113 | ) | Performance share awards | | 12 |
| | | | (425 | ) | | | | 52 |
| | | | (373 | ) | | 10 |
| | | | (360 | ) | | | | 126 |
| | | | (234 | ) | Restricted stock units | | 36 |
| | | | (1,312 | ) | | | | 76 |
| | | | (1,236 | ) | | 15 |
| | | | (624 | ) | | | | 227 |
| | | | (397 | ) | Deferred compensation plans | | 1 |
| | | | 24 |
| | | | 21 |
| | | | 45 |
| | Compensation expense — stock appreciation rights and options | | | | | | 1,610 |
| | | | | | | | 1,610 |
| | | | | | 1,891 |
| | | | | | | | 1,891 |
| Other share-based compensation expense | | | | | | 2,851 |
| | | | | | | | 2,851 |
| | | | | | 3,629 |
| | | | | | | | 3,629 |
| Other | | (1 | ) | | | | (227 | ) | | (49 | ) | | (318 | ) | | | | (594 | ) | | 11 |
| | | | (192 | ) | | 25 |
| | 224 |
| | | | 57 |
| Balance at June 30, 2015 | | 39,905 |
| | $ | 10,000 |
| | $ | 160,072 |
| | $ | 969,548 |
| | $ | (338,121 | ) | | $ | (60,171 | ) | | $ | 741,328 |
| | Balance at June 30, 2017 | | | 39,041 |
| | 10,000 |
| | 164,655 |
| | 1,033,751 |
| | (381,448 | ) | | (81,702 | ) | | 745,256 |
| Net income | | | | | | | | | 141,625 |
| | | | | | 141,625 |
| Other comprehensive income (loss) | | | | | | | | | | | | | (8,050 | ) | | (8,050 | ) | Reclassifications of certain income tax effects from accumulated other comprehensive loss | | | | | | | | | 471 |
| | | | (471 | ) | | — |
| Cash dividends — $1.18 per share | | |
| | | | | | (46,162 | ) | | | | | | (46,162 | ) | Purchases of common stock for treasury | | | (393 | ) | | | |
| | | | (22,778 | ) | | | | (22,778 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | | 19 |
| | | | (482 | ) | | | | 84 |
| | | | (398 | ) | Performance share awards | | | 5 |
| | | | (273 | ) | | | | (24 | ) | | | | (297 | ) | Restricted stock units | | | 15 |
| | | | (740 | ) | | | | (56 | ) | | | | (796 | ) | Compensation expense — stock appreciation rights and options | | | | | | | 1,961 |
| | | | | | | | 1,961 |
| Other share-based compensation expense | | | | | | | 4,666 |
| | | | | | | | 4,666 |
| Other | | | 16 |
| | | | (404 | ) | | (7 | ) | | 347 |
| | | | (64 | ) | Balance at June 30, 2018 | | | 38,703 |
| | $ | 10,000 |
| | $ | 169,383 |
| | $ | 1,129,678 |
| | $ | (403,875 | ) | | $ | (90,223 | ) | | $ | 814,963 |
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES Business Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading distributor of bearings, power transmission products, engineered fluid power components and systems, specialty flow control solutions, and other industrial distributorsupplies, serving Maintenance Repair & Operations (MRO) and Original Equipment Manufacturer (OEM) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial, and fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, and fluid power, and flow control shop services. Applied also offers maintenance trainingstoreroom services and inventory management solutions that provide added value to its customers. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems. Consolidation The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. For the year ended June 30, 2013 the financial results of the Company’s Canadian and Mexican subsidiaries were included in the consolidated financial statements for the twelve months ended May 31. During fiscal 2014, the Company eliminated the one month reporting lag for both the Canadian and Mexican subsidiaries in the first and third quarters respectively. See the "Change in Accounting Principle" section below for additional information related to the elimination of the reporting lag. Foreign Currency The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) income (loss) in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income) expense, (income), net. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. Marketable Securities The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other (income) expense, (income), net in the statements of consolidated income. Concentration of Credit Risk The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and New Zealand.Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While Appliedthe Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand.
Allowances for Doubtful Accounts The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be greater credit risks, trends within the entire customer pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While theCompany has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Inventories Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2015,2018, approximately 22.1%16.8% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. The Company evaluates the recoverability of its slow moving or obsoleteand inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs. Supplier Purchasing Programs The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the Company’s LIFO inventory accounting methodmethods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheetsheets as an offset to amounts due to the related supplier. Property and Related Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution and administrative expenses in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between the carrying amount and the fair value of the assets.
Goodwill and Intangible Assets Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company utilizes discounted cash flow models and market multiples for comparable businesses to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management, including estimated future operating results, estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly. The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles are amortized using the sum-of-the-years-digits method or the expected cash flow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is included in selling, distribution and administrative expensesexpense in the accompanying statements of consolidated income. Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Identifiable intangible assets with indefinite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indefinite livedindefinite-lived identifiable intangible assets. Self-Insurance Liabilities The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment. Revenue Recognition Sales are recognized when there is evidence of an arrangement, the sales price is fixed, collectibility is reasonably assured and the product’s title and risk of loss is transferred to the customer. Typically, these conditions are met when the product is shipped to the customer. The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net sales. The Company reports its sales net of actual sales returns and the amount of reserves established for anticipated sales returns based on historical rates. Sales tax collected from customers is excluded from net sales in the accompanying statements of consolidated income. Shipping and Handling Costs The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expensesexpense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expenses were approximately $24,430, $16,230$19,320, $20,060 and $15,560$21,480 for the fiscal years ended June 30, 2015, 20142018, 2017 and 2013, respectively.2016, respectively. Income Taxes Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with the Accounting Standards Codification ("ASC") Topic 740 - Income Taxes topic of the ASC (Accounting Standards Codification). The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.
Share-Based Compensation Share-based compensation represents the cost related to share-based awards granted to employees under eitherthe 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 2007 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-yearten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date. Treasury Shares Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital. ChangesRecently Adopted Accounting Guidance
Change in Accounting Principle - Net Periodic and Post-retirement Benefit Costs U.S. Inventory Costing Methodology
From fiscal 2013 throughIn March 2017, the endFASB issued its final standard on improving the presentation of net periodic pension and postretirement benefit costs. This standard, issued as ASU 2017-07, requires that an employer report the service cost component for defined benefit plans and postretirement plans in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This update is effective for annual financial statement periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. The Company early adopted ASU 2017-07 in the first quarter of fiscal 2014, the Company implemented SAP as its new enterprise resource planning system (ERP) at its U.S. service centers. As implementation occurred at each service center, the method used to apply the link chain dollar value last-in first-out (LIFO) method of accounting changed for the inventories at that location.2018. The new inventory costing methodology utilizes the weighted-average cost method to determine the current year LIFO indices as well as any new LIFO layers established, whereas previously, current costs were used. Upon completion of the implementation, on July 1, 2014 the Company changed its accounting policy to the new method. Differences between amounts recognized in the financial statements during the implementation period and the previous accounting policy prior to July 1, 2014 were immaterial.
The Company believes that this change in accounting principle is preferable under the circumstances because weighted-average cost will provide a better reflection of actual transactions and inventory purchases, resulting in improved matching of actual costs and current revenues. This change will also result in greater consistency in inventory costing across the organization, as certain other U.S. locations were previously using weighted-average cost for similar LIFO calculations in their legacy inventory systems, and the new ERP system will make inventory costing a more efficient process within the U.S. ASC 250, "Accounting Changes and Error Corrections," requires that unless it is impracticable to do so, the voluntary adoption of a new accounting principle should be done retrospectively to all prior periods. Before July 1, 2014, the Company’s former ERP system did not capture weighted-average costs within the U.S. and the data needed to recalculate previous LIFO indices does not exist. Thus, the Company has concluded it is impracticable to recognize a cumulative effect or to retrospectively apply the effect of this change in accounting principle prior to July 1, 2014, but believes that those effects would be immaterial in all periods.
Alignment of Canadian Subsidiary Reporting
Effective July 1, 2013, the Company aligned the consolidation of the Company’s Canadian subsidiary in the consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes that this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principle and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $1,200adoption of this guidance resulted in the reclassification of the other components of net benefit cost from selling, distribution, and administrative expense to other (income) expense, net in the statements of consolidated income, forresulting in an increase to operating income. There is no impact to income before income taxes, net income, or net income per share. Therefore, $143, $155, and $113 of service costs are included in selling, distribution and administrative expense, and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net in the month of June 2013 and has been included within “Other (Income) Expense, net” on the statementstatements of consolidated income for the yearyears ended June 30, 2014.2018, and 2017, and 2016, respectively. The statement of consolidated incomeCompany used a practical expedient where the amounts disclosed in our Benefit Plans footnote for the prior year ended June 30, 2014 reflectscomparative periods were the same results, had the financial statements been retrospectively adjusted, with the exception of net income which would have decreased by $1,200. Net sales, operating income and net incomebasis for the year ended June 30, 2013 would have decreased by $1,050, $600estimation for applying the retrospective presentation requirements.
Accumulated Other Comprehensive Income In January 2018, the FASB issued its final standard on reporting comprehensive income. The standard, issued as ASU 2018-02, allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and $500 hadJobs Act. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company early adopted ASU 2018-02 in the financial statements been retrospectively adjusted.
Alignment of Mexican Subsidiary Reporting
Effective January 1, 2014,fiscal 2018 using the Company alignedat the consolidationbeginning of the Company’s Mexican subsidiaryperiod of adoption method. The impact of adoption was a reclassification of $471 from accumulated other comprehensive loss to retained earnings.
Change in Accounting Principle - Simplifying the test for Goodwill Impairment In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard, issued as ASU 2017-04, eliminates step 2 from the goodwill impairment test and instead requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes thatfourth quarter of fiscal 2018 and will apply this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principleguidance prospectively to its annual and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $200 of income for the month of December 2013 and has been included within “Other (Income) Expense, net” on the statement of consolidated income for year ended June 30, 2014. Net sales, operating income and net income for the year ended June 30, 2014 would have decreased by $1,100, $100 and $250 had the financial statements been retrospectively adjusted. Net sales, operating income and net income for the year ended June 30, 2013 would have decreased by $900, $400 and $250 had the financial statements been retrospectively adjusted.interim goodwill impairment tests. NewRecently Issued Accounting PronouncementsGuidance
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers. The standard, issued as Accounting Standards Update (ASU)ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." On July 9,In August 2015, the FASB agreedissued ASU 2015-14 to delay the effective date of ASU 2014-09 by one year. In accordance with the delay, the update is effective for financial statement periods beginning after December 15, 2017.2017 and may be adopted either retrospectively or on a modified retrospective basis. Early adoption is permitted, but not before financial statement periods beginning after December 15, 2016. In March 2016 the FASB issued ASU 2016-08 and ASU 2016-10, and in May 2016 the FASB issued ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue recognition model. The Company has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business processes, and financial statement disclosures. We have substantially completed an analysis of revenue streams at each of the business units and are evaluating the impact the new standard will have on revenue recognition. The Company primarily sells purchased products and recognizes revenue at point of sale or delivery and the majority of its revenue will continue to be recognized at a point in time under the new standard. A small percentage of revenue will be recognized using an over time revenue recognition model. The new standard will be adopted in the first quarter of fiscal 2019 using the modified retrospective method of adoption, and the Company will recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings as of July 1, 2018. The standard is not expected to have a material impact on the Company's consolidated financial statements, except for expanded disclosures on revenue in order to comply with the new guidance. The Company will continue to evaluate the impacts of the adoption of the standard and these assessments are subject to change. In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should recognize the assets and liabilities that arise from leases." This update is effective for financial statement periods beginning after December 15, 2018, with earlier application permitted. The Company has established a cross-functional team to evaluate the new standard and has begun implementing new lease administration software. The Company is still determining the financial impact that this standard update will have on its consolidated financial statements, but anticipates it will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the consolidated balance sheet. The Company will continue to evaluate the impacts of the adoption of the standard and these assessments are subject to change. In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures. In June 2014,August 2016, the FASB issued its final standard on accounting for share-basedthe classification of certain cash receipts and cash payments whenwithin the termsstatement of an award provide that a performance target could be achieved after the requisite service period. Thecash flows. This standard, issued as ASU 2014-12, clarifies that2016-15, makes a performance target that affects vestingnumber of changes meant to add or clarify guidance on the classification of certain cash receipts and that can be achieved afterpayments in the requisite service period, should be treated as a performance condition. Thestatement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2015,2018, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures. In April 2015,October 2016, the FASB issued its final standard on simplifying the presentationincome tax consequences of debt issue costs.intra-entity transfers of assets other than inventory. This standard, issued as ASU 2015-03,2016-16, requires that all costs incurred to issue debt be presented inan entity recognize the balance sheet as a direct reduction fromincome tax consequences of an intra-entity transfer of an asset other than inventory when the carrying valuetransfer occurs and eliminates the exception for an intra-entity transfer of the debt, similar to the presentation of debt discounts.an asset other than inventory. This update is effective for annual and interim financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years,2017, with early adoption permitted. The Company will adopt this standard when it becomes effective in the first quarter of fiscal 2019, and it is not expected to have a material impact on the Company’s financial statements and related disclosures. In May 2017, the FASB issued its final standard on scope of modification accounting. This standard, issued as 2017-09, provides guidance about which change to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This update is effective for annual and interim financial statement periods beginning after December 15, 2017, with early adoption permitted. The Company has not yet determined the impact of the adoption of this guidance will result in the reclassification of the unamortized debt issuance costspronouncement on the consolidated balance sheets, which were $622its financial statements and $703 at June 30, 2015 and 2014, respectively.related disclosures.
NOTE 2: 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. KnoxFCX Acquisition
On July 1, 2014,January 31, 2018, the Company acquiredcompleted the acquisition of 100% of the outstanding stockshares of Knox Oil Field SupplyFCX Performance, Inc. (“Knox”("FCX"), headquartered in San Angelo, Texas, fora Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration of $132,000, including cash paid of $118,000 at closing. The primary reasontransferred for the acquisition was $781,781, which was financed by cash-on-hand and a new credit facility comprised of Knox is to complementa $780,000 Term Loan A and expanda $250,000 revolver, effective with the Company’s capabilities to serve the upstream oil and gas industry in the United States.transaction closing. See note 5 Debt. As a distributor of oilfield supplieshighly engineered valves, instruments, pumps and relatedlifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business iswill be included in the Service Center Based DistributionFluid Power & Flow Control Segment. The Company funded the acquisition by drawing $120,000 from the previously uncommitted shelf facility with Prudential Investment Management at a fixed interest rate of 3.19% with an average seven year life. The remaining $14,000 purchase price will be paid as acquisition holdback payments on the first three anniversaries of the acquisition with interest at a fixed rate of 1.50% per annum.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of KnoxFCX based on their preliminary estimated fair values at the acquisition date: date, which are subject to adjustment. The purchase accounting will be finalized within one year from the acquisition date. | | | Knox Acquisition |
| FCX Acquisition |
| | 2015 |
| 2018 |
| Cash | | $ | 11,141 |
| Accounts receivable | $ | 19,100 |
| 80,836 |
| Inventories | 18,800 |
| 47,325 |
| Other current assets | | 1,657 |
| Property | 3,900 |
| 8,282 |
| Identifiable intangible assets | 58,500 |
| 305,420 |
| Goodwill | 63,200 |
| 439,164 |
| Other assets | | 775 |
| Total assets acquired | 163,500 |
| $ | 894,600 |
| Accounts payable and accrued liabilities | 7,200 |
| 54,518 |
| Deferred income taxes | 24,300 |
| | Other liabilities | | 2,677 |
| Deferred tax liabilities | | 55,624 |
| Net assets acquired | $ | 132,000 |
| $ | 781,781 |
| | | | Purchase price | $ | 132,800 |
| $ | 784,281 |
| Reconciliation of fair value transferred: | | | Working Capital Adjustments | (800 | ) | (2,500 | ) | Total Consideration | $ | 132,000 |
| $ | 781,781 |
|
NoneGoodwill acquired of the goodwill acquired$160,814 is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies
Net sales, operating income and other benefits that the Company believes will resultnet income from the FCX acquisition of Knox. Reliance Acquisition
On May 1, 2014, the Company acquired 100% of the outstanding stock of Reliance Industrial Products (“Reliance”), headquartered in Nisku, Alberta, Canada, with operations in Western Canada and the Western United States, for a total purchase priceincluded in the amountCompany’s results since January 31, 2018, the date of $188,500. The primary reasons for the acquisition, are to provide the Company enhanced capabilities to serve the upstream oil and gas industry in the United States and Canada. A distributor of fluid conveyance and oilfield supplies, this business is included in the Service Center Based Distribution Segment. The Company funded the acquisition by using available cash in Canada in the amount of $31,900, existing revolving credit facilities of $36,600 and a new $100,000 five year term loan facility, with the remainder of $20,000 to be paid in equal amounts as acquisition holdback payments on the first two anniversaries of the acquisition, plus interest at 2% per annum.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of Reliance based on their estimated fair values at the acquisition date:
| | | | | | Reliance Acquisition |
| | 2014 |
| Accounts receivable | $ | 20,600 |
| Inventories | 22,900 |
| Other current assets | 6,000 |
| Property | 12,900 |
| Identifiable intangible assets | 73,200 |
| Goodwill | 79,500 |
| Total assets acquired | 215,100 |
| Accounts payable and accrued liabilities | 15,800 |
| Deferred income taxes | 19,500 |
| Net assets acquired | $ | 179,800 |
| | | Purchase price | $ | 188,500 |
| Reconciliation of fair value transferred: | | Cash acquired | (1,400 | ) | Working capital adjustments | (8,200 | ) | Debt assumed | 900 |
| Total Consideration | $ | 179,800 |
|
None of the goodwill acquired is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies and other benefits that the Company believes will result from the acquisition of Reliance. | | | | | | January 31, 2018 to June 30, 2018 |
| Net sales | $ | 249,752 |
| Operating income | 16,845 |
| Net income | 8,758 |
|
The Companycompany incurred $1,448$2,849 in third partythird-party costs during fiscal 20142018 pertaining to the acquisition of Reliance. These expensesFCX, which are included in the selling, distribution and administration expense line in the statementstatements of consolidated income for the year ended June 30, 2014.fiscal 2018. Knox and Reliance Pro Forma Results (Unaudited)
The following unaudited pro forma consolidated results of operations have been prepared as if the RelianceFCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2013 and the Knox acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2014: | | Pro forma, year ended June 30: | 2014 |
| 2013 |
| 2018 |
| 2017 |
| Sales | $ | 2,687,903 |
| $ | 2,600,453 |
| | Net sales | | $ | 3,330,430 |
| $ | 2,943,583 |
| Operating income | $ | 184,164 |
| $ | 187,419 |
| 234,603 |
| 196,194 |
| Net income | $ | 121,158 |
| $ | 128,779 |
| 158,181 |
| 126,270 |
| Diluted net income per share | $ | 2.86 |
| $ | 3.03 |
| $ | 4.03 |
| $ | 3.20 |
|
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional depreciation and amortization that would have been chargedrecorded assuming the fair value adjustments to property, plant, and equipment, and amortizableidentified intangible assets had been applied as of July 1, 2013.2016. In addition, pro forma adjustments have been made for the interest expense that would have been incurred as a result of the indebtedness used to finance the acquisitions. The pro forma net income amounts also incorporate an adjustment to the recorded income tax expense for the income tax effect of the pro forma adjustments described above. These pro forma results of operations do not include any anticipated synergies or other effects of the planned integration of Reliance and Knox;FCX; accordingly, such pro forma adjustments do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred as of the date indicated or that may result in the future.
Other Fiscal 2015 Acquisitions
Other acquisitions during the year include the acquisition of substantially all of the net assets of Rodamientos y Derivados del Norte S.A. de C.V., a Mexican distributor of bearings and power transmission products and related products, and Great Southern Bearings / Northam Bearings, a Western Australia distributor of bearings and power transmission products on July 1, 2014 as well as Ira Pump and Supply Inc. (Ira Pump) a Texas distributor of oilfield pumps and supplies on November 3, 2014. These companies are included in the Service Center Based Distribution Segment. The total combined consideration for these acquisitions was approximately $54,900. Net tangible assets acquired were $21,200 and intangibles including goodwill were $33,700, based upon estimated fair values at the acquisition date. The estimated fair values related to Ira Pump are preliminary and subject to adjustment. The Company funded these acquisitions from borrowings under our existing debt facilities. Total acquisition holdback payments of $6,900 will be paid at various times through July 2017. The results of operations for the Mexican, Australian and Ira Pump acquisitions are not material for any period presented.future.
Other Fiscal 2014 Acquisitions2018 Acquisition In December 2013,On July 3, 2017, the Company acquired substantially all100% of the net assetsoutstanding stock of Texas Oilpatch Services Corporation,Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a Texas distributor of bearings, oil seals, power transmission products,accessories and related replacement parts to the oilfield industry. The acquired businesscomponents for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for thisthe acquisition was $17,000,$5,920, net tangible assets acquired was $3,863were $3,395, and intangibles, including goodwill was $13,137.$2,525 based upon estimated fair values at the acquisition date. The purchase price includes $2,550$906 of acquisition holdback paymentspayments. Due to changes in foreign currency exchange rates, the balance of $842 is included in other current liabilities and other liabilities on the consolidated balance sheets as of June 30, 2018, which have beenwill be paid into an escrow account controlled byon the first three anniversaries of the acquisition with interest at a third party.fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations offor the acquired entity are not material in relation to the Company’sCompany's consolidated financial statements.
Fiscal 2013 Acquisitions2017 Acquisition In December 2012,On March 3, 2017, the Company acquired substantially all of the net assets of Norma Bearings, Inc.Sentinel Fluid Controls ("Sentinel"), a distributor of bearingshydraulic and power transmission products, located in Laval, Quebec. The acquired businesslubrication components, systems and solutions operating from four locations. Sentinel is included in the Service Center Based DistributionFluid Power & Flow Control segment. In December 2012,The purchase price for the acquisition was $3,755, net tangible assets acquired were $3,130, and goodwill was $625 based upon estimated fair values at the acquisition date. The purchase price included $982 of acquisition holdback payments, of which $328 and $175 were paid during fiscal years 2018 and 2017, respectively. The remaining balance of $479 is included in other current liabilities and other liabilities on the consolidated balance sheets, which will be paid plus interest at various times in the future. The Company funded the amount paid for the acquisition at closing 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 2016 Acquisitions On June 14, 2016, the Company acquired 100% of the outstanding stock of Seals Unlimited ("Seals"), a distributor of sealing, fastener, and hose products located in Burlington, Ontario. On January 4, 2016, the Company acquired substantially all of the net assets of Parts Associates, Inc.HUB Industrial Supply ("HUB"), a distributor of maintenance suppliesconsumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and solutions, headquartered in Cleveland, Ohio. The acquired business is included in the Service Center Based Distribution segment. In November 2012,Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Hyquip,Atlantic Fasteners Co., Inc., a Wisconsin distributor of a broad line of hydraulic, rubber and plastic industrial hose and tubing, plus related accessories. The acquired business is included in the Fluid Power Businesses segment. In September 2012, the Company acquired 100% of the outstanding stock of Bearings & Oil Seals Specialists Inc. ("Atlantic Fasteners"), a distributor of gaskets, seals, bearingC-Class consumables including industrial fasteners and power transmission products,related industrial supplies located in Hamilton, Ontario. The acquired business isAgawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. In August 2012,On October 1, 2015, the Company acquired 100%substantially all of the outstanding stocknet assets of SKF Group's company-owned distribution businessS.G. Morris Co. ("SGM"). SGM, headquartered in AustraliaCleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and New Zealand ("Applied Australia"). As one of the largest bearing suppliers in these markets, Applied Australia also distributes seals, lubrication products,West Virginia and power transmission products. The acquired business is included in the Service Center Based DistributionFluid Power & Flow Control segment. The following table summarizes thetotal combined consideration for these acquisitions was approximately $65,900, net tangible assets acquired were $22,700, and intangibles including goodwill were $43,200 based upon estimated fair values of assets acquired and liabilities assumed for these acquisitions: | | | | | | 2013 |
| Accounts receivable | $ | 7,500 |
| Inventories | 23,700 |
| Other current assets | 200 |
| Property | 1,100 |
| Identifiable Intangibles assets | 19,800 |
| Goodwill | 24,400 |
| Total assets acquired | 76,700 |
| Accounts payable and accrued liabilities | 1,900 |
| Other current liabilities | 6,200 |
| Net assets acquired | $ | 68,600 |
| | | Purchase price | $ | 68,600 |
|
at the acquisition dates. The purchase price included $1,015 that was deferred, sometotal combined consideration includes $3,300 of which has been paid as acquisition holdback payments, of which $1,250 was paid during fiscal year 2017. The remaining balance of $2,050 is included in fiscal 2015other current liabilities on the consolidated balance sheets, which will be paid plus interest in October 2018. The Company funded the amounts paid for the acquisitions at closing using
available cash and 2014. Additional 2013 pro-forma information hasborrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not been included as it is not material.material in relation to the Company's consolidated financial statements. Holdback Liabilities for Acquisitions Acquisition holdback payments of approximately $19,200, $6,500$2,592, $283, $415 and $3,900$75 will be made in fiscal 2016, 20172019, 2020, 2021, and 2018,2024, respectively. The related liabilities for these payments are recorded in the Consolidated Balance Sheetsconsolidated balance sheets in other current liabilities for the amounts due in fiscal year 20162019 and other liabilities for the amounts due in fiscal years 20172020 through 2018.2024. NOTE 3: INVENTORIES Inventories consist of the following: | | June 30, | | 2015 |
| | 2014 |
| | 2018 |
| | 2017 |
| U.S. inventories at average cost | | $ | 397,524 |
| | $ | 363,692 |
| | $ | 443,521 |
| | $ | 373,984 |
| Foreign inventories at average cost | | 116,674 |
| | 123,468 |
| | 117,711 |
| | 108,734 |
| | | 514,198 |
| | 487,160 |
| | 561,232 |
| | 482,718 |
| Less: Excess of average cost over LIFO cost for U.S. inventories | | 151,779 |
| | 151,413 |
| | 139,163 |
| | 137,573 |
| Inventories on consolidated balance sheets | | $ | 362,419 |
| | $ | 335,747 |
| | $ | 422,069 |
| | $ | 345,145 |
|
The overall impact of LIFO layer liquidations increased gross profit by $579, $9,414, and $2,100 in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. In fiscal 2013,2017, reductions in U.S. inventories, primarily in the bearings pool which included the scrapping of approximately $6,000 of product, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The overall impact of LIFO layer liquidations increased gross profit by $6,300 in fiscal 2013. There were no LIFO layer liquidations in fiscal 2015 or 2014. NOTE 4: GOODWILL AND INTANGIBLES The changes in the carrying amount of goodwill for both the Service Center Based Distribution Segmentsegment and the Fluid Power Businesses& Flow Control segment for the years ended June 30, 20152018 and 20142017 are as follows: | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power Businesses |
| | Total |
| Balance at July 1, 2013 | $ | 105,920 |
| | $ | 929 |
| | $ | 106,849 |
| Goodwill acquired during the year | 84,798 |
| | — |
| | 84,798 |
| Other, primarily currency translation | 1,847 |
| | — |
| | 1,847 |
| Balance at June 30, 2014 | 192,565 |
| | 929 |
| | 193,494 |
| Goodwill acquired during the year | 77,728 |
| | — |
| | 77,728 |
| Other, primarily currency translation | (16,816 | ) | | — |
| | (16,816 | ) | Balance at June 30, 2015 | $ | 253,477 |
| | $ | 929 |
| | $ | 254,406 |
|
| | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Balance at July 1, 2016 | $ | 198,486 |
| | $ | 4,214 |
| | $ | 202,700 |
| Goodwill added during the year | 3,220 |
| | 625 |
| | 3,845 |
| Other, primarily currency translation | 34 |
| | (444 | ) | | (410 | ) | Balance at June 30, 2017 | 201,740 |
| | 4,395 |
| | 206,135 |
| Goodwill added during the year | 2,525 |
| | 439,164 |
| | 441,689 |
| Other, primarily currency translation | (1,181 | ) | | — |
| | (1,181 | ) | Balance at June 30, 2018 | $ | 203,084 |
| | $ | 443,559 |
| | $ | 646,643 |
|
At June 30, 2015, 2014During the first quarter of fiscal 2017, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the HUB acquisition. The fair values of the customer relationships and 2013, accumulatedtrade names intangible assets were decreased by $2,636 and $584, respectively, with a corresponding total increase to goodwill of $3,220. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $156 during fiscal 2017, which is recorded in selling, distribution and administrative expense in the statements of consolidated income.
On July 1, 2016, the Company enacted a change in its management reporting structure which changed the composition of the Canada service center reporting unit. This triggering event required the Company to perform an interim goodwill impairment losses subsequenttest for the Canada service center reporting unit. The Company performed step one of the goodwill impairment test for the Canada service center reporting unit as of July 1, 2016 and determined that the reporting unit had excess fair value of approximately $8,000 or 5% when compared to fiscal year 2002 totaled $36,605 and relate entirelyits carrying amount of approximately $163,000. In conjunction with this management change, $2,628 of goodwill was reallocated from the Canada service center reporting unit to the Fluid Power Businesses segment.U.S. service center reporting unit based on the relative fair value as of July 1, 2016. The Company has sevensix (6) reporting units and performed itsfor which an annual goodwill impairment assessment was performed as of January 1, 2015.2018. The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts
by at least 30% as of January 1, 2018. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Income and Market approaches. The Income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors. The Market approach utilizes an analysis of comparable publicly traded companies. The Company had seven (7) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2016. The Company concluded that five (5) of the reporting units had material excesses ofunits’ fair value compared tosubstantially exceeded their carrying amounts. The Company concluded thatcarrying value for two (2) reporting units (Canada service center and Australia / Australia/New Zealand) had excessZealand service center) exceeded the fair value, indicating there may be goodwill impairment. The fair values of the reporting units in accordance with step one of the goodwill impairment test were determined using the Income and Market approaches. Step two of the goodwill impairment test compares the fair value of approximately $39,000 and $4,000 or 15% and 14%, respectively when compared tothe reporting unit goodwill with the carrying amountsamount of approximately $258,000goodwill. The implied fair value of goodwill is determined in the same manner as in a business combination. The fair value of the reporting unit from step one is allocated to all of the assets and $28,000, respectively. liabilities of the reporting unit, including unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Step two of the goodwill impairment test for the Canada service center reporting unit was completed in the third quarter of fiscal 2016. The analysis resulted in a goodwill impairment of $56,022 for the Canada service center reporting unit. The non-cash impairment charge was the result of the overall decline in the industrial economy in Canada coupled with the substantial and sustained decline in the oil and gas sector during calendar year 2015. This led to reduced spending by customers and reduced revenue expectations. The uncertainty regarding the oil and gas industries and overall industrial economy in Canada also led the reporting unit to reduce expectations. Step two of the goodwill impairment test for the Australia/New Zealand reporting unit was completed in the third quarter of fiscal 2016. The analysis concluded that all of the Australia/New Zealand reporting unit’s goodwill was impaired, and therefore the Company recorded a non-cash impairment expense of $8,772 in the third quarter of fiscal 2016. The impairment charge was primarily the result of the decline in the mining and extraction industries in Australia, reduced spending by customers, and the effects of reduced revenue expectations. The techniques used in the Company's impairment testtests have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions forecast at the assessment date.measurement dates. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date. The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years. Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth. A number of benchmarks from independent industry and other economic publications were also used. Changes in future actual results, assumptions, and estimates after the assessmentmeasurement date may lead to an outcome where additional impairment charges would be required in future
periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. At June 30, 2018 and 2017, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment and $36,605 related to the Fluid Power & Flow Control segment. The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:following: | | June 30, 2015 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | June 30, 2018 | | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | | | | | | Customer relationships | $ | 225,332 |
| | $ | 65,789 |
| | $ | 159,543 |
| $ | 465,691 |
| | $ | 125,009 |
| | $ | 340,682 |
| Trade names | 42,689 |
| | 13,187 |
| | 29,502 |
| 112,939 |
| | 22,454 |
| | 90,485 |
| Vendor relationships | 14,465 |
| | 7,258 |
| | 7,207 |
| 11,425 |
| | 7,382 |
| | 4,043 |
| Non-competition agreements | 4,578 |
| | 2,002 |
| | 2,576 |
| 2,761 |
| | 2,024 |
| | 737 |
| Total Intangibles | $ | 287,064 |
| | $ | 88,236 |
| | $ | 198,828 |
| $ | 592,816 |
| | $ | 156,869 |
| | $ | 435,947 |
|
| | June 30, 2014 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| | June 30, 2017 | | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | | | | | | Customer relationships | $ | 170,395 |
| | $ | 48,285 |
| | $ | 122,110 |
| $ | 235,009 |
| | $ | 102,414 |
| | $ | 132,595 |
| Trade names | 36,912 |
| | 10,394 |
| | 26,518 |
| 43,873 |
| | 19,295 |
| | 24,578 |
| Vendor relationships | 15,446 |
| | 6,628 |
| | 8,818 |
| 14,152 |
| | 9,141 |
| | 5,011 |
| Non-competition agreements | 3,322 |
| | 1,260 |
| | 2,062 |
| 3,788 |
| | 2,410 |
| | 1,378 |
| Total Intangibles | $ | 226,075 |
| | $ | 66,567 |
| | $ | 159,508 |
| $ | 296,822 |
| | $ | 133,260 |
| | $ | 163,562 |
|
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off. During 2015,2018, the Company acquired identifiable intangible assets with ana preliminary acquisition cost allocation and weighted-average life as follows: | | | Acquisition Cost Allocation |
| | Weighted-Average Life | Acquisition Cost Allocation |
| | Weighted-Average Life | Customer relationships | $ | 68,078 |
| | 19.5 years | $ | 234,370 |
| | 20.0 years | Trade names | 7,627 |
| | 14.7 years | 71,050 |
| | 15.0 years | Non-competition agreements | 1,664 |
| | 5.0 years | | Total Intangibles Acquired | $ | 77,369 |
| | 18.7 years | $ | 305,420 |
| | 18.8 years |
AmortizationAmortization of identifiable intangibles totaled $25,797, $14,023$32,065, $24,371 and $13,233$25,580 in fiscal 2015, 20142018, 2017 and 2013,2016, respectively, and is included in selling, distribution and administrative expenses in the statements of consolidated income. Future amortization expense based on the Company’s identifiable intangible assets as of June 30, 20152018 is estimated to be $24,600 for 2016, $23,000 for 2017, $20,900 for 2018, $19,200$44,000 for 2019, $42,500 for 2020, $40,200 for 2021, $37,800 for 2022 and $17,500$35,300 for 2020.2023.
A significant portion of our intangible assets relate to recent acquisitions that primarily operate in the oil and gas sectors. Considering the recent downturn in the energy market, a prolonged period of low oil and natural gas prices may result in asset impairments, including potential impairment of the carrying value of our goodwill and finite-lived intangible assets.
NOTE 5: DEBT Revolving Credit Facility & Term Loan TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780,000 unsecured borrowings of up to $150,000.term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR prime, or the bank’s cost of fundsprime at the Company’sCompany's discretion. This agreement also enables the Company to refinance this debt on a long-term basis. At June 30, 2015 and 2014,2018, the Company had $52,000 and $69,000, respectively,$775,125 outstanding under this credit facility.the term loan and $19,500 outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of $3,764$3,625 to secure certain insurance obligations, totaled $94,236$226,875 at June 30, 20152018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the loansterm loan as of June 30, 2018 was 4.13%. The weighted average interest rate on the amount outstanding onunder the revolving credit facility as of June 30, 20152018 was 1.15%3.93%.
The new credit facility replaced the Company's previous credit facility agreement. At June 30, 2017, the Company had $120,313 outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2,441 to secure certain insurance obligations, totaled $247,559 at June 30, 2017. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with theeither revolving credit agreement, in the amount of $1,841,$2,698 as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations. Other Long-Term Borrowings The Company entered into a $100,000 unsecured five-year term loan with a group of banks in April2014 with a final maturity date in April2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was a rate of 1.19%. The term loan has an outstanding amount of $96,875 and $99,375 at June 30, 2015 and 2014, respectively.
In April 2014 the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency with a remaining term of nine years, maturing in May 2024. At June 30, 2015 and 2014, $2,120 and $2,337 was outstanding, respectively.
At June 30, 2015,2018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The "Series C" notes have a principal amount of $120,000 and carry a fixed interest rate of 3.19%, which isand are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principleprincipal amount of $50,000, and carry a fixed interest rate of 3.21% which is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $50,000 in additional financing was available under this facility.
In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At June 30, 2018 and 2017, $1,438 and $1,669 was outstanding, respectively. Unamortized debt issue costs of $551 and $105 are included as a reduction of current portion of long-term debt on the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively. Unamortized debt issue costs of $1,807 and $294 are included as a reduction of long-term debt on the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively. The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next five years: | | Fiscal Year | Aggregate Maturity |
| Aggregate Maturity |
| 2016 | $ | 3,349 |
| | 2017 | $ | 57,227 |
| | 2018 | $ | 5,856 |
| | 2019 | $ | 83,359 |
| $ | 19,734 |
| 2020 | $ | 25,238 |
| 49,613 |
| 2021 | | 79,241 |
| 2022 | | 84,120 |
| 2023 | | 708,124 |
| Thereafter | $ | 145,966 |
| 25,231 |
|
Covenants The revolvingnew credit facility the term loan agreement, and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 times consolidated income before interest, taxes, depreciation and amortization. At June 30, 2018, the Company's indebtedness was less than 3.0 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at June 30, 2018.
NOTE 6: FAIR VALUE MEASUREMENTS Marketable securities measured at fair value at June 30, 20152018 and June 30, 20142017 totaled $9,330$10,318 and $11,011,$10,481, 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 consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy). As of June 30, 2015,2018, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy). The revolving credit facility and the term loan contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).
NOTE 7: INCOME TAXES Income Before Income Taxes The components of income before income taxes are as follows: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| U.S. | $ | 152,618 |
| | $ | 147,980 |
| | $ | 153,546 |
| $ | 186,874 |
| | $ | 154,472 |
| | $ | 139,960 |
| Foreign | 23,253 |
| | 18,282 |
| | 24,119 |
| 17,844 |
| | 12,494 |
| | (60,982 | ) | Income before income taxes | $ | 175,871 |
| | $ | 166,262 |
| | $ | 177,665 |
| $ | 204,718 |
| | $ | 166,966 |
| | $ | 78,978 |
|
Provision The provision (benefit) for income taxes consists of: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Current: | | | | | | | | | | | Federal | $ | 52,861 |
| | $ | 50,455 |
| | $ | 38,859 |
| $ | 48,131 |
| | $ | 26,456 |
| | $ | 45,226 |
| State and local | 6,884 |
| | 6,576 |
| | 5,736 |
| 8,038 |
| | 4,692 |
| | 6,349 |
| Foreign | 5,603 |
| | 4,619 |
| | 4,742 |
| 5,309 |
| | 4,760 |
| | 4,407 |
| Total current | 65,348 |
| | 61,650 |
| | 49,337 |
| 61,478 |
| | 35,908 |
| | 55,982 |
| Deferred: | | | | | | | | | | | Federal | (3,799 | ) | | (5,328 | ) | | 10,277 |
| 5,955 |
| | 852 |
| | 397 |
| State and local | (153 | ) | | (267 | ) | | 346 |
| (586 | ) | | 535 |
| | (30 | ) | Foreign | (1,009 | ) | | (2,614 | ) | | (444 | ) | (3,754 | ) | | (4,239 | ) | | (6,948 | ) | Total deferred | (4,961 | ) | | (8,209 | ) | | 10,179 |
| 1,615 |
| | (2,852 | ) | | (6,581 | ) | Total | $ | 60,387 |
| | $ | 53,441 |
| | $ | 59,516 |
| $ | 63,093 |
| | $ | 33,056 |
| | $ | 49,401 |
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on certain un-remitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, and creates new taxes on certain foreign-sourced earnings. During fiscal 2018, the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate from 35% to 21%. The rate change was administratively effective as of the beginning of our fiscal year, resulting in the Company using a blended statutory rate for the annual period of 28.06%. The corporate income tax rate change had a favorable impact to the Company of $12,113 for fiscal 2018. The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 is incomplete. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act. Accordingly, as of June 30, 2018 we have not completed our accounting for the tax effects of the Act. For fiscal 2018, we recognized a provisional tax liability of $3,877 related to the one-time transition tax on certain un-remitted earnings of foreign subsidiaries, which is payable over eight years. We also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. The Company recorded a provisional amount of $2,414 of additional deferred income tax expense related to the re-measurement of our deferred tax balance. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Overall, considering the decrease in the corporate income tax rate and the expense related to the transition tax and deferred tax re-measurement, the Act resulted in a net tax benefit of $5,822 for fiscal 2018, which is included as a component of income tax expense in the statements of consolidated income. During the fourth quarter of fiscal 2017, the Company recorded a net tax benefit of $22,246 pertaining to a worthless stock deduction. The tax benefit of this deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes reduced by $1,019 of tax provided for a valuation allowance applicable to the related state deferred income tax asset.
The exercise of non-qualified stock appreciation rights and options during fiscal 2015, 20142018, 2017 and 20132016 resulted in $352, $1,462$419, $1,921 and $1,675,$212, respectively, of income tax benefits to the Company derived from the difference between the market and option price of the shares at the date of exercise and the option price.fair value of the options on the grant date. Vesting of stock awards and other stock compensation in fiscal 2015, 20142018, 2017 and 20132016 resulted in $690, $1,211$430, $482 and $890,$(4), respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial reporting purposes. TheseDue to the adoption of ASU 2016-09 in fiscal 2017, the tax benefits for fiscal 2018 and 2017 were recorded in income tax expense in the statements of consolidated income, while the fiscal 2016 tax expense was recorded in additional paid-in capital.
Effective Tax Rates The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 28.1 | % | | 35.0 | % | | 35.0 | % | Effects of: | | | | | | | | | | | State and local taxes | 2.5 | % | | 2.4 | % | | 2.3 | % | 3.1 |
| | 2.8 |
| | 5.2 |
| U.S. tax on foreign income, net | — | % | | (1.6 | )% | | — | % | | Foreign income taxes | (2.5 | )% | | (2.6 | )% | | (2.3 | )% | | U.S. federal tax reform | | 3.1 |
| | — |
| | — |
| Worthless stock deduction | | — |
| | (13.9 | ) | | — |
| Stock compensation | | (0.4 | ) | | (1.4 | ) | | — |
| Goodwill impairment | | — |
| | — |
| | 27.1 |
| Impact of foreign operations | | (1.3 | ) | | (2.3 | ) | | (3.0 | ) | Deductible dividend | (0.5 | )% | | (0.5 | )% | | (0.5 | )% | (0.3 | ) | | (0.4 | ) | | (0.9 | ) | Valuation Allowance | 0.5 | % | | — | % | | — | % | | Valuation allowance | | (0.9 | ) | | 0.3 |
| | 0.5 |
| Other, net | (0.7 | )% | | (0.6 | )% | | (1.0 | )% | (0.6 | ) | | (0.3 | ) | | (1.3 | ) | Effective income tax rate | 34.3 | % | | 32.1 | % | | 33.5 | % | 30.8 | % | | 19.8 | % | | 62.6 | % |
Consolidated Balance Sheets Significant components of the Company’s deferred tax assets and liabilities are as follows: | | June 30, | 2015 |
| | 2014 |
| 2018 |
| | 2017 |
| Deferred tax assets: | | | | | | | Compensation liabilities not currently deductible | $ | 28,902 |
| | $ | 30,662 |
| $ | 19,334 |
| | $ | 26,873 |
| Expenses and reserves not currently deductible | 9,115 |
| | 8,364 |
| | Other expenses and reserves not currently deductible | | 13,169 |
| | 11,601 |
| Goodwill and intangibles | 7,363 |
| | 8,294 |
| 3,197 |
| | 5,661 |
| Foreign tax credit | 1,155 |
| | — |
| | Net operating loss carryforwards (expiring in years 2017-2034) | 860 |
| | 386 |
| | Foreign tax credit (expiring in years 2025-2026) | | 413 |
| | 709 |
| Net operating loss carryforwards (expiring in years 2023-2038) | | 11,315 |
| | 5,729 |
| Other | 289 |
| | 281 |
| 199 |
| | 119 |
| Total deferred tax assets | 47,684 |
| | 47,987 |
| 47,627 |
| | 50,692 |
| Less: Valuation allowance | (917 | ) | | — |
| (38 | ) | | (1,831 | ) | Deferred tax assets, net of valuation allowance | 46,767 |
| | 47,987 |
| 47,589 |
| | 48,861 |
| Deferred tax liabilities: | | | | | | | Inventories | (5,499 | ) | | (6,490 | ) | (8,196 | ) | | (7,447 | ) | Goodwill and intangibles | (38,707 | ) | | (23,254 | ) | (86,176 | ) | | (30,482 | ) | Depreciation and differences in property bases | (9,328 | ) | | (10,219 | ) | (9,294 | ) | | (10,122 | ) | Total deferred tax liabilities | (53,534 | ) | | (39,963 | ) | (103,666 | ) | | (48,051 | ) | Net deferred tax (liabilities) assets | $ | (6,767 | ) | | $ | 8,024 |
| $ | (56,077 | ) | | $ | 810 |
| Net deferred tax (liabilities) assets are classified as follows: | | | | | | | Other current assets | $ | 13,293 |
| | $ | 11,371 |
| | Deferred tax assets (long-term) | 97 |
| | 21,166 |
| | Other assets | | $ | 2,103 |
| | $ | 8,985 |
| Other liabilities | (20,157 | ) | | (24,513 | ) | (58,180 | ) | | (8,175 | ) | Net deferred tax (liabilities) assets | $ | (6,767 | ) | | $ | 8,024 |
| $ | (56,077 | ) | | $ | 810 |
|
Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. The remaining net deferred tax asset is the amount
management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future income levels. As a result of the Act, the Company’s net unremitted foreign earnings of $77,374 have been subject to U.S. federal income taxes are provided on the portiontaxation. As of non-U.S. subsidiaries' income that is not considered to be permanently reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2015,2018, all such undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested and for whichreinvested. Therefore, no U.S. tax hastaxes have been provided totaled approximately $139,042. Determinationthat would result from the remittance of thesuch earnings. The net amount of the unrecognized tax liability with respect to the distribution of these earnings is not practicable; however,estimated to be approximately $1,986. In addition, we expect foreign tax credits would be available to either offset or partially reduce U.S. income taxesthe tax cost in the event of a distribution. In 2014, the Company recognized a tax benefit of $2,804 related to U.S. tax on foreign income which reduced the Company's effective tax rate by approximately 1.6%. This tax benefit was due to the reversal of taxes previously
accrued on a portion of the undistributed earnings of non-U.S. subsidiaries applicable to a change in the permanent reinvestment assertion. In 2015, $17,793 of cash was distributed by one of the Company's non-U.S. subsidiaries as a non-taxable return of capital. All undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested outside of the U.S. at June 30, 2015.
Unrecognized Income Tax Benefits The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended June 30, 2015, 20142018, 2017 and 2013:2016: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Unrecognized Income Tax Benefits at beginning of the year | $ | 2,364 |
| | $ | 2,655 |
| | $ | 1,539 |
| $ | 3,533 |
| | $ | 2,915 |
| | $ | 2,604 |
| Current year tax positions | 472 |
| | 730 |
| | 957 |
| 143 |
| | 574 |
| | 539 |
| Prior year tax positions | — |
| | — |
| | 790 |
| 636 |
| | 259 |
| | — |
| Expirations of statutes of limitations | (160 | ) | | (1,007 | ) | | (565 | ) | (324 | ) | | (189 | ) | | (132 | ) | Settlements | (72 | ) | | (14 | ) | | (66 | ) | — |
| | (26 | ) | | (96 | ) | Unrecognized Income Tax Benefits at end of year | $ | 2,604 |
| | $ | 2,364 |
| | $ | 2,655 |
| $ | 3,988 |
| | $ | 3,533 |
| | $ | 2,915 |
|
Included in the balance of unrecognized income tax benefits at June 30, 2015, 20142018, 2017 and 20132016 are $2,377, $2,104$3,725, $3,323 and $2,342,$2,691, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate. During 2015, 20142018, 2017 and 2013,2016, the Company recognized $49$(110) and $16$163 and $3$127 of (benefit) expense, respectively, for interest and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of $497$677 and $449$787 as of June 30, 20152018 and 2014,2017, respectively. The Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months. The Company is subject to U.S. federal income tax examinations for the tax years 20122015 through 20152018 and to state and local income tax examinations for the tax years 20092012 through 2015.2018. In addition, the Company is subject to foreign income tax examinations for the tax years 20082011 through 2015.2018. The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year.
NOTE 8: SHAREHOLDERS’ EQUITY Treasury Shares At June 30, 2015,2018, 596 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change in control and director and officer indemnification agreements.
Accumulated Other Comprehensive Income (Loss) Changes in the accumulated other comprehensive income (loss) for the years ended June 30, 20152018, 2017, and 2014, is2016, are comprised of the following: amounts, shown net of taxes: | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized gain (loss) on securities available for sale |
| | Postemployment benefits |
| | Total Accumulated other comprehensive income (loss) |
| Balance at July 1, 2012 | $ | 1,718 |
| | $ | (58 | ) | | $ | (6,229 | ) | | $ | (4,569 | ) | Other comprehensive income (loss) | (1,358 | ) | | 6 |
| | 1,967 |
| | 615 |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 533 |
| | 533 |
| Net current-period other comprehensive income (loss), net of taxes | (1,358 | ) | | 6 |
| | 2,500 |
| | 1,148 |
| Balance at June 30, 2013 | $ | 360 |
| | $ | (52 | ) | | $ | (3,729 | ) | | $ | (3,421 | ) | Other comprehensive income (loss) | 629 |
| | 73 |
| | 871 |
| | 1,573 |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 233 |
| | 233 |
| Net current-period other comprehensive income (loss), net of taxes | 629 |
| | 73 |
| | 1,104 |
| | 1,806 |
| Balance at June 30, 2014 | $ | 989 |
| | $ | 21 |
| | $ | (2,625 | ) | | $ | (1,615 | ) | Other comprehensive income (loss) | (58,233 | ) | | (25 | ) | | (472 | ) | | (58,730 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 174 |
| | 174 |
| Net current-period other comprehensive income (loss), net of taxes | (58,233 | ) | | (25 | ) | | (298 | ) | | (58,556 | ) | Balance at June 30, 2015 | $ | (57,244 | ) | | $ | (4 | ) | | $ | (2,923 | ) | | $ | (60,171 | ) |
| | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized (loss) gain on securities available for sale |
| | Post-employment benefits |
| | Total accumulated other comprehensive (loss) income |
| Balance at July 1, 2015 | $ | (57,244 | ) | | $ | (4 | ) | | $ | (2,923 | ) | | $ | (60,171 | ) | Other comprehensive loss | (24,441 | ) | | (34 | ) | | (1,215 | ) | | (25,690 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 315 |
| | 315 |
| Net current-period other comprehensive loss | (24,441 | ) | | (34 | ) | | (900 | ) | | (25,375 | ) | Balance at June 30, 2016 | (81,685 | ) | | (38 | ) | | (3,823 | ) | | (85,546 | ) | Other comprehensive income | 2,238 |
| | 59 |
| | 1,239 |
| | 3,536 |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 308 |
| | 308 |
| Net current-period other comprehensive income | 2,238 |
| | 59 |
| | 1,547 |
| | 3,844 |
| Balance at June 30, 2017 | (79,447 | ) | | 21 |
| | (2,276 | ) | | (81,702 | ) | Other comprehensive (loss) income | (8,549 | ) | | 20 |
| | 524 |
| | (8,005 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | (45 | ) | | (45 | ) | Amounts reclassified for certain income tax effects to retained earnings | 22 |
| | 9 |
| | (502 | ) | | (471 | ) | Net current-period other comprehensive (loss) income | (8,527 | ) | | 29 |
| | (23 | ) | | (8,521 | ) | Balance at June 30, 2018 | $ | (87,974 | ) | | $ | 50 |
| | $ | (2,299 | ) | | $ | (90,223 | ) |
Other Comprehensive Income (Loss) Details of other comprehensive income (loss) are as follows: | | Year Ended June 30, | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax (Benefit) Expense |
| | Net Amount |
| Foreign currency translation adjustments | $ | (58,233 | ) | | $ | — |
| | $ | (58,233 | ) | | $ | 629 |
| | $ | — |
| | $ | 629 |
| | $ | (1,358 | ) | | $ | — |
| | $ | (1,358 | ) | $ | (8,875 | ) | | $ | (326 | ) | | $ | (8,549 | ) | | $ | 2,238 |
| | $ | — |
| | $ | 2,238 |
| | $ | (24,441 | ) | | $ | — |
| | $ | (24,441 | ) | Postemployment benefits: | | | | | | | | | | | | | | | | | | | Actuarial gain (loss) on remeasurement | (776 | ) | | (304 | ) | | (472 | ) | | 1,402 |
| | 531 |
| | 871 |
| | 3,153 |
| | 1,186 |
| | 1,967 |
| | Post-employment benefits: | | | | | | | | | | | | | | | | | | | Actuarial gain (loss) on re-measurement | | 709 |
| | 185 |
| | 524 |
| | 2,038 |
| | 799 |
| | 1,239 |
| | (1,998 | ) | | (783 | ) | | (1,215 | ) | Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | 286 |
| | 112 |
| | 174 |
| | 382 |
| | 149 |
| | 233 |
| | 872 |
| | 339 |
| | 533 |
| (73 | ) | | (28 | ) | | (45 | ) | | 506 |
| | 198 |
| | 308 |
| | 518 |
| | 203 |
| | 315 |
| Unrealized gain (loss) on investment securities available for sale | (38 | ) | | (13 | ) | | (25 | ) | | 112 |
| | 39 |
| | 73 |
| | 10 |
| | 4 |
| | 6 |
| 37 |
| | 17 |
| | 20 |
| | 91 |
| | 32 |
| | 59 |
| | (52 | ) | | (18 | ) | | (34 | ) | Other comprehensive income (loss) | $ | (58,761 | ) | | $ | (205 | ) | | $ | (58,556 | ) | | $ | 2,525 |
| | $ | 719 |
| | $ | 1,806 |
| | $ | 2,677 |
| | $ | 1,529 |
| | $ | 1,148 |
| | Reclassification of certain income tax effects to retained earnings | | — |
| | 471 |
| | (471 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Other comprehensive (loss) income | | $ | (8,202 | ) | | $ | 319 |
| | $ | (8,521 | ) | | $ | 4,873 |
| | $ | 1,029 |
| | $ | 3,844 |
| | $ | (25,973 | ) | | $ | (598 | ) | | $ | (25,375 | ) |
Net Income Per Share Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing net income per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include RSUsRestricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury
stock method and the two-class method. For the years presented there were no material differences in the net income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed below. The following table presents amounts used in computing net income per share and the effect on the weighted-average number of shares of dilutive potential common shares: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Net Income | $ | 115,484 |
| | $ | 112,821 |
| | $ | 118,149 |
| $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| Average Shares Outstanding: | | | | | | | | | | | Weighted-average common shares outstanding for basic computation | 40,892 |
| | 41,942 |
| | 42,060 |
| 38,752 |
| | 39,013 |
| | 39,254 |
| Dilutive effect of potential common shares | 295 |
| | 389 |
| | 482 |
| 529 |
| | 391 |
| | 212 |
| Weighted-average common shares outstanding for dilutive computation | 41,187 |
| | 42,331 |
| | 42,542 |
| 39,281 |
| | 39,404 |
| | 39,466 |
| Net Income Per Share — Basic | $ | 2.82 |
| | $ | 2.69 |
| | $ | 2.81 |
| $ | 3.65 |
| | $ | 3.43 |
| | $ | 0.75 |
| Net Income Per Share — Diluted | $ | 2.80 |
| | $ | 2.67 |
| | $ | 2.78 |
| $ | 3.61 |
| | $ | 3.40 |
| | $ | 0.75 |
|
Stock appreciation rights and options relating to 435, 28966, 141 and 212775 shares of common stock were outstanding at June 30, 2015, 20142018, 2017 and 2013,2016, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.
NOTE 9: SHARE-BASED COMPENSATION Share-Based Incentive Plans Following approval by the Company's shareholders in October 2015, the 2015 Long-Term Performance Plan (the "2015 Plan") replaced the 2011 Long-Term Performance Plan. The 20112015 Plan, which expires in 2016,2020, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| SARs and options | $ | 1,610 |
| | $ | 1,808 |
| | $ | 2,317 |
| $ | 1,961 |
| | $ | 1,891 |
| | $ | 1,543 |
| Performance shares | 836 |
| | 309 |
| | 1,074 |
| 2,006 |
| | 1,331 |
| | 446 |
| Restricted stock and RSUs | 2,015 |
| | 2,394 |
| | 2,370 |
| 2,660 |
| | 2,298 |
| | 2,078 |
| Total compensation costs under award programs | $ | 4,461 |
| | $ | 4,511 |
| | $ | 5,761 |
| $ | 6,627 |
| | $ | 5,520 |
| | $ | 4,067 |
|
Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-based compensation plans was $1,749, $1,768$1,923, $4,848 and $2,241$1,595 for fiscal years 2015, 20142018, 2017 and 2013,2016, respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares. The aggregate unrecognized compensation cost for share-based award programs paid (or with the potential to be paid)paid at June 30, 20152018 are summarized in the table below: | | June 30, (Shares in thousands) | 2015 |
| | Expected Period of Recognition (Years) | | June 30, | | 2018 |
| | Average Expected Period of Expected Recognition (Years) | SARs and options | $ | 1,792 |
| | 2.4 | $ | 3,729 |
| | 2.5 | Performance shares | 3,701 |
| | 1.7 | 3,282 |
| | 1.7 | Restricted stock and RSUs | 1,898 |
| | 2.3 | 2,173 |
| | 1.9 | Total unrecognized compensation costs under award programs | $ | 7,391 |
| | 2.0 | $ | 9,184 |
| | 2.1 |
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.02.1 years. The aggregate number of shares of common stock which may be awarded under the 20112015 Plan is 2,000;2,500; shares available for future grants at June 30, 20152018 were 1,107.1,655.
Stock Appreciation Rights and Stock Options The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2015, 20142018, 2017 and and 20132016 are: | | | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Expected life, in years | 4.7 |
| | 4.6 |
| | 5.5 |
| 6.0 |
| | 4.8 |
| | 4.4 |
| Risk free interest rate | 1.4 | % | | 1.3 | % | | 0.9 | % | 2.1 | % | | 1.2 | % | | 1.3 | % | Dividend yield | 2.5 | % | | 2.5 | % | | 2.5 | % | 2.5 | % | | 2.5 | % | | 2.5 | % | Volatility | 29.0 | % | | 31.8 | % | | 43.3 | % | 24.3 | % | | 24.1 | % | | 26.0 | % | Per share fair value of SARs and stock options granted during the year | $9.53 | | $11.02 | | $13.11 | $11.25 | | $7.97 | | $6.79 |
The expected life is based upon historical exercise experience of the officers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs and stock options. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life.
SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. A summary of SARs and stock options activity is presented below: | | | Shares |
| | Weighted-Average Exercise Price |
| Shares |
| | Weighted-Average Exercise Price |
| Year Ended June 30, 2015 | | | Year Ended June 30, 2018 | | | (Shares in thousands) | Shares |
| | Weighted-Average Exercise Price |
| Shares |
| | Weighted-Average Exercise Price |
| Outstanding, beginning of year | | | Granted | | | Exercised | (75 | ) | | 25.23 |
| (58 | ) | | 37.55 |
| Forfeited | (56 | ) | | 48.47 |
| (45 | ) | | 55.64 |
| Outstanding, end of year | 1,116 |
| | $ | 35.86 |
| 1,401 |
| | $ | 45.32 |
| Exercisable at end of year | 781 |
| | $ | 31.32 |
| 789 |
| | $ | 41.08 |
| Expected to vest at end of year | | 1,379 |
| | $ | 45.22 |
|
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were 5.66.6, 5.3, and 4.56.6 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were $7,559$34,869 $22,927, and $7,311,$34,440, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2015, 20142018, 2017, and 20132016 was $1,601, $5,241$1,765, $8,396, and $7,135,$2,422, respectively. The total fair value of shares vested during fiscal 2015, 20142018, 2017, and 20132016 was $2,187, $2,080$2,149, $1,788, and $2,135,$1,291, respectively. Performance Shares Performance shares are paid in shares of Applied stock at the end of a three-year period provided the Company achieves goals established by the committee. The number of Applied shares payable will vary depending on the level of the goals achieved. A summary of nonvested performance shares activity at June 30, 20152018 is presented below:below: | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2015 | | | Year Ended June 30, 2018 | | | (Shares in thousands) | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Shares |
| | Weighted-Average Grant-Date Fair Value |
| Nonvested, beginning of year | | | Awarded | | | Forfeitures | (1 | ) | | 50.40 |
| | Vested | (20 | ) | | 27.28 |
| (10 | ) | | 48.76 |
| Nonvested, end of year | 38 |
| | $ | 46.66 |
| 93 |
| | $ | 45.16 |
|
The Committee set three one-year goals for each of the 2015, 20142018, 2017 and 20132016 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. Based uponFor the outstanding grants as of June 30, 2015,2018, the maximum number of shares which could be earned in future periods was 78.67.
Restricted Stock and Restricted Stock Units Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest onethree to four years from the award date, assuming continued employment with Applied. Applied primarily pays dividend equivalents on RSUs on a current basis. A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 20152018 is presented below: | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2015 | | | Year Ended June 30, 2018 | | | (Share amounts in thousands) | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Shares |
| | Weighted-Average Grant-Date Fair Value |
| Nonvested, beginning of year | | | Granted | | | Forfeitures | (7 | ) | | 48.81 |
| (10 | ) | | 54.96 |
| Vested | (84 | ) | | 32.54 |
| (43 | ) | | 52.58 |
| Nonvested, end of year | 90 |
| | $ | 46.18 |
| 116 |
| | $ | 51.27 |
|
NOTE 10: BENEFIT PLANS Retirement Savings Plan Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company had also made discretionary profit-sharing contributions to the Retirement Savings Plan for fiscal 2013. The discretionary profit-sharing contribution was ended in fiscal 2014. The Company’s expense for profit sharing and matching of employees’ 401(k) contributions was $3,156, $2,788$6,551, $6,677 and $11,231$2,535 during fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Deferred Compensation Plans The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Non-employee directors were able to defer receipt of director fees until January 1, 2015. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock. Post-employment Benefit Plans The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded: Supplemental Executive Retirement Benefits Plan The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. Key Executive Restoration Plan In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), an unfunded,a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $300 ,$234$359, $289, and $233$268 of expense associated with this plan in fiscal 2015, 20142018, 2017, and 2013,2016, respectively. Qualified Defined Benefit Retirement Plan The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly employees at retirement. These employees do not participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement.
Salary Continuation Benefits The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020. Retiree Health Care Benefits The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of
coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual. The Company uses a June 30 measurement date for all plans. The following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the post-employment plans at June 30: | | | Pension Benefits | | Retiree Health Care Benefits | Pension Benefits | | Retiree Health Care Benefits | | 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
| 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| Change in benefit obligation: | | | | | | | | | | | | | | | Benefit obligation at beginning of the year | $ | 34,558 |
| | $ | 40,664 |
| | $ | 2,790 |
| | $ | 3,719 |
| $ | 24,411 |
| | $ | 26,605 |
| | $ | 1,684 |
| | $ | 2,235 |
| Service cost | 97 |
| | 77 |
| | 53 |
| | 48 |
| 124 |
| | 126 |
| | 19 |
| | 29 |
| Interest cost | 896 |
| | 1,180 |
| | 95 |
| | 139 |
| 729 |
| | 687 |
| | 52 |
| | 63 |
| Plan participants’ contributions | — |
| | — |
| | 64 |
| | 63 |
| — |
| | — |
| | 68 |
| | 69 |
| Benefits paid | (6,697 | ) | | (7,251 | ) | | (238 | ) | | (246 | ) | (3,181 | ) | | (1,562 | ) | | (223 | ) | | (237 | ) | Amendments | (8 | ) | | 188 |
| |
| | — |
| — |
| | — |
| | — |
| | (245 | ) | Actuarial (gain) loss during year | 1,148 |
| | (300 | ) | | (620 | ) | | (933 | ) | | Actuarial gain during year | | (549 | ) | | (1,445 | ) | | (109 | ) | | (230 | ) | Benefit obligation at end of year | $ | 29,994 |
| | $ | 34,558 |
| | $ | 2,144 |
| | $ | 2,790 |
| $ | 21,534 |
| | $ | 24,411 |
| | $ | 1,491 |
| | $ | 1,684 |
| Change in plan assets: | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | $ | 7,245 |
| | $ | 6,697 |
| | $ | — |
| | $ | — |
| $ | 6,530 |
| | $ | 6,737 |
| | $ | — |
| | $ | — |
| Actual gain (loss) on plan assets | 247 |
| | 763 |
| | — |
| | — |
| | Actual gain on plan assets | | 516 |
| | 578 |
| | — |
| | — |
| Employer contributions | 6,390 |
| | 7,036 |
| | 174 |
| | 183 |
| 3,837 |
| | 776 |
| | 155 |
| | 168 |
| Plan participants’ contributions | — |
| | — |
| | 64 |
| | 63 |
| — |
| | — |
| | 68 |
| | 69 |
| Benefits paid | (6,697 | ) | | (7,251 | ) | | (238 | ) | | (246 | ) | (3,181 | ) | | (1,561 | ) | | (223 | ) | | (237 | ) | Fair value of plan assets at end of year | $ | 7,185 |
| | $ | 7,245 |
| | $ | — |
| | $ | — |
| $ | 7,702 |
| | $ | 6,530 |
| | $ | — |
| | $ | — |
| Funded status at end of year | $ | (22,809 | ) | | $ | (27,313 | ) | | $ | (2,144 | ) | | $ | (2,790 | ) | $ | (13,832 | ) | | $ | (17,881 | ) | | $ | (1,491 | ) | | $ | (1,684 | ) |
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income (loss)loss for the post-employment plans were as follows: | | | Pension Benefits | | Retiree Health Care Benefits | Pension Benefits | | Retiree Health Care Benefits | June 30, | 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
| 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| Amounts recognized in the consolidated balance sheets: | | | | | | | | | | | | | | | Other current liabilities | $ | 5,256 |
| | $ | 6,390 |
| | $ | 220 |
| | $ | 220 |
| $ | 3,298 |
| | $ | 2,814 |
| | $ | 220 |
| | $ | 220 |
| Post-employment benefits | 17,553 |
| | 20,923 |
| | 1,924 |
| | 2,570 |
| 10,534 |
| | 15,067 |
| | 1,271 |
| | 1,464 |
| Net amount recognized | $ | 22,809 |
| | $ | 27,313 |
| | $ | 2,144 |
| | $ | 2,790 |
| $ | 13,832 |
| | $ | 17,881 |
| | $ | 1,491 |
| | $ | 1,684 |
| Amounts recognized in accumulated other comprehensive (loss) income: | | | | | | | | | Amounts recognized in accumulated other comprehensive loss: | | | | | | | | | Net actuarial (loss) gain | $ | (7,311 | ) | | $ | (6,474 | ) | | $ | 1,492 |
| | $ | 960 |
| $ | (4,781 | ) | | $ | (5,798 | ) | | $ | 1,121 |
| | $ | 1,167 |
| Prior service cost | (208 | ) | | (293 | ) | | 1,219 |
| | 1,490 |
| — |
| | (35 | ) | | 554 |
| | 922 |
| Total amounts recognized in accumulated other comprehensive (loss) income | $ | (7,519 | ) | | $ | (6,767 | ) | | $ | 2,711 |
| | $ | 2,450 |
| | Total amounts recognized in accumulated other comprehensive loss | | $ | (4,781 | ) | | $ | (5,833 | ) | | $ | 1,675 |
| | $ | 2,089 |
|
The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets: | | | Pension Benefits | Pension Benefits | June 30, | 2015 |
| | 2014 |
| 2018 |
| | 2017 |
| Projected benefit obligations | $ | 29,994 |
| | $ | 34,558 |
| $ | 21,534 |
| | $ | 24,411 |
| Accumulated benefit obligations | 29,994 |
| | 34,558 |
| 21,534 |
| | 24,411 |
| Fair value of plan assets | 7,185 |
| | 7,245 |
| 7,702 |
| | 6,530 |
|
The net periodic costs (benefits) are as follows: | | | Pension Benefits | | Retiree Health Care Benefits | Pension Benefits | | Retiree Health Care Benefits | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| | 2018 |
| | 2017 |
| | 2016 |
| Service cost | $ | 97 |
| | $ | 77 |
| | $ | 78 |
| | $ | 53 |
| | $ | 48 |
| | $ | 80 |
| $ | 124 |
| | $ | 126 |
| | $ | 91 |
| | $ | 19 |
| | $ | 29 |
| | $ | 22 |
| Interest cost | 896 |
| | 1,180 |
| | 1,260 |
| | 95 |
| | 139 |
| | 188 |
| 729 |
| | 687 |
| | 879 |
| | 52 |
| | 63 |
| | 75 |
| Expected return on plan assets | (495 | ) | | (416 | ) | | (403 | ) | | — |
| | — |
| | — |
| (472 | ) | | (460 | ) | | (491 | ) | | — |
| | — |
| | — |
| Recognized net actuarial loss (gain) | 559 |
| | 611 |
| | 735 |
| | (87 | ) | | (38 | ) | | (53 | ) | 424 |
| | 872 |
| | 913 |
| | (154 | ) | | (181 | ) | | (210 | ) | Amortization of prior service cost | 86 |
| | 78 |
| | 83 |
| | (272 | ) | | (271 | ) | | 107 |
| 27 |
| | 86 |
| | 86 |
| | (369 | ) | | (271 | ) | | (271 | ) | Recognition of prior service cost upon plan curtailment | | 8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Net periodic cost (benefits) | $ | 1,143 |
| | $ | 1,530 |
| | $ | 1,753 |
| | $ | (211 | ) | | $ | (122 | ) | | $ | 322 |
| $ | 840 |
| | $ | 1,311 |
| | $ | 1,478 |
| | $ | (452 | ) | | $ | (360 | ) | | $ | (384 | ) |
In accordance with the Company's adoption of ASU 2017-07, the Company reports the service cost component of the net periodic post-employment costs in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net periodic post-employment costs are presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Therefore, $143, $155, and $113 of service costs are included in selling, distribution and administrative expense, and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net in the statements of consolidated income for the years ended June 30, 2018, 2017, and 2016, respectively. The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $914 and $86, respectively.$185. The estimated net actuarial gain and income from prior service cost for the retiree health care benefits that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $211$121 and $271,$369, respectively. Assumptions TheA discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve and the Findley Discount Curve. During fiscal 2015, the Society of Actuaries released a series of updated mortality tables resulting from recent studies measuring mortality rates for various groups of individuals. As of June 30, 2015, the Company adopted these mortality tables, which reflect improved trends in longevity and have the effect of increasing the estimate of benefits to be received by plan participants.
The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for the plans were as follows: | | | Pension Benefits | | Retiree Health Care Benefits | Pension Benefits | | Retiree Health Care Benefits | June 30, | 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
| 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| Assumptions used to determine benefit obligations at year end: | | | | | | | | | | | | | | | Discount rate | 3.0 | % | | 2.8 | % | | 4.0 | % | | 3.8 | % | 3.5 | % | | 2.8 | % | | 3.8 | % | | 3.3 | % | Assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | | | | Discount rate | 2.8 | % | | 3.0 | % | | 3.8 | % | | 4.0 | % | 2.8 | % | | 2.3 | % | | 3.3 | % | | 2.9 | % | Expected return on plan assets | 7.0 | % | | 7.0 | % | | N/A |
| | N/A |
| 7.0 | % | | 7.0 | % | | N/A |
| | N/A |
|
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 6.8% and 7.0% as of June 30, 20152018 and 2014,2017, respectively, decreasing to 5.0% by 2023.2027. A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 20152018 and for the year then ended: | | | One-Percentage Point | | One-Percentage Point | | | Increase |
| | Decrease |
| Increase | | Decrease | Effect on total service and interest cost components of periodic expense | $ | 20 |
| | $ | (17 | ) | $ | 9 |
| | $ | (8 | ) | Effect on post-retirement benefit obligation | 209 |
| | (177 | ) | 152 |
| | (130 | ) |
Plan Assets The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan areis valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30: | | | Target Allocation | | Fair Value | Target Allocation | | Fair Value | | | 2015 |
| | 2014 |
| | 2018 |
| | 2017 |
| Asset Class: | | | | | | | | | Equity* securities (Level 1) | 40 – 70% | | $ | 4,022 |
| | $ | 3,813 |
| 40 – 70% | | $ | 6,226 |
| | $ | 3,880 |
| Debt securities (Level 2) | 20 – 50% | | 2,930 |
| | 3,155 |
| 20 – 50% | | 1,337 |
| | 2,538 |
| Other (Level 1) | 0 – 20% | | 233 |
| | 277 |
| 0 – 20% | | 139 |
| | 112 |
| Total | 100% | | $ | 7,185 |
| | $ | 7,245 |
| 100% | | $ | 7,702 |
| | $ | 6,530 |
|
* Equity securities do not include any Company common stock. The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in conjunction with the Qualified Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term objectives and invest the pension assets in accordance with ERISA and fiduciary standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital, without undue exposure to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment results that meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets assumption was developed by considering the historical returns and the future expectations for returns of each asset class as well as the target asset allocation of the pension portfolio. Cash Flows Employer Contributions The Company expects to contribute $5,300$3,300 to its pension benefit plans and $170$130 to its retiree health care benefit plans in fiscal 2016.2019. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.assets. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next five years and in the aggregate for the subsequent five years: | | | | | | | | | During Fiscal Years | Pension Benefits |
| | Retiree Health Care Benefits |
| 2016 | $ | 5,600 |
| | $ | 170 |
| 2017 | 1,800 |
| | 180 |
| 2018 | 2,300 |
| | 190 |
| 2019 | 4,000 |
| | 180 |
| 2020 | 3,300 |
| | 170 |
| 2021 through 2025 | 7,400 |
| | 620 |
|
| | | | | | | | | During Fiscal Years | Pension Benefits |
| | Retiree Health Care Benefits |
| 2019 | $ | 3,700 |
| | $ | 130 |
| 2020 | 3,800 |
| | 120 |
| 2021 | 1,300 |
| | 110 |
| 2022 | 1,300 |
| | 110 |
| 2023 | 1,400 |
| | 100 |
| 2024 through 2028 | 5,200 |
| | 530 |
|
NOTE 11: LEASES The Company leases many service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The Company leased its corporate headquarters facility until purchasing it in April 2014. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 20152018 are as follows: | | During Fiscal Years | | | 2016 | $ | 24,900 |
| | 2017 | 19,700 |
| | 2018 | 14,600 |
| | 2019 | 10,900 |
| $ | 38,100 |
| 2020 | 5,800 |
| 27,500 |
| 2021 | | 17,800 |
| 2022 | | 11,200 |
| 2023 | | 5,800 |
| Thereafter | 6,500 |
| 11,000 |
| Total minimum lease payments | $ | 82,400 |
| $ | 111,400 |
|
Rental expense incurred for operating leases, principally from leases for real property, vehicles and computer equipment was $39,300$41,000 in 2015, $36,9002018, $35,900 in 20142017 and $36,300$37,300 in 2013,2016, and was classified within selling, distribution and administrative expenses onin the Statementsstatements of Consolidated Income.consolidated income. The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $3,100, $2,500$2,400, $2,400, and $1,200$3,800 and in fiscal 2015, 20142018, 2017, and 2013.2016, respectively. NOTE 12: SEGMENT AND GEOGRAPHIC INFORMATION Effective July 1, 2017, the Company completed a number of changes to its organizational structure that resulted in a change in how the Company manages its businesses, allocates resources and measures performance. As a result, the Company has revised its reportable segments to reflect how management currently reviews financial information and makes operating decisions. All Canadian and Mexican subsidiaries are now grouped under the Service Center Based Distribution segment. All prior-period amounts have been adjusted to reflect the reportable segment change. The Company's reportable segments are: Service Center Based Distribution and Fluid Power Businesses.& Flow Control. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment provides customers with solutions to their maintenance, repair and original equipment manufacturing needs through the distribution of industrial products including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion products, tools, safety products, and other industrial and maintenance supplies. The Fluid Power Businesses& Flow Control segment distributes engineered fluid power components and specialty flow control solutions and operates shops that assemble fluid power systems and components, performs equipment repair, and offers technical advice to customers.
The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power Businesses& Flow Control segment to the Service Center Based Distribution segment of $24,087, $21,809$25,556, $22,719, and $20,217,$20,261, in fiscal 2015, 20142018, 2017, and 2013,2016, respectively, have been eliminated in the following table.table.
Segment Financial Information | | | Service Center Based Distribution |
| | Fluid Power Businesses |
| | Total |
| Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Year Ended June 30, 2015 | | | | | | | Year Ended June 30, 2018 | | | | | | | Net sales | $ | 2,254,768 |
| | $ | 496,793 |
| | $ | 2,751,561 |
| $ | 2,346,418 |
| | $ | 726,856 |
| | $ | 3,073,274 |
| Operating income for reportable segments | 140,421 |
| | 48,535 |
| | 188,956 |
| 136,718 |
| | 83,194 |
| | 219,912 |
| Assets used in the business | 1,230,543 |
| | 204,425 |
| | 1,434,968 |
| 1,198,296 |
| | 1,087,445 |
| | 2,285,741 |
| Depreciation and amortization of property | 15,196 |
| | 1,382 |
| | 16,578 |
| 15,336 |
| | 2,462 |
| | 17,798 |
| Capital expenditures | 13,531 |
| | 1,402 |
| | 14,933 |
| 18,492 |
| | 4,738 |
| | 23,230 |
| Year Ended June 30, 2014 | | | | | | | Year Ended June 30, 2017 | | | | | | | Net sales | $ | 1,973,359 |
| | $ | 486,519 |
| | $ | 2,459,878 |
| $ | 2,180,358 |
| | $ | 413,388 |
| | $ | 2,593,746 |
| Operating income for reportable segments | 118,857 |
| | 44,621 |
| | 163,478 |
| 115,794 |
| | 46,569 |
| | 162,363 |
| Assets used in the business | 1,116,311 |
| | 217,858 |
| | 1,334,169 |
| 1,187,054 |
| | 200,541 |
| | 1,387,595 |
| Depreciation and amortization of property | 12,399 |
| | 1,578 |
| | 13,977 |
| 14,375 |
| | 931 |
| | 15,306 |
| Capital expenditures | 18,744 |
| | 1,446 |
| | 20,190 |
| 14,566 |
| | 2,479 |
| | 17,045 |
| Year Ended June 30, 2013 | | | | | | | Year Ended June 30, 2016 | | | | | | | Net sales | $ | 2,003,440 |
| | $ | 458,731 |
| | $ | 2,462,171 |
| $ | 2,150,478 |
| | $ | 368,950 |
| | $ | 2,519,428 |
| Operating income for reportable segments | 138,484 |
| | 41,083 |
| | 179,567 |
| 113,111 |
| | 37,174 |
| | 150,285 |
| Assets used in the business | 859,547 |
| | 199,159 |
| | 1,058,706 |
| 1,132,222 |
| | 179,803 |
| | 1,312,025 |
| Depreciation and amortization of property | 10,692 |
| | 1,809 |
| | 12,501 |
| 15,049 |
| | 917 |
| | 15,966 |
| Capital expenditures | 10,415 |
| | 1,799 |
| | 12,214 |
| 12,500 |
| | 630 |
| | 13,130 |
|
ERP related assets are included in assets used in the business and capital expenditures within the Service Center Based Distribution segment. Within the geographic disclosures, these assets are included in the United States. Expenses associated with the ERP are included in the Corporate and other income, net, line in the reconciliation of operating income for reportable segments to the consolidated income before income taxes table below. A reconciliation of operating income for reportable segments to the consolidated income before income taxes is as follows: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Operating income for reportable segments | $ | 188,956 |
| | $ | 163,478 |
| | $ | 179,567 |
| $ | 219,912 |
| | $ | 162,363 |
| | $ | 150,285 |
| Adjustments for: | | | | | | | | | | | Intangible amortization — Service Center Based Distribution | 19,561 |
| | 7,336 |
| | 5,829 |
| 17,375 |
| | 18,954 |
| | 19,913 |
| Intangible amortization — Fluid Power Businesses | 6,236 |
| | 6,687 |
| | 7,404 |
| | Intangible amortization — Fluid Power & Flow Control | | 14,690 |
| | 5,417 |
| | 5,667 |
| Goodwill Impairment — Service Center Based Distribution | | — |
| | — |
| | 64,794 |
| Corporate and other income, net | (21,460 | ) | | (14,903 | ) | | (10,065 | ) | (37,980 | ) | | (37,394 | ) | | (29,871 | ) | Total operating income | 184,619 |
| | 164,358 |
| | 176,399 |
| 225,827 |
| | 175,386 |
| | 89,782 |
| Interest expense, net | 7,869 |
| | 249 |
| | 165 |
| 23,485 |
| | 8,541 |
| | 8,763 |
| Other expense (income), net | 879 |
| | (2,153 | ) | | (1,431 | ) | | Other (income) expense, net | | (2,376 | ) | | (121 | ) | | 2,041 |
| Income before income taxes | $ | 175,871 |
| | $ | 166,262 |
| | $ | 177,665 |
| $ | 204,718 |
| | $ | 166,966 |
| | $ | 78,978 |
|
Fluctuations in corporate and other income, net, are due to changes in corporate expenses, as well as in the amounts and levels of certain supplier support benefits and amounts of expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.
Product Category Net sales by product category are as follows: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Industrial | $ | 2,013,447 |
| | $ | 1,739,496 |
| | $ | 1,776,172 |
| $ | 2,085,571 |
| | $ | 1,855,437 |
| | $ | 1,836,484 |
| Fluid power | 738,114 |
| | 720,382 |
| | 685,999 |
| | Fluid power & flow control | | 987,703 |
| | 738,309 |
| | 682,944 |
| Net sales | $ | 2,751,561 |
| | $ | 2,459,878 |
| | $ | 2,462,171 |
| $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
|
The fluid power & flow control product category includes sales of hydraulic, pneumatic, lubrication, filtration, and filtrationflow control components and systems, and repair services through the Company’s Fluid Power Businesses& Flow Control segment as well as the Service Center Based Distribution segment. Geographic Information Net sales are presented in geographic areas based on the location of the facility shipping the product. Long-lived assets are based on physical locations and are comprised of the net book value of property and intangible assets. Information by geographic area is as follows: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Net Sales: | | | | | | | | | | | United States | $ | 2,238,263 |
| | $ | 2,031,142 |
| | $ | 2,017,168 |
| $ | 2,615,041 |
| | $ | 2,182,552 |
| | $ | 2,117,485 |
| Canada | 358,580 |
| | 291,117 |
| | 298,269 |
| 273,622 |
| | 251,999 |
| | 257,797 |
| Other Countries | 154,718 |
| | 137,619 |
| | 146,734 |
| 184,611 |
| | 159,195 |
| | 144,146 |
| Total | $ | 2,751,561 |
| | $ | 2,459,878 |
| | $ | 2,462,171 |
| $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
|
| | June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Long-Lived Assets: | | | | | | | | | | | United States | $ | 217,597 |
| | $ | 153,945 |
| | $ | 144,289 |
| $ | 501,373 |
| | $ | 207,126 |
| | $ | 225,538 |
| Canada | 76,565 |
| | 99,161 |
| | 19,038 |
| 50,261 |
| | 57,947 |
| | 66,304 |
| Other Countries | 9,113 |
| | 9,998 |
| | 11,183 |
| 5,656 |
| | 6,558 |
| | 7,163 |
| Total | $ | 303,275 |
| | $ | 263,104 |
| | $ | 174,510 |
| $ | 557,290 |
| | $ | 271,631 |
| | $ | 299,005 |
|
Other countries consist of Mexico, Australia, New Zealand, and New Zealand.Singapore. NOTE 13: COMMITMENTS AND CONTINGENCIES The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company believes the likelihood is remote that the ultimate resolution of any of these matters 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. NOTE 14: OTHER (INCOME) EXPENSE, (INCOME), NET Other (income) expense, (income), net, consists of the following: | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| 2018 |
| | 2017 |
| | 2016 |
| Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (442 | ) | | $ | (1,683 | ) | | $ | (1,280 | ) | | Elimination of one-month Canadian and Mexican reporting lag, effective July 1, 2013 and January 1, 2014, respectively | — |
| | (1,342 | ) | | — |
| | Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan | | $ | (785 | ) | | $ | (1,188 | ) | | $ | (87 | ) | Foreign currency transaction (gains) losses | 1,251 |
| | 801 |
| | (143 | ) | (210 | ) | | 209 |
| | 1,039 |
| Net other periodic post-employment costs | | 245 |
| | 796 |
| | 981 |
| Life insurance (income) expense, net | | (1,628 | ) | | 107 |
| | 108 |
| Other, net | 70 |
| | 71 |
| | (8 | ) | 2 |
| | (45 | ) | | — |
| Total other expense (income), net | $ | 879 |
| | $ | (2,153 | ) | | $ | (1,431 | ) | | Total other (income) expense, net | | $ | (2,376 | ) | | $ | (121 | ) | | $ | 2,041 |
|
NOTE 15: SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2015 through the date the financial statements were issued.
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12,500. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.
56
QUARTERLY OPERATING RESULTS (In thousands, except per share amounts) (UNAUDITED) | | | | | | | | | | | Per Common Share | | | | | | | | | Per Common Share | | Net Sales |
| | Gross Profit |
| | Operating Income |
| | Net Income |
| | Net Income |
| | Cash Dividend |
| Net Sales |
| | Gross Profit |
| | Operating Income |
| | Net Income |
| | Net Income |
| | Cash Dividend |
| 2015 | | | | | | | | | | | | | 2018 | | | | | | | | | | | | | First Quarter | $ | 702,325 |
| | $ | 194,932 |
| | $ | 46,165 |
| | $ | 29,122 |
| | $ | 0.70 |
| | $ | 0.25 |
| $ | 680,701 |
| | $ | 192,424 |
| | $ | 51,837 |
| | $ | 33,721 |
| | $ | 0.86 |
| | $ | 0.29 |
| Second Quarter | 691,702 |
| | 195,713 |
| | 46,807 |
| | 29,707 |
| | 0.72 |
| | 0.25 |
| 667,187 |
| | 188,360 |
| | 46,715 |
| | 30,950 |
| | 0.79 |
| | 0.29 |
| Third Quarter | 679,994 |
| | 187,363 |
| | 43,772 |
| | 28,610 |
| | 0.70 |
| | 0.27 |
| 827,665 |
| | 239,524 |
| | 56,444 |
| | 36,592 |
| | 0.93 |
| | 0.30 |
| Fourth Quarter | 677,540 |
| | 191,806 |
| | 47,875 |
| | 28,045 |
| | 0.70 |
| | 0.27 |
| 897,721 |
| | 263,687 |
| | 70,831 |
| | 40,362 |
| | 1.03 |
| | 0.30 |
| | $ | 2,751,561 |
| | $ | 769,814 |
| | $ | 184,619 |
| | $ | 115,484 |
| | $ | 2.80 |
| | $ | 1.04 |
| $ | 3,073,274 |
| | $ | 883,995 |
| | $ | 225,827 |
| | $ | 141,625 |
| | $ | 3.61 |
| | $ | 1.18 |
| 2014 | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | First Quarter | $ | 605,305 |
| | $ | 169,795 |
| | $ | 39,539 |
| | $ | 26,844 |
| | $ | 0.63 |
| | $ | 0.23 |
| $ | 624,848 |
| | $ | 178,330 |
| | $ | 43,218 |
| | $ | 27,371 |
| | $ | 0.70 |
| | $ | 0.28 |
| Second Quarter | 581,949 |
| | 163,383 |
| | 39,837 |
| | 25,909 |
| | 0.61 |
| | 0.23 |
| 608,123 |
| | 172,456 |
| | 37,656 |
| | 24,085 |
| | 0.61 |
| | 0.28 |
| Third Quarter | 618,006 |
| | 171,220 |
| | 40,173 |
| | 30,394 |
| | 0.72 |
| | 0.25 |
| 679,304 |
| | 190,802 |
| | 45,467 |
| | 29,494 |
| | 0.75 |
| | 0.29 |
| Fourth Quarter | 654,618 |
| | 182,528 |
| | 44,809 |
| | 29,674 |
| | 0.71 |
| | 0.25 |
| 681,471 |
| | 196,107 |
| | 48,249 |
| | 52,960 |
| | 1.34 |
| | 0.29 |
| | $ | 2,459,878 |
| | $ | 686,926 |
| | $ | 164,358 |
| | $ | 112,821 |
| | $ | 2.67 |
| | $ | 0.96 |
| $ | 2,593,746 |
| | $ | 737,695 |
| | $ | 174,590 |
| | $ | 133,910 |
| | $ | 3.40 |
| | $ | 1.14 |
| 2013 | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | First Quarter | $ | 610,519 |
| | $ | 164,533 |
| | $ | 44,318 |
| | $ | 29,532 |
| | $ | 0.70 |
| | $ | 0.21 |
| $ | 641,904 |
| | $ | 181,012 |
| | $ | 41,026 |
| | $ | 24,291 |
| | $ | 0.61 |
| | $ | 0.27 |
| Second Quarter | 589,517 |
| | 162,919 |
| | 40,569 |
| | 27,043 |
| | 0.64 |
| | 0.21 |
| 610,346 |
| | 173,167 |
| | 38,362 |
| | 23,947 |
| | 0.61 |
| | 0.27 |
| Third Quarter | 621,654 |
| | 174,400 |
| | 43,477 |
| | 29,302 |
| | 0.69 |
| | 0.23 |
| 633,172 |
| | 174,793 |
| | (33,032 | ) | | (44,728 | ) | | (1.14 | ) | | 0.28 |
| Fourth Quarter | 640,481 |
| | 181,110 |
| | 48,035 |
| | 32,272 |
| | 0.76 |
| | 0.23 |
| 634,006 |
| | 178,450 |
| | 42,445 |
| | 26,067 |
| | 0.66 |
| | 0.28 |
| | $ | 2,462,171 |
| | $ | 682,962 |
| | $ | 176,399 |
| | $ | 118,149 |
| | $ | 2.78 |
| | $ | 0.88 |
| $ | 2,519,428 |
| | $ | 707,422 |
| | $ | 88,801 |
| | $ | 29,577 |
| | $ | 0.75 |
| | $ | 1.10 |
|
On August 14, 201510, 2018, there were 5,8934,307 shareholders of record including 4,3212,914 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company’s common stock is listed on the New York Stock Exchange. The closing price on August 14, 201510, 2018 was $40.77$72.20 per share. The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period. Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs. Fiscal 20152018 During the second quarter of fiscal 2018, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate to a blended statutory rate for the annual period of 28.1%. The corporate income tax rate change had a favorable impact to the Company of $12.1 million for fiscal 2018. Further, we recognized provisional amounts for the one-time transition tax of $3.9 million and for the re-measurement of the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse of $2.4 million. Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018, which is included as a component of income tax expense in the statements of consolidated income. During the third quarter of fiscal 2018, the Company completed the acquisition of all of the outstanding shares of FCX Performance, Inc. (FCX), a Columbus, Ohio based distributor of specialty process flow control products and services. At the time of closing, FCX operated 68 locations with approximately 1,000 employees. The total consideration transferred for the acquisition was approximately $782 million, which was financed by cash-on-hand and a new credit facility comprised of a $780 million Term Loan A and $250 million revolver (the Credit Facility), effective with the transaction closing. This Credit Facility was used to finance the transaction, as well as to repay the Company's existing term loan outstanding prior to the acquisition date. Fiscal 2017 During the fourth quarter of fiscal 2015,2017, the Company recorded a tax benefit pertaining to a worthless stock tax deduction of $22.2 million, or $0.56 per share. This deduction is based on the write-off of its investment in one of its Canadian subsidiaries for U.S. tax purposes.
In fiscal 2017 reductions in U.S. inventories in the bearings pool resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. A portion of these reductions resulted from the scrapping of $6.0 million of bearings inventory which resulted in a similar amount of scrap expense being recognized in the fourth quarter of fiscal 2017. The overall impact of the fiscal 2017 LIFO layer liquidations increased gross profit by $9.4 million in the fourth quarter of fiscal 2017. The net benefit of the bearings products LIFO layer liquidation benefit, less the bearing product scrap expense was $3.4 million. Fiscal 2016 During the third quarter of fiscal 2016, the Company recorded goodwill impairment of $64.8 million related to the Canada and Australia/New Zealand service center reporting units within the Service Center Based Distribution reportable segment. After taxes, the impairment had a negative impact on earnings of $63.8 million and reduced earnings per share by $1.62 per share. During fiscal 2016, the Company incurred certain restructuring charges. During the third quarter, a reserve of $3.6 million was recorded within cost of sales for potential non-salable, non-returnable and excess inventory due to declining demand, primarily for Canada oil and gas operations. SD&A included expenses of $5.2 million during the fiscal year related to severance of $1.8 million. Also, we sold a building recognizing a gain of $1.5 million.and facility consolidations, primarily for oil and gas operations. Total restructuring charges reduced gross profit for the year by $3.6 million, operating income by $8.8 million, net income by $6.2 million and earnings per share by $0.16. During the fourth quarter of fiscal 2015, income tax expense increased due to recording a valuation allowance against certain deferred tax assets for foreign jurisdictions of $1.0 million. Also, an increase of tax rates in certain foreign jurisdictions at the end of the fiscal period increased tax expense by $1.2 million during the quarter. No LIFO layer liquidations took place during the year ended June 30, 2015.
Fiscal 2014
During the first quarter of fiscal 2014, the Company aligned the consolidation of the Company's Canadian subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $1.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, the Company aligned the consolidation of the Company's Mexican subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $0.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, $2.8 million of tax reserves were reversed. The impact of this reversal was a reduction in income tax expense of $2.8 million and a $0.07 increase in earnings per share.
No LIFO layer liquidations took place during the year ended June 30, 2014.
Fiscal 2013
During the fourth quarter of fiscal 2013,2016, the Company realized LIFO layer liquidation benefits of $6,300$2.1 million from certain inventory quantity levels decreasing. Additional scrap expense of $3.0 million above our normal scrap rate was also recorded in the June 30, 2013 quarter.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures On January 31, 2018, the Company completed the acquisition of FCX Performance, Inc ("FCX"). As permitted by SEC guidance, the scope of management’s evaluation of internal control over financing reporting as of June 30, 2018 did not include the internal control over financial reporting of FCX. However, we are extending our oversight and monitoring processes that support our internal control over financial reporting to include FCX's operations. 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.
Management's Report on Internal Control over Financial Reporting The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President & Chief Executive Officer and the Vice President - Chief Financial Officer & Treasurer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with respect to the preparation and presentation of the consolidated financial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2015.2018. This evaluation was based on the criteria set forth in the framework Internal"Internal Control —- Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over financial reporting was effective as of June 30, 2015.2018. The Company acquired Knox Oil Field SupplyFCX Performance Inc. (Knox)("FCX") on July 1, 2014.January 31, 2018. Management has excluded KnoxFCX from its assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2015. Knox2018. FCX represents approximately 11%39.5% and 4%8.1% of total assets and net sales, respectively, of the consolidated financial statement amounts as of and for the year ended June 30, 2015.2018. The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. | | | | /s/ Neil A. Schrimsher | | /s/ Mark O. EiseleDavid K. Wells | President & Chief Executive Officer | | Vice President - Chief Financial Officer & Treasurer |
August 26, 201517, 2018
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc. Cleveland, Ohio
Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the "Company"“Company”) as of June 30, 2015,2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2018, of the Company and our report dated August 17, 2018, expressed an unqualified opinion on those consolidated financial statements. As described in Management'sManagement’s Report on Internal Control overControls Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Knox Oil Field SupplyFCX Performance Inc. ("Knox"FCX"), which was acquired on July 1, 2014January 31, 2018 and whose financial statements constitute 11% and 4%39.5% of total assets and 8.1% of net sales respectively, of the consolidated financial statement amountsstatements as of and for the year ended June 30, 2015.2018. Accordingly, our audit did not include the internal control over financial reporting at Knox. FCX. Basis for Opinion The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control overControls Over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2015 of the Company and our report dated August 26, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP Cleveland, Ohio August 26, 201517, 2018
Changes in Internal Control Over Financial Reporting The Company has undertaken a multi-year ERP (SAP) project to transform the Company's technology platforms and enhance its business information and transaction systems. The Company has completed its SAP implementation in its Western Canadian and U.S. Service Center Based Businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the transformation of its financial and accounting systems including fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation system, have been transitioned to SAP during fiscal 2015. During fiscal year 2016 the Company will continue to evaluate and determine an appropriate deployment schedule for operations in Eastern Canada and other operations not on SAP, as well as refine our current business and system processes. The company expects to convert to a new consolidation process and system at the beginning of fiscal 2016. Changes in the Company's key business applications and financial processes as a result of the continuing implementation of SAP and other business systems are being evaluated by management. The Company is designing processes and internal controls to address changes in the Company's internal control over financial reporting as a result of the SAP implementation. This ongoing SAP implementation presents risks to maintaining adequate internal controls over financial reporting.
Other than as described above, thereThere have not been any changes in internal control over financial reporting during the quarter ended June 30, 20152018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy statement relating to the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the caption “Item 1 - Election of Directors.” The information required by this Item as to Applied's executive officers has been furnished in this report in Part I, after Item 4, under the caption “Executive Officers of the Registrant.” The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to Applied's proxy statement, under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” Applied has a code of ethics, named the Code of Business Ethics, that applies to our employees, including our principal executive officer, principal financial officer, and principal accounting officer. The Code of Business Ethics is posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to and waivers from the Code of Business Ethics will be disclosed promptly at the same location. Information regarding the composition of Applied’s audit committee and the identification of audit committee financial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under the caption “Corporate Governance.” ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the captions “Executive Compensation” and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Applied's shareholders have approved the following equity compensation plans: the 1997 Long-Term Performance Plan, the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the Deferred Compensation Plan, and the Deferred Compensation Plan for Non-Employee Directors. All of these plans are currently in effect. The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2015.2018. | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights |
| | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights |
| | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | Equity compensation plans approved by security holders | 1,116,188 |
| | $ | 35.86 |
| | * | 1,378,637 |
| | $45.22 | | * | Equity compensation plans not approved by security holders | 0 |
| | 0 |
| | 0 | — |
| | — |
| | — |
| | Total | 1,116,188 |
| | $ | 35.86 |
| | * | 1,378,637 |
| | $45.22 |
| * |
| | * | The 2015 Long-Term Performance Plan was adopted to replace the 2011 Long-Term Performance Plan and the 2011 Long-Term Performance Plan was adopted to replace the 2007 Long-Term Performance Plan, and the 2007 Long-Term Performance Plan replaced the 1997 Long-Term Performance Plan. Stock options and stock appreciation rights remain outstanding under each of the 19972007 and 20072011 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 20112015 Long-Term Performance Plan at June 30, 2015,2018 was 1,106,794. The number of shares issuable under the Deferred Compensation Plan for Non-Employee Directors and the Deferred Compensation Plan depends on the dollar amount of participant contributions deemed invested in Applied common stock. 1,665,033. |
Information concerning the security ownership of certain beneficial owners and management is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the caption “Holdings of Major Shareholders, Officers, and Directors.” ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the caption “Corporate Governance.” ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the caption “Item 43 - Ratification of Auditors.”
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. (a)1. Financial Statements. The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report: | | | | • | Report of Independent Registered Public Accounting Firm | | | | • | Statements of Consolidated Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Consolidated Balance Sheets at June 30, 20152018 and 20142017 | | | | • | Statements of Consolidated Cash Flows for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Notes to Consolidated Financial Statements for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Supplementary Data: | | | | | • | Quarterly Operating Results |
(a)2. Financial Statement Schedule. The following schedule is included in this Part IV, and is found in this report at the page indicated: | | | | | Page No. | | | | | Schedule II - Valuation and Qualifying Accounts: Pg. 6670 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto. (a)3. Exhibits. | | | * Asterisk indicates an executive compensation plan or arrangement. | Exhibit No. | Description | | | 3.1 | | | | 3.2 | | | | 4.1 | | | | 4.2 | Private Shelf Agreement dated as of November 27, 1996, as amended through October 30, 2014,June 29, 2018, between Applied and PGIM, Inc. (formerly known as Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America)), conformed to show all amendments (filed as Exhibit 4.2 to Applied's Form 10-Q for the quarter ended March 31, 2015, SEC File No. 1-2299, and incorporated here by reference).amendments. | | | 4.3 | Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as most recently amended, on February 4, 2013, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K datedfiled July 1,2, 2014, SEC File No. 1-2299, and incorporated here by reference). | | |
| | | 4.4 | Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q dated November 4,for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | 4.5 | Credit Agreement dated as of May 15, 2012,January 31, 2018, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 410.1 to Applied's Form 8-K dated May 17, 2012,filed February 6, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | 4.6 | Credit Agreement dated as of April 25, 2014, among Applied Industrial Technologies, Inc., Key Bank National Association, as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 1, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | *10.1 | A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement for the annual meeting of shareholders to be held October 27, 201530, 2018 under the caption “Director Compensation.” | | | *10.2 | | | | *10.3 | | | | *10.4 | Second | | | *10.5 | | | | *10.6 | 1997 Long-Term Performance Plan, as amended April 19, 2007 (filed as Exhibit 10(k) to Applied's Form 10-K for the year ended June 30, 2007, SEC File No. 1-2299, and incorporated here by reference). | | | *10.7 | Section 409A Amendment to the 1997 Long-Term Performance Plan (filed as Exhibit 10.4 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference). | | | *10.8 | | | | *10.910.7 | | | | *10.1010.8 | | | | *10.1110.9 | | | | *10.10 | | | | *10.1210.11 | | | | *10.1310.12 | | | | *10.1410.13 | Performance Shares | | | *10.1510.14 | Restricted Stock Units | | | *10.1610.15 | | | | *10.1710.16 | | | | *10.1810.17 | | | |
| | | *10.2010.19 | | | | *10.2110.20 | | | | *10.2210.21 | | | | *10.2310.22 | | | | *10.2410.23 | | | | *10.2510.24 | | | | *10.2610.25 | | | | *10.2710.26 | | | | *10.27 | | | | *10.28 | Supplemental Defined Contribution Plan (Post-2004 Terms) (filed as Exhibit 10.6 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference). | | | *10.29 | | | | *10.3010.29 | | | | *10.3110.30 | | | | *10.3210.31 | Form of | | | *10.3310.32 | | | | *10.3410.33 | | | | *10.3510.34 | | | | *10.3610.35 | Non-qualified Deferred Compensation Agreement between Applied | | | 10.3710.36 | Share Purchase Agreement dated April 25, 2014,and Plan of Merger by and among Applied Industrial Technologies, Inc., Applied Alberta, Inc., Michael Sirois, Sirois Family Trust, Georg Eger, Eger Family Trust, Blair Hetlinger, Christopher Sirois, Kenneth Pacula, Grant Bechtloff, Ryan Farley, Dwayne Letawsky, Douglas Kilbach, Steven Vanderwater, 1562039 Alberta Ltd., 1561902 Alberta Ltd., 1614176 Alberta Ltd., 1814971 Alberta Ltd.Fortress Merger Sub Holding LLC, Fortress Merger Sub LP, FCX Group Holdings, LP, FCX Group GP, LLC, and 1814966 Alberta Ltd.Harvest Partners, LP (filed as Exhibit 10.1 to Applied’sApplied's Form 8-K dated May 1, 2014,filed January 9, 2018, SEC File No. 1-2299, and incorporated here by reference). | | |
| | | 10.38 | Stock Purchase Agreement dated May 23, 2014, among Applied Industrial Technologies, Inc., Alex Dan Knox and Dayton Scott Knox (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 27, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | 21 | | | | 23 | | | | 24 | | | | 31 | | | | 32 | |
| | | | | 101.INS | XBRL Instance Document | | | 101.SCH | XBRL Taxonomy Extension Schema Document | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Applied 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 Applied'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.
ITEM 16. FORM 1O-K SUMMARY. Not applicable.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2015, 2014,2018, 2017, AND 20132016 (in thousands) | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| Year Ended June 30, 2015 | | | | | | | | | | | | | | Year Ended June 30, 2018 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 10,385 |
| | $ | 2,597 |
| | $ | 231 |
| (A) | | $ | 2,592 |
| (B) | | $ | 10,621 |
| | $ | 9,628 |
| | $ | 2,803 |
| | $ | 4,578 |
| (A) | | $ | 3,443 |
| (B) | | $ | 13,566 |
| Year Ended June 30, 2014 | | | | | | | | | | | | | | Year Ended June 30, 2017 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 7,737 |
| | $ | 3,970 |
| | $ | (129 | ) | (A) | | $ | 1,193 |
| (B) | | $ | 10,385 |
| | $ | 11,034 |
| | $ | 2,071 |
| | $ | (133 | ) | (A) | | $ | 3,344 |
| (B) | | $ | 9,628 |
| Year Ended June 30, 2013 | | | | | | | | | | | | | | Year Ended June 30, 2016 | | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 8,332 |
| | $ | 2,267 |
| | $ | (104 | ) | (A) | | $ | 2,758 |
| (B) | | $ | 7,737 |
| | $ | 10,621 |
| | $ | 4,303 |
| | $ | (46 | ) | (A) | | $ | 3,844 |
| (B) | | $ | 11,034 |
|
| | (A) | Amounts in the year ending June 30, 2018 represent reserves recorded through purchase accounting for acquisitions made during the year of $3,549 and for the return of merchandise by customers of $1,029. Amounts in prior fiscal years represent reserves for the return of merchandise by customers. |
| | (B) | Amounts represent uncollectible accounts charged off. |
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. | | | | /s/ Neil A. Schrimsher | | /s/ Mark O. EiseleDavid K. Wells | Neil A. Schrimsher President & Chief Executive Officer | | Mark O. EiseleDavid K. Wells
Vice President-Chief Financial Officer & Treasurer | | | | /s/ Christopher Macey | | (Principal financial officer and principal accounting officer) | Christopher Macey Corporate Controller (Principal Accounting Officer) | | |
Date: August 26, 201517, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. | | | | * | | * | Peter A. Dorsman, Director | | L. Thomas Hiltz, Director | | | | * | | * | Edith Kelly-Green, Director | | Dan P. Komnenovich, Director | | | | * | | * | John F. Meier,Robert J. Pagano, Jr., Director | | J. Michael Moore,Vincent K. Petrella, Director | | | | * | | /s/ Neil A. Schrimsher | Vincent K. Petrella,Joe A. Raver, Director | | Neil A. Schrimsher, President & Chief Executive Officer and Director | | | | * | | * | Dr. Jerry Sue Thornton, Director | | Peter C. Wallace, Director and Chairman | | | | | | |
| | /s/ Fred D. Bauer | Fred D. Bauer, as attorney in fact | for persons indicated by “*” |
Date: August 26, 201517, 2018
s Versus Prior Period |
| Year Ended June 30, As a % of Net Sales | | Change in
Sales in fiscal 20152018 were $2.75$3.1 billion, which was $291.7$479.5 million or 11.9%18.5% above the prior year, with sales from acquisitions accounting for $280.2$264.7 million or 11.4%. Unfavorable10.2% of the increase, and favorable foreign currency translation decreased sales by $43.3accounting for an increase of $16.0 million or 1.8%0.6%. There were 251.5 selling days in fiscal 2018 and 252.5 selling days in fiscal 2017. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, sales were up $54.8$198.8 million or 2.3%7.7% during the year. We had 252.5 selling daysyear, of which 5.9% is from the Service Center Based Distribution segment and 2.1% is from the Fluid Power & Flow Control segment, offset by a 0.3% decrease due to one less sales day. The following table shows changes in both fiscal 2015 and fiscal 2014.sales by reportable segment. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Reportable Segment | 2018 |
| 2017 |
| Service Center Based Distribution | $ | 2,346.4 |
| $ | 2,180.4 |
| $ | 166.0 |
| $ | 3.6 |
| $ | 16.0 |
| $ | 146.4 |
| Fluid Power & Flow Control | 726.9 |
| 413.4 |
| 313.5 |
| 261.1 |
| — |
| 52.4 |
| Total | $ | 3,073.3 |
| $ | 2,593.8 |
| $ | 479.5 |
| $ | 264.7 |
| $ | 16.0 |
| $ | 198.8 |
|
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $281.4$166.0 million, or 14.3%7.6%. Acquisitions within this segment increased sales by $280.2$3.6 million or 14.2%0.2%, and favorable foreign currency translation increased sales by $16.0 million or 0.7%. UnfavorableExcluding the impact of businesses acquired and the impact of foreign currency translation, sales increased $146.4 million or 6.7%, driven by an increase of 7.0% from operations, offset by a 0.3% decrease due to one less sales day. Sales of our Fluid Power & Flow Control segment increased $313.5 million or 75.8%. Acquisitions within this segment increased sales $261.1 million or 63.2%. Excluding the impact of businesses acquired, sales increased $52.4 million or 12.7%, driven by an increase of 13.1% from operations, offset by a 0.4% decrease due to one less sales day.
The following table shows changes in sales by geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Geographic Area | 2018 |
| 2017 |
| United States | $ | 2,615.1 |
| $ | 2,182.6 |
| $ | 432.5 |
| $ | 261.1 |
| $ | — |
| $ | 171.4 |
| Canada | 273.6 |
| 252.0 |
| 21.6 |
| — |
| 11.3 |
| 10.3 |
| Other countries | 184.6 |
| 159.2 |
| 25.4 |
| 3.6 |
| 4.7 |
| 17.1 |
| Total | $ | 3,073.3 |
| $ | 2,593.8 |
| $ | 479.5 |
| $ | 264.7 |
| $ | 16.0 |
| $ | 198.8 |
|
Sales in our U.S. operations increased $432.5 million or 19.8%, with acquisitions adding $261.1 million or 12.0%. Excluding the impact of businesses acquired, U.S. sales were up $171.4 million or 7.8%, of which 8.2% is growth from operations, offset by a 0.4% decrease due to one less sales day. Sales from our Canadian operations increased $21.6 million or 8.6%, and favorable foreign currency translation increased Canadian sales by $11.3 million or 4.5%. Excluding the impact of foreign currency translation, Canadian sales were up $10.3 million or 4.1%, of which 3.7% is growth from operations, and the remaining 0.4% increase is due to one additional sales day. Consolidated sales from our other country operations increased $25.4 million or 16.0% compared to the prior year. Acquisitions added sales of $3.6 million or 2.3% and favorable foreign currency translation increased other country sales by $4.7 million or 2.9%. Excluding the impact of businesses acquired and the impact of foreign currency translation, other country sales were up $17.1 million or 10.8% compared to the prior year, driven by an increase from operations of 11.0%, offset by a decrease of 0.2% due to one less sales day in Australia, New Zealand, and Singapore. The sales product mix for fiscal 2018 was 67.9% industrial products and 32.1% fluid power/flow control products compared to 71.5% and 28.5%, respectively, in the prior year. Our gross profit margin increased to 28.8% in fiscal 2018 compared to 28.4% in fiscal 2017 due to the acquisition of FCX, which favorably impacted the gross profit margin by 38 basis points in fiscal 2018. The following table shows the changes in SD&A. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | SD&A Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | 2018 |
| 2017 |
| SD&A | $ | 658.2 |
| $ | 562.3 |
| $ | 95.9 |
| $ | 74.7 |
| $ | 3.9 |
| $ | 17.3 |
|
Selling, distribution and administrative expense (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, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $95.9 million or 17.0% during fiscal 2018 compared to the prior year, and as a percent of sales decreased to 21.4% from 21.7% in fiscal 2017. Changes in foreign currency exchange rates had the effect of increasing SD&A by $3.9 million or 0.7% compared to the prior year. SD&A from businesses acquired added $74.7 million or 13.3% of SD&A expenses, including $6.1 million of one-time costs and $9.6 million of intangibles amortization related to the FCX acquisition. Excluding the impact of businesses acquired and the unfavorable impact from foreign currency translation, SD&A increased $17.3 million or 3.0% during fiscal 2018 compared to fiscal 2017. Excluding the impact of acquisitions, total compensation increased $20.1 million during fiscal 2018 compared to the prior fiscal year as a result of merit increases and improved Company performance. All other expenses within SD&A were down $2.8 million. Operating income increased $50.4 million, or 28.8%, to $225.8 million during fiscal 2018 from $175.4 million during fiscal 2017, and as a percent of sales, increased to 7.3% from 6.8% due to growth from operations and the acquisition of FCX. Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 5.8% in fiscal 2018 from 5.3% in fiscal 2017. Operating income as a percentage of sales for the Fluid Power & Flow Control segment increased to 11.4% in fiscal 2018 from 11.3% in fiscal 2017. These increases are due to the positive leveraging impact from the increase in sales in the current year.
Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense. Other (income) expense, net, represents certain non-operating items of income and expense. This was $2.4 million of income in fiscal 2018 compared to $0.1 million of income in fiscal 2017. Current year income primarily consists of life insurance income of $1.6 million, unrealized gains on investments held by non-qualified deferredcompensation trusts of $0.8 million, and foreign currency transaction gains of $0.2 million, offset by net other periodic post-employment costs of $0.2 million. Fiscal 2017 income consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.2 million, offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.2 million, and life insurance expense of $0.1 million. The effective income tax rate was 30.8% for fiscal 2018 compared to 19.8% for fiscal 2017. The fiscal 2018 effective tax rate was favorably impacted by the enactment of the Tax Cuts and Jobs Act (the "Act") in December 2017, which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. This resulted in a blended statutory rate for the Company for fiscal 2018 of 28.06%. Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018. The corporate income tax rate change had a favorable impact to the Company of $12.1 million, which was offset by income tax expense of $3.9 million accounting for the one-time transition tax related to the Company's undistributed foreign earnings and expense of $2.4 million related to the re-measurement of deferred tax balances. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit, pertaining to a worthless stock tax deduction which decreased the effective tax rate by 13.3%. The tax benefit was net of a $1.0 million valuation allowance applicable to the related state deferred income tax asset. This deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2017 effective tax rate was favorably impacted further by $2.4 million of net excess tax benefits, resulting from stock-based compensation awards vesting and exercises, that were recognized as a reduction of income tax expense and decreased the effective income tax rate for fiscal 2017 by 1.4%. We expect our income tax rate for fiscal 2019 to be in the range of 24.0% to 26.0%. As a result of the factors addressed above, net income for fiscal 2018 increased $7.7 million from the prior year. Net income per share was $3.61 per share for fiscal 2018 compared to $3.40 for fiscal 2017. Current year results were favorably impacted by organic growth, as well as positive impacts on earnings per share of $0.15 per share related to tax reform and $0.05 per share related to the results of FCX, offset by a negative impact of $0.13 per share for one-time costs related to the acquisition of FCX. The prior year results include a positive impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Net income per share was favorably impacted by lower weighted average common shares outstanding in fiscal 2018 as a result of our share repurchase program. At June 30, 2018, we had a total of 610 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, New Zealand, and Singapore, versus 552 at June 30, 2017. The number of Company employees was 6,634 at June 30, 2018 and 5,554 at June 30, 2017. YEAR ENDED JUNE 30, 2017 vs. 2016 The following table is included to aid in review of Applied’s statements of consolidated income. | | | | | | | | | | | Year Ended June 30, As a % of Net Sales | | Change in $'s Versus Prior Period |
| | 2017 |
| | 2016 |
| | % Change |
| Net Sales | 100.0 | % | | 100.0 | % | | 2.9 | % | Gross Profit Margin | 28.4 | % | | 28.1 | % | | 4.3 | % | Selling, Distribution & Administrative | 21.7 | % | | 22.0 | % | | 1.7 | % | Operating Income | 6.8 | % | | 3.6 | % | | 95.3 | % | Net Income | 5.2 | % | | 1.2 | % | | 352.8 | % |
Sales in fiscal 2017 were $2.6 billion, which was $74.3 million or 2.9% above fiscal 2016, with sales from acquisitions accounting for $31.1 million or 1.2% of the increase, offset by a decrease due to unfavorable foreign currency translation of $1.1 million or 0.1%. There were 252.5 selling days in fiscal 2017 and 253.5 selling days in
fiscal 2016. Excluding the impact of businesses acquired and prior to the impact of foreign currency translation, sales were up $44.3 million or 1.8% during fiscal 2017, driven by an increase of 1.6% from our traditional core operations in addition to an increase of 0.6% from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day. The following table shows changes in sales by reportable segment. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Reportable Segment | 2017 |
| 2016 |
| Service Center Based Distribution | $ | 2,180.4 |
| $ | 2,150.5 |
| $ | 29.9 |
| $ | 19.8 |
| $ | (1.1 | ) | $ | 11.2 |
| Fluid Power & Flow Control | 413.4 |
| 369.0 |
| 44.4 |
| 11.3 |
| — |
| 33.1 |
| Total | $ | 2,593.8 |
| $ | 2,519.5 |
| $ | 74.3 |
| $ | 31.1 |
| $ | (1.1 | ) | $ | 44.3 |
|
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, increased $29.9 million, or 1.4%. Acquisitions within this segment increased sales by $19.8 million or 0.9%, while unfavorable foreign currency translation decreased sales by $36.5$1.1 million or 1.8%0.1%. Excluding the impact of businesses acquired and unfavorable currency translation impact, sales increased $37.7$11.2 million or 1.9%.0.6%, driven by an increase of 0.7% from our upstream oil and gas-focused subsidiaries and an increase of 0.3% from within our traditional core operations, offset by a 0.4% decrease due to one less sales day. Sales of our Fluid Power Businesses& Flow Control segment which operatesincreased $44.4 million or 12.0%. Acquisitions within this segment increased sales $11.3 million or 3.1%. Excluding the impact of businesses acquired, sales increased $33.1 million or 8.9%, driven by an increase from operations, primarily in OEM markets, increased $10.3 million or 2.1%the U.S., primarily attributedof 9.3%, offset by a decrease of 0.4% due to strongone less sales growth at several of our U.S. based Fluid Power businesses which added $17.1 million or 3.5%, while unfavorable foreign currency translation decreasedday. The following table shows changes in sales by $6.8 million or 1.4%.geographical area. Other countries includes Mexico, Australia, New Zealand, and Singapore. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | Sales Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| Sales by Geographic Area | 2017 |
| 2016 |
| United States | $ | 2,182.6 |
| $ | 2,117.5 |
| $ | 65.1 |
| $ | 25.1 |
| $ | — |
| $ | 40.0 |
| Canada | 252.0 |
| 257.8 |
| (5.8 | ) | 6.0 |
| (0.2 | ) | (11.6 | ) | Other countries | 159.2 |
| 144.2 |
| 15.0 |
| — |
| (0.9 | ) | 15.9 |
| Total | $ | 2,593.8 |
| $ | 2,519.5 |
| $ | 74.3 |
| $ | 31.1 |
| $ | (1.1 | ) | $ | 44.3 |
|
Sales in our U.S. operations were up $207.1increased $65.1 million or 10.2%3.1%, with acquisitions adding $175.8$25.1 million or 8.7%1.2%. Excluding the impact of businesses acquired, U.S. sales were up $40.0 million or 1.9%, of which 1.4% was from our traditional core operations and 0.9% was from our upstream oil and gas-focused subsidiaries, offset by a 0.4% decrease due to one less sales day. Sales from our Canadian operations increased $67.5decreased $5.8 million or 23.2%2.2%, with acquisitions adding $86.4 million or 29.7%. Unfavorableunfavorable foreign currency translation decreaseddecreasing Canadian sales by $30.4$0.2 million or 10.4%0.1%. Acquisitions added $6.0 million, or 2.3%. Excluding the impact of businesses acquired and priorunfavorable foreign currency translation impact, Canadian sales were down $11.6 million or 4.4%, of which 2.0% related to the impact of currency translation,upstream oil and gas-focused subsidiaries, 2.0% was from the traditional core operations, and the remaining 0.4% decrease due to one less sales were up $11.5 million or 3.9% during the year.day. Consolidated sales from our other country operations, which include Mexico, Australia, and New Zealand, were $17.1and Singapore, increased $15.0 million or 12.4% above the prior year, with acquisitions adding sales of $18.0 million or 13.1%.10.4% compared to fiscal 2016. Unfavorable foreign currency translation decreased other country sales by $12.9$0.9 million or 9.4%0.7%. Excluding the impact of businesses acquired and priorPrior to the impact of currency translation, other country sales were up $12.0$15.9 million or 8.7% during11.1% compared to the year.fiscal 2016, driven by an increase from operations of 13.0%, primarily in Australia and Singapore, offset by a decrease of 1.9% due to fewer sales days. The sales product mix for fiscal 20152017 was 73.2%71.5% industrial products and 26.8%28.5% fluid power products compared to 70.7%72.9% industrial and 29.3%27.1% fluid power in the prior year. These changes in product mix relate entirely to the product mix of our recent acquisitions being primarily industrial products.fiscal 2016. Our gross profit margin was 28.0%increased to 28.4% in fiscal 2015 versus 27.9%2017 compared to 28.1% in fiscal 2014.2016. The increase was primarily due to recording a more favorable impact from LIFO layer liquidations which increased margins areattributablegross profit by $9.4 million in fiscal 2017 and $2.1 million in fiscal 2016, offset by a $4.8 million increase in scrap expense in fiscal 2017 compared to fiscal 2016. Further, the impactgross profit margin for fiscal 2016 was negatively impacted by $3.6 million of relatively higher gross margins from acquired
restructuring expense recorded within cost of sales related to inventory reserves for excess and obsolete inventory for the upstream oil and gas-focused operations. The following table shows the changes in SD&A. | | | | | | | | | | | | | | | | | | | | Amounts in millions | | | | Amount of change due to | | Year ended June 30, | SD&A Increase |
| Acquisitions |
| Foreign Currency |
| Organic Change |
| | 2017 |
| 2016 |
| SD&A | $ | 562.3 |
| $ | 552.8 |
| $ | 9.5 |
| $ | 8.2 |
| $ | 0.1 |
| $ | 1.2 |
|
Selling, distribution and administrative expenses (SD&A) consist 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, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $62.6$9.5 million or 12.0%1.7% during fiscal 20152017 compared to fiscal 2016, and as a percent of sales decreased to 21.7% from 21.9% in fiscal 2016. Changes in foreign currency exchange rates had the prior year,effect of increasing SD&A by $0.1 million or less than 0.1% compared to fiscal 2016. Additional SD&A from businesses acquired in fiscal 2017 added $8.2 million or 1.5% of SD&A expenses including $1.0 million associated with intangibles amortization. Excluding the impact of businesses acquired and the unfavorable impact from foreign currency translation, SD&A increased $1.2 million or 0.2% during fiscal 2017 compared to fiscal 2016. Excluding the impact of acquisitions, total compensation increased $12.9 million during fiscal 2017 compared to fiscal 2016 as a result of merit increases, improved Company performance, and increased costs related to health care claims. These increases were offset by severance expense and other restructuring charges related to consolidating facilities of $5.2 million of SD&A included in fiscal 2016 that did not reoccur during fiscal 2017. Also, excluding the impact of acquisitions, bad debt expense decreased $2.3 million during fiscal 2017 compared to fiscal 2016, due to improvement in aged receivables. Further, the Company recorded a gain of $1.6 million in fiscal 2017 related to the sale of five buildings during the year. All other expenses within SD&A were down $2.6 million. During the third quarter of fiscal 2016, the Company performed its annual goodwill impairment test. As a result of this test, the Company determined that all of the goodwill associated with the Australia/New Zealand Service Center Based Distribution reporting unit was impaired as of January 1, 2016. This impairment was the result of the decline in the mining and extraction industries in Australia and the resulting reduced customer spending due to a decline in demand throughout Asia. Further, due to a sustained decline in oil prices and reduced customer spending in Canada, the Company determined that a portion of the goodwill associated with the Canada Service Center Based Distribution reporting unit was also impaired as of January 1, 2016. Accordingly, the Company recognized a combined non-cash impairment charge of $64.8 million for goodwill during fiscal 2016, which decreased net income by $63.8 million and earnings per share by $1.62. Changes in future results, assumptions, and estimates used in calculating the goodwill impairment test could result in additional impairment charges in future periods. Operating income increased $85.6 million, or 95.3%, to $175.4 million during fiscal 2017 from $89.8 million during fiscal 2016, and as a percent of sales, increased to 21.3%6.8% from 21.2% in fiscal 2014. The acquired businesses added an incremental $69.4 million of SD&A expenses, which includes an additional $13.4 million associated with acquired identifiable intangibles amortization. Excluding the $11.0 million decline in SD&A from foreign currency translation, the remaining SD&A amounts3.6%. These increases were similarprimarily due to the prior year. The increase in SD&A asCompany recognizing a percentagenon-cash goodwill impairment charge of sales, was driven by additional intangible asset amortization from businesses acquired. Operating income increased $20.3$64.8 million or 12.3%, to $184.6and restructuring charges of $8.8 million during fiscal 2015 from $164.4 million2016 that did not reoccur during 2014, andfiscal 2017, as a percent ofwell as higher sales remained stable at 6.7%. The increasevolume in operating income dollars is primarily attributable to our acquired businesses.fiscal 2017.
Operating income as a percentage of sales for the Service Center Based Distribution segment increased to 6.2%was 5.3% in fiscal 2015 from 6.0% in2017 and fiscal 2014. This increase is primarily attributable to an increase in gross profit as a percentage of sales, as a result of our recent acquisitions which operate at higher gross profit margins, representing an increase of 0.1%, along with a decrease in SD&A as a percentage of sales of 0.1%.2016, before the goodwill impairment charge. Operating income as a percentage of sales for the Fluid Power Businesses& Flow Control segment increased to 9.8%11.3% in fiscal 20152017 from 9.2%10.1% in fiscal 2014.2016. This increase is primarily attributablewas due to the positive leveraging of organicimpact from the increase in sales, growth inprimarily from our U.S. based Fluid Power Businesses, without a commensurate increaseoperations in SD&A expenses.this segment, in fiscal 2017. Segment operating income is impacted by changes in the amounts and levels of certain supplier support benefits and expenses allocated to the segments. The expense allocations include corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense. InterestOther (income) expense, net, increased to $7.9 million in fiscal 2015 entirely due to acquisition related borrowing.
Other expense (income), net, represents certain non-operating items of income and expense. This was $0.9$0.1 million of income in fiscal 2017 compared to $2.0 million of expense in fiscal 2015 compared to $2.2 million of2016. Fiscal 2017 income in fiscal 2014. Current year expense primarily consists of foreign currency transaction losses of $1.3 million offset by unrealized gains on investments held by non-qualified
deferred compensation trusts of $0.4 million. Fiscal 2014 consisted primarily of unrealized gains on investments held by non-qualified deferredcompensation trusts of $1.7$1.2 million, as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by net other periodic post-employment costs of $0.8 million, foreign currency transaction losses of $0.8$0.2 million, and life
insurance expense of $0.1 million. Fiscal 2016 expense consisted primarily of foreign currency transaction losses of $1.0 million and net other periodic post-employment costs of $1.0 million. IncomeThe effective income tax expense as a percent of income before taxesrate was 34.3%19.8% for fiscal 2015 and 32.1%2017 compared to 62.6% for fiscal 2014.2016. The fiscal 2017 effective tax rate was favorably impacted by a $22.2 million net tax benefit pertaining to a worthless stock tax deduction, which decreased the effective tax rate by 13.3%. The tax benefit was net of a $1.0 million valuation allowance applicable to the related state deferred income tax asset. This increasededuction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes. The fiscal 2016 effective tax rate was unfavorably impacted due to the recording of $64.8 million of goodwill impairment during fiscal 2016, of which $61.3 million was not tax deductible. The goodwill impairment increased the effective tax rate for fiscal 2016 by 27.1%. The remaining decrease in the effective tax rate iswas primarily due to recordingthe adoption of valuation allowances against certain deferredASU 2016-09 in the first quarter of fiscal 2017, which requires excess tax assets for foreign jurisdictions in fiscal 2015 as well as the non-recurrence of a one-time favorable tax benefit in fiscal 2014 in accounting for undistributed earnings of non-U.S. subsidiaries. All undistributed earnings of our foreign subsidiaries are consideredbenefits and deficiencies resulting from stock-based compensation awards vesting and exercises to be permanently reinvested at June 30, 2015 and 2014.
We expect ourrecognized in the income statement. During fiscal 2017, $2.4 million of net excess tax benefits were recognized as a reduction of income tax expense, which decreased the effective income tax rate for fiscal 2016 to be in the range of 34.0% to 34.5%.
As a result of the factors addressed above, net income for fiscal 2015 increased $2.7 million or 2.4% from the prior year. Net income per share increased at a slightly higher rate of 4.9% due to lower weighted-average shares outstanding in fiscal 2015.
At June 30, 2015, we had a total of 565 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia and New Zealand, versus 538 at June 30, 2014.
The number of Company employees was 5,839 at June 30, 2015 and 5,472 at June 30, 2014.
YEAR ENDED JUNE 30, 2014 vs. 2013
The following table is included to aid in review of Applied’s statements of consolidated income.
| | | | | | | | | | | Year Ended June 30, As a % of Net Sales | | Change in $'s Versus Prior Period |
| | 2014 |
| | 2013 |
| | % Increase |
| Net Sales | 100.0 | % | | 100.0 | % | | (0.1 | )% | Gross Profit Margin | 27.9 | % | | 27.7 | % | | 0.6 | % | Selling, Distribution & Administrative | 21.2 | % | | 20.6 | % | | 3.2 | % | Operating Income | 6.7 | % | | 7.2 | % | | (6.8 | )% | Net Income | 4.6 | % | | 4.8 | % | | (4.5 | )% |
Sales in fiscal 2014 were $2.46 billion, which was $2.3 million or 0.1% below the 2013 fiscal year. We experienced overall declines in sales from our businesses not acquired in fiscal year 2014 of approximately $34.3 million or2017 by 1.4%. There was one additional selling day in fiscal 2014 as compared to fiscal 2013. Currency translation decreased fiscal year sales by approximately $26.2 million or 1.1%. Incremental sales from companies acquired since the 2013 fiscal year contributed $58.2 million or 2.4%.
Sales of our Service Center Based Distribution segment, which operates primarily in MRO markets, decreased $30.1 million, or 1.5%. This decline was due to decreases in sales from businesses not acquired in fiscal year 2014 of $62.5 million or 3.1% coupled with an unfavorable impact of foreign currency translation of $23.1 million or 1.2%. Offseting these decreases was acquisitions, which added $55.5 million or 2.8%.
Sales of our Fluid Power Businesses segment, which operates primarily in OEM markets, increased $27.8 million or 6.1%. We experienced sales growth at several of our Fluid Power businesses which added $29.9 million or 6.6% along with acquisitions within this segment which added $2.8 million or 0.6%, while unfavorable foreign currency translation losses decreased sales by $4.9 million or 1.1%.
Sales in our U.S. operations were up $14.0 million or 0.7% with acquisitions adding $32.8 million or 1.6% offsetting declines in sales from our businesses not acquired in fiscal year 2014 of $18.8 million or 0.9%. Sales from our Canadian operations decreased $7.2 million or 2.4%. Acquisitions added $19.3 million or 6.5%, offset by unfavorable foreign currency translation losses which reduced sales by $17.5 million or 5.9% coupled with declines in sales from our businesses not acquired in fiscal year 2014 of $9.0 million or 3.0%, mostly as a result of weakness within the Canadian mining sector. Consolidated sales from our other country operations, which include Mexico, Australia and New Zealand, were $9.1 million or 6.2% below the 2013 fiscal year. This decrease is primarily the result of unfavorable foreign currency translation losses of $8.7 million or 5.9%, coupled with declines in sales of $6.5 million or 4.4%, mostly within the mining sector, from our businesses not acquired in fiscal year 2014, while acquisitions added $6.1 million or 4.2% in fiscal 2014.
The sales product mix for fiscal 2014 was 70.7% industrial products and 29.3% fluid power products compared to 72.1% industrial and 27.9% fluid power in fiscal year 2013. The change in our product mix in fiscal year 2014 was due to sales growth within our Fluid Power Businesses segment coupled with sales declines in our Service Center Based Distribution segment.
Our gross profit margin was 27.9% in fiscal 2014 versus 27.7% in fiscal 2013. The increased margins wereattributable to the impact of relatively higher gross margins from acquired operations.
Selling, distribution and administrative expenses (SD&A) consist 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, legal, facility related expenses and expenses incurred with acquiring businesses. SD&A increased $16.0 million or 3.2% during fiscal 2014 compared to fiscal 2013, and as a percent of sales increased to 21.2% from 20.6% in fiscal 2013. The acquired businesses added $19.3 million of SD&A expenses, which included an additional $2.5 million associated with acquired identifiable intangibles amortization. The increase in SD&A as a percentage of sales, was driven by relatively higher SD&A levels from businesses acquired in fiscal year 2014.
Operating income decreased $12.0 million, or 6.8%, to $164.4 million during fiscal 2014 from $176.4 million during 2013. As a percent of sales, operating income decreased to 6.7% in fiscal 2014 from 7.2% in 2013. The decrease in operating income was primarily attributable to relatively flat gross profit levels coupled with added levels of SD&A from businesses acquired in the 2014 fiscal year. The decrease in operating margin percentage was driven by the negative leverage resulting from decreasing sales from businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales to 21.2% from 20.6% in fiscal year 2013, slightly offset by an increase in gross profit as a percentage of sales to 27.9% from 27.7%.
Operating income as a percentage of sales for the Service Center Based Distribution segment decreased to 6.0% in fiscal 2014 from 6.9% in fiscal 2013. This decrease was attributable to the negative leverage resulting from decreasing sales in businesses not acquired in fiscal year 2014 without a similar level of SD&A reductions, which resulted in an increase in SD&A as a percentage of sales. In addition, SD&A for acquisitions in fiscal year 2014 operated at a relatively higher SD&A level. The SD&A impacts represented an approximate 1.0% reduction in operating income as a percentage of sales and were slightly offset by an increase in gross profit margins also due to acquisitions in fiscal year 2014 (representing an increase of approximately 0.1%) representing the total net change in operating income as a percentage of sales.
Operating income as a percentage of sales for the Fluid Power Businesses segment increased to 9.2% in fiscal 2014 from 9.0% in fiscal 2013. This increase was due to the positive leverage provided by an increase in sales without a commensurate increase in SD&A levels at several of our Fluid Power Businesses (representing a 0.5% increase in operating income as a percentage of sales), offset by a slight decrease in gross profit margins (representing a 0.3 decrease in operating income as a percentage of sales).
Segment operating income was impacted by changes in the amounts and levels of expenses allocated to the segments. The expense allocations included corporate charges for working capital, logistics support and other items and impact segment gross profit and operating expense.
Interest expense, net, remained relatively stable as compared to fiscal year 2013.
Other expense (income), net, represented certain non-operating items of income and expense. This was $2.2 million of income in fiscal 2014 compared to $1.4 million of income in fiscal 2013. Fiscal year 2014 income primarily consisted of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.7 million as well as $1.3 million of income associated with the elimination of the one-month Canadian and Mexican reporting lags (see note 1 in Item 8 under the caption "Financial Statements and Supplementary Data"), offset by foreign currency transaction losses of $0.8 million. Fiscal 2013 consisted primarily of unrealized gains on investments held by non-qualified deferred compensation trusts of $1.3 million.
Income tax expense as a percent of income before taxes was 32.1% for fiscal 2014 and 33.5% for fiscal 2013. The impact of lower effective tax rates in foreign jurisdictions favorably reduced our rate when compared to the U.S. federal statutory rate by 2.6%. Further reducing our rate compared to the U.S. federal statutory rate by 1.6% was the reversal of a deferred tax liability recorded in the years prior to fiscal 2014 on a portion of the undistributed earnings in Canada. All undistributed earnings of our foreign subsidiaries were considered to be permanently reinvested at June 30, 2014. The effective tax rate for fiscal 2014 was further reduced by 1.1% due to a favorable permanent dividend deduction along with other items. These reductions compared to the U.S. federal statutory rate were offset by the impact of state2017 and local taxes which increased the rate by 2.4%.2016.
As a result of the factors addressed above, net income for fiscal 2014 decreased $5.32017 increased $104.3 million or 4.5% from fiscal year 2013.2016. Net income per share decreased atwas $3.40 per share for fiscal 2017 compared to $0.75 for fiscal 2016. Fiscal 2017 results included a slightlypositive impact on earnings per share of $0.56 per share related to the tax benefit recorded for the worthless stock deduction. Fiscal 2016 results included negative impacts on earnings per share of $1.62 per share for goodwill impairment charges and $0.16 per share for restructuring charges. Net income per share was favorably impacted by lower rate of 4.0% due to lower weighted-averageweighted average common shares outstanding in fiscal 2014.2017 as a result of our share repurchase program. At June 30, 2014,2017, we had a total of 538552 operating facilities in the United States, Puerto Rico, Canada, Mexico, Australia, and New Zealand, and Singapore, versus 522559 at June 30, 2013.2016. The number of Company employees was 5,4725,554 at June 30, 20142017 and 5,1095,569 at June 30, 2013.2016. LIQUIDITY AND CAPITAL RESOURCES Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. At June 30, 20152018 we had total debt obligations outstanding of $321.0$966.1 million compared to $170.7$292.0 million at June 30, 2014.2017. Management expects that our existing cash, cash equivalents, funds available under the revolving credit and uncommitted shelf facilities, and cash provided from operations, and the use of operating leases will be sufficient to finance normal working capital needs in each of the countries we operate in, payment of dividends, acquisitions, investments in properties, facilities and equipment, 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 holds, from time to time, relatively significant cash and cash equivalent balances outside of the United States of America. The following table shows the Company's total cash as of June 30, 2015 by geographic location; all amounts are in thousands.
| | | | | Country | Amount |
| United Sates | $ | 17,256 |
| Canada | 40,325 |
| Other Countries | 11,889 |
| Total | $ | 69,470 |
|
To the extent cash in foreign countries is distributed to the U.S., it could become subject to U.S. income taxes. Foreign tax credits may be available to offset all or a portion of such taxes. At June 30, 2015, all foreign earnings are considered permanently reinvested.
The Company’s working capital at June 30, 20152018 was $549.2$625.5 million compared to $545.2$572.8 million at June 30, 2014.2017. The current ratio was 2.4 to 1 at June 30, 2018 and 2.8 to 1 at June 30, 2015 and 2.9 to 1 at June 30, 2014.2017. Net Cash Flows The following table is included to aid in review of Applied’s statements of consolidated cash flows; all amounts are in thousands. | | | | | | | | | | | | | | Year Ended June 30, | | 2015 |
| | 2014 |
| | 2013 |
| Net Cash Provided by (Used in): | | | | | | Operating Activities | $ | 154,538 |
| | $ | 110,110 |
| | $ | 111,397 |
| Investing Activities | (173,621 | ) | | (203,637 | ) | | (78,825 | ) | Financing Activities | 24,689 |
| | 92,142 |
| | (38,025 | ) | Exchange Rate Effect | (7,325 | ) | | (590 | ) | | 175 |
| Decrease in Cash and Cash Equivalents | $ | (1,719 | ) | | $ | (1,975 | ) | | $ | (5,278 | ) |
| | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| Net Cash Provided by (Used in): | | | | | | Operating Activities | $ | 147,304 |
| | $ | 164,619 |
| | $ | 162,014 |
| Investing Activities | (797,906 | ) | | (16,894 | ) | | (75,031 | ) | Financing Activities | 600,284 |
| | (103,349 | ) | | (93,007 | ) | Exchange Rate Effect | (589 | ) | | 820 |
| | (3,585 | ) | Increase (Decrease) in Cash and Cash Equivalents | $ | (50,907 | ) | | $ | 45,196 |
| | $ | (9,609 | ) |
The increasedecrease in cash provided by operating activities resulted fromduring fiscal 2018 is primarily due to increased working capital levels to support increased sales compared to the operationsprior year periods. The decrease in cash was further impacted by
increased interest payments, and the payment of newly acquired businesses along with$7.1 million of one-time costs, both related to the FCX acquisition. These decreases were partially offset by improved cash collections on accounts receivable within our U.S. based businesses.operating results, including the impact of the FCX acquisition. Net cash used in investing activities in fiscal 20152018 included $14.9 million for capital expenditures and $160.6$775.7 million used for acquisitions.the acquisitions of FCX and DICOFASA, and $23.2 million used for capital expenditures. Net cash used in investing activities in fiscal 20142017 included $20.2$17.0 million for capital expenditures $10.0and $2.8 million used for acquisitions. These were offset by $2.9 million of which wasproceeds received from the sale of five buildings during fiscal 2017. Net cash used for the purchase of our headquarters facility, and $184.3 million for acquisitions. Capital expenditures for fiscal 2014 included an insignificant amount related to the ERP project as the portion of that project pertaining to capital spending primarily endedin investing activities in fiscal 2013. Fiscal 2013 investing cash
activities2016 included the use of $12.2$13.1 million for capital expenditures ($5.6and $62.5 million related to the ERP project), and $67.6 millionused for acquisitions.
Net cash provided by financing activities in fiscal 20152018 included $170.0$780.0 million of cash from borrowings under long term debt facilities used for the financing of acquisitions, offset by $17.0new credit facility and $19.5 million of repaymentsnet borrowings under ourthe revolving credit facility, and $2.7offset by $125.4 million of long termlong-term debt repayments. Further uses of cash were $42.7$45.9 million for dividend payments, $76.5$22.8 million used to repurchase 1,740,100393,300 shares of treasury stock, and $7.7$3.3 million of acquisition holdback payments. Net cash provided by financing activities in fiscal 2014 included $100.0 million from borrowings under long term debt facilities as well as $69.0 million in borrowings under our revolving credit facility, both of which were utilizedused for the financingpayment of acquisitions. These sources of cash were offset by $40.4 million for dividend payments and $36.7 million used to repurchase 759,900 shares of treasury stock. debt issuance costs. Net cash used in financing activities in fiscal 20132017 included $37.2$3.4 million of long-term debt repayments and $33.0 million of net repayments under the revolving credit facility. Further uses of cash were $44.6 million for dividend payments, and $3.8$8.2 million relatedused to repurchase 162,500 shares of treasury stock, $11.3 million used for acquisition holdback payments, partiallyand $3.5 million used to pay taxes for shares withheld. Net cash used in financing activities in fiscal 2016 included $98.7 million of long-term debt repayments and $19.0 million of net repayments under the revolving credit facility, offset by $2.6$125.0 million of excess tax benefitscash from share-based compensation.borrowings under the credit facility. Further uses of cash were $43.3 million for dividend payments, $37.5 million used to repurchase 951,100 shares of treasury stock, and $18.9 million of acquisition holdback payments. The increase in dividends over the last three fiscal years is the result of regular increases in our dividend payout rates. We paid dividends of $1.04, $0.96$1.18, $1.14, and $0.88$1.10 per share in fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Capital Expenditures We expect capital expenditures for fiscal 20162019 to be in the $13.0$26.0 million to $15.0$28.0 million range, primarily consisting of capital associated with additional information technology equipment and infrastructure investments. Depreciation for fiscal 20162019 is expected to be in the range of $16.0$21.0 million to $17.0 million.$22.0 million. ERP Project In fiscal 2011 Applied commenced its ERP (SAP) project to transform the Company's technology platforms and enhance its business information and technology systems for future growth. We havefirst deployed our solution in our Western Canadian operating locations and our traditional U.S. Service Center Based Businesses,Distribution businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the conversion to SAP of its related financial and accounting systems, including the receivables, payables, treasury, inventory, fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation process/system, have beenwere transitioned to SAP during fiscal 2015. TheAt the beginning of fiscal 2016 the Company expects to convertconverted to a new consolidation process and system atsystem. During the beginningfourth quarter of fiscal 2016.2017, operations in Eastern Canada transitioned onto SAP, and the majority of the Company's upstream oil and gas-focused operations transitioned onto SAP during fiscal 2018. The Company will continue to evaluate and determineconsider an appropriate deployment schedule for operations in Eastern Canada as well as other operations not on SAP. Share Repurchases The Board of Directors has authorized the repurchase of shares of the Company’s stock. These purchases may be made in open market and negotiated transactions, from time to time, depending upon market conditions. At June 30, 2015,2018, we had authorization to purchase an additional 1,247,3001,056,700 shares. In fiscal 2015, 20142018, 2017 and 2013,2016, we repurchased 1,740,100, 759,900393,300, 162,500, and 1,300951,100 shares of the Company’s common stock, respectively, at an average price per share of $43.97, $48.34$57.92, $50.72, and $40.96,$39.39, respectively. Borrowing Arrangements TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780.0 million unsecured borrowings of up to $150.0 million.term loan and a $250.0 million unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR prime, or the bank’s cost of fundsprime at the Company's discretion. This agreement also enables the Company to refinance this debt on a long term basis. As ofAt June 30, 2015 and 2014,2018, the Company had $52.0$775.1 million and $69.0 million in borrowings outstanding under this credit facility, respectively.the term loan and $19.5 million outstanding under the revolver. Unused lines under this facility, at June 30, 2015, net of outstanding letters of credit of $3.8$3.6 million to secure certain insurance obligations, totaled $94.2$226.9 million at June 30, 2018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the revolving credit facility borrowingsterm loan as of June 30, 20152018 was 1.15%4.13%.
Additionally
The weighted average interest rate on the amount outstanding under the revolving credit facility as of June 30, 2018 was 3.93%. At June 30, 2017, the Company had $120.3 million outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2.4 million to secure certain insurance obligations, totaled $247.6 million at June 30, 2015,2017. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with either revolving credit agreement, in the amount of $1.8$2.7 million as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations. In April 2014 the Company entered into a $100.0 million unsecured five-year term loan with a group of banks with a final maturity date in April 2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was 1.19%. The term loan had $96.9 million outstanding at June 30, 2015.
Also in April 2014, the Company assumed $2.4 million of debt as a part of the acquisition of our headquarters facility. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency and matures in May 2024. We had $2.1 million outstanding under this note at June 30, 2015.
At June 30, 20152018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170.0 million.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 have a principal amount of $120.0 million and carry a fixed interest rate of 3.19%; the principal is, and are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principal amount of $50.0 million, and carry a fixed interest rate of 3.21%; the principal is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $50.0 million in additional financing was available under this facility. 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, maturing in May 2024. At June 30, 2018 and 2017, $1.4 million and $1.7 million was outstanding, respectively. The revolvingnew credit facility and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 times consolidated income before interest, taxes, depreciation and amortization. At June 30, 2015,2018, the Company's indebtedness was less than two3.0 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at June 30, 2015 and expects to remain in compliance during the terms of the agreements.2018. Accounts Receivable Analysis The following table is included to aid in analysis of accounts receivable and the associated provision for losses on accounts receivable (all dollar amounts are in thousands): | | | | | | | | | June 30, | 2015 |
| | 2014 |
| Accounts receivable, gross | $ | 386,926 |
| | $ | 386,117 |
| Allowance for doubtful accounts | 10,621 |
| | 10,385 |
| Accounts receivable, net | $ | 376,305 |
| | $ | 375,732 |
| Allowance for doubtful accounts, % of gross receivables | 2.7 | % | | 2.7 | % | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| Provision for losses on accounts receivable | $ | 2,597 |
| | $ | 3,970 |
| Provision as a % of net sales | 0.09 | % | | 0.16 | % |
| | | | | | | | | June 30, | 2018 |
| | 2017 |
| Accounts receivable, gross | $ | 562,377 |
| | $ | 400,559 |
| Allowance for doubtful accounts | 13,566 |
| | 9,628 |
| Accounts receivable, net | $ | 548,811 |
| | $ | 390,931 |
| Allowance for doubtful accounts, % of gross receivables | 2.4 | % | | 2.4 | % | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| Provision for losses on accounts receivable | $ | 2,803 |
| | $ | 2,071 |
| Provision as a % of net sales | 0.09 | % | | 0.08 | % |
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 50.055.0 at June 30, 20152018 versus 51.451.6 at June 30, 2014.2017. The inclusion of FCX had no impact on the Company's DSO at June 30, 2018. Accounts receivable increased 0.2%40.4% this year, comparedof which 20.7% is accounts receivable for FCX. The remaining increase is due to an increase of 11.9%in sales inexcluding FCX for the twelve months ended June 30, 2015. Acquisitions added $29.3 million, or 7.8%, of accounts receivable, changes in foreign currency rates decreased receivables by $15.6 million and improved collections led to a decrease in receivables of $13.1 million. We primarily attribute the decrease in DSO to the improved timing of collections within our traditional U.S. Service Center Based Distribution Businesses. DSO and past due balances have declined now that all traditional U.S. Service Center Based Distribution Businesses have been fully operational on the new ERP system for all of fiscal 2015.2018. Approximately 4.2%2.4% of our accounts receivable balances are more than 90 days past due at June 30, 20152018 compared to 5.7%1.7% at June 30, 2014.2017. This improvementincrease primarily relates to our U.S. Service Center Based Businesses.Distribution businesses. On an overall basis, our provision for losses from uncollected receivables represents 0.09% of our sales in the year ended June 30, 2015.2018. Historically, this percentage is around 0.10% to 0.15%. Our experience with losses on accounts which have uncollected receivables was better than our historical averages in fiscal 2015. Management believes the overall receivables aging and provision for losses on uncollected receivables are at reasonable levels, and that past due balances will continue to decline in fiscal 2016.levels.
Inventory Analysis Inventories are valued at the average cost method, 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 uses inventory valued at average costs. The annualized inventory turnover (using average costs) for the period ended June 30, 2015 2018 was 4.0 versus 3.7 versus 3.8 at June 30, 2014. This decrease is due to the impact of recent acquisitions which historically have had lower inventory turnover rates, coupled with strategic inventory investments that we believe will assist with future sales growth.2017. We believe our inventory turnover ratio in fiscal 20162019 will be slightly better than our fiscal 20152018 levels.
CONTRACTUAL OBLIGATIONS The following table shows the approximate value of the Company’s contractual obligations and other commitments to make future payments as of June 30, 20152018 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| Operating leases | $ | 82,400 |
| | $ | 24,900 |
| | $ | 34,300 |
| | $ | 16,700 |
| | $ | 6,500 |
| | | Planned funding of post-retirement obligations | 27,200 |
| | 5,400 |
| | 3,800 |
| | 6,700 |
| | 11,300 |
| | | Unrecognized income tax benefit liabilities, including interest and penalties | 3,100 |
| | | | | | | | | | 3,100 |
| Long term debt obligations | 321,000 |
| | 3,300 |
| | 63,100 |
| | 108,600 |
| | 146,000 |
| | | Interest on long term debt obligations (1) | 37,100 |
| | 6,600 |
| | 13,000 |
| | 11,000 |
| | 6,500 |
| | | Acquisition holdback payments | 29,600 |
| | 19,200 |
| | 10,400 |
| | | | | | | Total Contractual Cash Obligations | $ | 500,400 |
| | $ | 59,400 |
| | $ | 124,600 |
| | $ | 143,000 |
| | $ | 170,300 |
| | $ | 3,100 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | Total |
| | Period Less Than 1 yr |
| | Period 2-3 yrs |
| | Period 4-5 yrs |
| | Period Over 5 yrs |
| | Other |
| Operating leases | $ | 111,400 |
| | $ | 38,100 |
| | $ | 45,300 |
| | $ | 17,000 |
| | $ | 11,000 |
| | — |
| Planned funding of post-retirement obligations | 16,300 |
| | 3,500 |
| | 4,400 |
| | 1,800 |
| | 6,600 |
| | — |
| Unrecognized income tax benefit liabilities, including interest and penalties | 4,700 |
| | — |
| | — |
| | — |
| | — |
| | 4,700 |
| Long-term debt obligations | 966,100 |
| | 19,700 |
| | 128,900 |
| | 792,300 |
| | 25,200 |
| | — |
| Interest on long-term debt obligations (1) | 84,300 |
| | 18,300 |
| | 40,800 |
| | 25,000 |
| | 200 |
| | — |
| Acquisition holdback payments | 3,365 |
| | 2,592 |
| | 698 |
| | — |
| | 75 |
| | — |
| Total Contractual Cash Obligations | $ | 1,186,165 |
| | $ | 82,192 |
| | $ | 220,098 |
| | $ | 836,100 |
| | $ | 43,075 |
| | $ | 4,700 |
|
(1) Amounts represent estimated contractual interest payments on outstanding long-term debt obligations. Rates in effect as of June 30, 20152018 are used for variable rate debt. Purchase orders for inventory and other goods and services are not included in our estimates as we are unable to aggregate the amount of such purchase orders that represent enforceable and legally binding agreements specifying all significant terms. The previous table includes the gross liability for unrecognized income tax benefits including interest and penalties as well as the balance outstanding under our revolving credit facility in the “Other” column as the Company is unable to make a reasonable estimate regarding the timing of cash settlements, if any, with the respective taxing authorities or lenders. SUBSEQUENT EVENTS
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12.5 million. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.authorities.
CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the consolidated financial statements and disclosed in the accompanying notes. The Business and Accounting Policies note to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. LIFO Inventory Valuation and Methodology Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories, and the average cost method for foreign inventories. We adopted the link chain dollar value LIFO method for accounting for U.S. inventories in fiscal 1974. Approximately 22.1%16.8% of our domestic inventory dollars relate to LIFO layers added in the 1970s. The excess of average cost over LIFO cost is $151.8$139.2 million as reflected in our consolidated balance sheet at June 30, 2015.2018. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. See the Inventories note to the consolidated financial statements in Item 8 under the caption "Financial Statements and Supplementary Data," for further information.
Allowances for Slow-Moving and Obsolete Inventories We evaluate the recoverability of our slow-moving or obsoleteand inactive inventories at least quarterly. We estimate the recoverable cost of such inventory by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. A significant portion of the products we hold in inventory have long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various supplier return programs. As of June 30, 2018 and 2017, the Company's reserve for slow-moving or obsolete inventories was $38.1 million and $28.8 million, respectively, recorded in inventories in the consolidated balance sheets. The increase is primarily due to a $6.8 million reserve related to the inventory acquired with FCX. Allowances for Doubtful Accounts We evaluate the collectibility of trade accounts receivable based on a combination of factors. Initially, we estimate an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of certain customers and industries estimated to be a greater credit risk, trends within the entire customer pool and changes in the overall aging of accounts receivable. While we have a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which we operate could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Accounts are written off against the allowance when it becomes evident that collection will not occur. As of June 30, 20152018 and 2014,2017, our allowance for doubtful accounts was 2.7%2.4% of gross receivables, for each period.receivables. Our provision for losses on accounts receivable was $2.6$2.8 million, $4.0$2.1 million and $2.3$4.3 million in fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Goodwill and Intangibles Goodwill is recognized as the amount by which the cost of an acquired entity exceeds the net amount assigned to assets acquired and liabilities assumed. Goodwill for acquired businesses is accounted for using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As part of acquisition accounting, we also recognize acquired identifiable intangible assets such as customer relationships, vendor relationships, trade names, and non-competition agreements apart from goodwill. Finite-lived identifiable intangibles are evaluated for impairment when changes in conditions indicate carrying value may not be recoverable. We evaluate goodwill for impairment at the reporting unit level annually as of January 1, and whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill, the impairment test uses a two-stepone-step approach. Step one compares theThe fair value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired, and the second step of goodwill impairment test is unnecessary.impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwillan impairment test is performed to measurecharge would be recognized for the amount of impairment loss (if any). Step two compares the implied fair value of the reporting unit goodwill withby which the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, meaning,exceeds the reporting unit's fair value, isnot to exceed the total amount of goodwill allocated to all the assets and liabilities of thethat reporting unit (including unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit is the price paid to acquire the reporting unit. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. Goodwill on our consolidated financial statements is relatedrelates to both the Service Center Based Distribution segment and the Fluid Power Businesses& Flow Control segment. The Company has sevensix reporting units for which are U.S. Service Centers, MSS, Canada Service Centers, Mexico Service Centers, Australia and New Zealand, Puerto Rico, and Fluid Power. Foran annual goodwill impairment assessment was performed as of January 1, 2018. The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts by at least 30% as of January 1, 2018. However, for one of our reporting units with goodwill of approximately $28.0 million, if we do not achieve our forecasted margin improvements goodwill could be impaired. The fair values of the reporting units in accordance with the goodwill impairment test as of January 1, 2015,were determined using the Company performed a quantitative analysisIncome and estimated the fair value of each of the reporting units using a combination of the incomeMarket approaches. The Income approach (also known asemploys the discounted cash flow ("DCF") method which utilizes the presentreflecting
projected cash flows expected to be generated by market participants and then adjusted for time value of cash flows to estimate fair value) and the marketmoney factors. The Market approach which measures fair value through theutilizes an analysis of comparable publicly traded companies ("guideline company analysis"), giving equal weight to both methods. The Company concluded that five of the reporting units had material excesses of fair value compared to their carrying amounts. The Company concluded that two reportingcompanies.
units (Canada service center and Australia / New Zealand) had excess fair value of approximately $39.0 million and $4.0 million, or fifteen and fourteen percent, respectively when compared to the carrying amounts of approximately $258.0 million and $28.0 million, respectively. The techniques used in the Company's impairment test have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions forecast at the assessmentmeasurement date. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date. The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years. Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth. A number of benchmarks from independent industry and other economic publications were also used. Changes in future actual results, assumptions, and estimates after the assessmentmeasurement date may lead to an outcome where additional impairment charges would be required in future periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions.
Self-Insurance Liabilities
We maintain business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. We accrue estimated losses using actuarial calculations, models and assumptions based on historical loss experience. We also maintain a partially self-insured health benefits plan, which provides medical benefits to U.S. based employees electing coverage. We maintain a reserve for all unpaid medical claims including those incurred but not reported based on historical experience and other assumptions. Although management believes that the estimated liabilities for self-insurance are adequate, the estimates described above may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate self-insurance liabilities are based on numerous assumptions, some of which are subjective. We will continue to adjust our estimated liabilities for self-insurance, as deemed necessary, in the event that future loss experience differs from historical loss patterns.
Pension and Other Post-employment Benefit Plans
The measurement of liabilities related to pension plans and other post-employment benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, and health care cost trend rates. We evaluate these assumptions and adjust them as necessary. Changes to these assumptions Further, continued adverse market conditions could result in a material change to the Company’s pension obligation causing a related increase or decrease in reported net operating results inrecognition of additional impairment if the periodCompany determines that the fair values of change in the estimate. At June 30, 2015, a 1% point change wouldits reporting units have the following effects (in thousands):
| | | | | | | | | | One-Percentage Point | Effect of change in: | Increase |
| | Decrease |
| Discount rate on liability | $ | (1,803 | ) | | $ | 2,172 |
| Discount rate on net periodic benefit cost | (86 | ) | | 102 |
|
A 1% change in the return on assets is not material as most of the plans are non-qualified and unfunded.fallen below their carrying values.
Income Taxes Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. As of June 30, 2015,2018, the Company had recognized $6.8$56.1 million of net deferred tax liabilities. Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets.assets on a jurisdiction by jurisdiction basis. The remaining net deferred tax asset is the amountmanagement believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future taxable income levels. Income taxes on undistributed earnings of non-U.S. subsidiaries are not accrued for the portion of such earnings that management considers to be permanently reinvested. At June 30, 2015, management considered all undistributed earnings of non-U.S. subsidiaries to be permanently reinvested. Undistributed earnings of non-U.S. subsidiaries totaled $139.0 million for which no provision for U.S. income tax had been made.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This Form 10-K, including 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; 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, or changes in supplier distribution programs; the cost of products and energy and other operating costs; changes in customer preferences for products and services of the nature and brands sold by us; changes in customer procurement policies and practices; competitive pressures; our reliance on information systems;systems and risks relating to 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; the volatility of our stock price and the resulting impact on our consolidated financial statements; risks related to legal proceedings to which we are a party; potentially adverse government regulation, and legislation, or policies, both enacted and under consideration, including with respect to health care and federal tax policy, (e.g., affecting the use of the LIFO inventory accounting method and the taxation of foreign-sourced income);international trade, such as recent tariffs and proposed tariffs on imports; and the occurrence of extraordinary events (including prolonged labor disputes, power outages,telecommunication outages, terrorist acts, 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. We discuss certain of these matters and other risk factors more fully throughout our Form 10-K, as well as other of our filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk is impacted by changes in foreign currency exchange rates as well as changes in interest rates. We occasionally utilize derivative instruments as part of our overall financial risk management policy, but do not use derivative instruments for speculative or trading purposes. We doAs of June 30, 2018, we did not currently have any outstanding derivative instruments. Foreign Currency Exchange Rate Risk Because we operate throughout North America, Australia and New Zealand and approximately 18.7%14.9% of our fiscal year 20152018 net sales were generated outside the United States, foreign currency exchange rates can impact our financial position, results of operations and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive income (loss) as reported in the statements of consolidated comprehensive income. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the statements of consolidated income as a component of other (income) expense, (income), net. Applied does not currently hedge the net investments in our foreign operations. During the course of the fiscal year, the Canadian, Mexican, Australian, Mexican and New Zealand foreigncurrency exchange rates decreased in relation to the U.S. dollar by 13.7%2.0%, 18.9%9.2%, 17.0%4.1%, and 22.3%7.4%, respectively. In the twelve months ended June 30, 2015,2018, we experienced net foreign currency translation losses totaling $58.2$8.9 million, which were included in other comprehensive income (loss). We utilize a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. A 10% strengthening from the levels experienced during the year ended June 30, 2015 of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2018 would have resulted in a $1.4$0.9 million decrease in net income for the year ended June 30, 2015.2018. A 10% weakening from the levels experienced during the year ended June 30, 2015 of the U.S. dollar relative to foreign currencies that affect the Company from the levels experienced during the year ended June 30, 2018 would have resulted in a $1.4$0.9 million increase in net income for the year ended June 30, 2015.2018. Interest Rate Risk Our primary exposure to interest rate risk results from our outstanding debt obligations with variable interest rates. The levels of fees and interest charged on our various debt facilities are based upon leverage levels and market interest rates. Our variable interest rate debt facilities outstanding include our five-year credit facility, which provides for a revolving credit facility with a capacity of up to $150.0$250.0 million in borrowings and $52.0$19.5 million outstanding at June 30, 2015, our $100.02018, and a $780.0 million five year term loan, facility, $96.9 million of which $775.1 million was outstanding at June 30, 2015,2018. Fixed interest rate debt facilities include $170.0 million outstanding under our unsecured shelf facility agreement, as well as $2.1$1.4 million of assumed debt from the purchase of our headquarters facility. We had total average variable interest rate bank borrowings of $191.4$431.7 million during fiscal 2015.2018. The impact of a hypothetical 1.0% increase in the interest rates on our average variable interest rate bank borrowings would have resulted in a $1.9$4.3 million increase in interest expense. Changes in market interest rates would also impact interest rates on these facilities. We monitor depository institutions that hold our cash and cash equivalents, primarily for safety of principal and secondarily for maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any of these entities.
For more information relating to borrowing and interest rates, see the “Liquidity and Capital Resources” section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and note 5 to the consolidated financial statements in Item 8. That information is also incorporated here by reference. In addition, see Item 1A, “Risk Factors,” for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc. Cleveland, Ohio
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and subsidiaries (the "Company"“Company”) as of June 30, 20152018 and 2014, and2017, the related statements of consolidated income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2015. Our audits also included2018, and the financial statementrelated notes and the schedule listed in the Index at Item 15. 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2018, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 17, 2018 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight BoardPCAOB (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of theCompany at June 30, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 26, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP Cleveland, Ohio
August 26, 201517, 2018
We have served as the Company's auditor since 1966. 26
STATEMENTS OF CONSOLIDATED INCOME (In thousands, except per share amounts)
| | | | | | | | | | | | | | Year Ended June 30, | | 2015 |
| | 2014 |
| | 2013 |
| Net Sales | | $ | 2,751,561 |
| | $ | 2,459,878 |
| | $ | 2,462,171 |
| Cost of Sales | | 1,981,747 |
| | 1,772,952 |
| | 1,779,209 |
| Gross Profit | | 769,814 |
| | 686,926 |
| | 682,962 |
| Selling, Distribution and Administrative, including depreciation | | 585,195 |
| | 522,568 |
| | 506,563 |
| Operating Income | | 184,619 |
| | 164,358 |
| | 176,399 |
| Interest Expense | | 8,121 |
| | 900 |
| | 621 |
| Interest Income | | (252 | ) | | (651 | ) | | (456 | ) | Other Expense (Income), net | | 879 |
| | (2,153 | ) | | (1,431 | ) | Income Before Income Taxes | | 175,871 |
| | 166,262 |
| | 177,665 |
| Income Tax Expense | | 60,387 |
| | 53,441 |
| | 59,516 |
| Net Income | | $ | 115,484 |
| | $ | 112,821 |
| | $ | 118,149 |
| Net Income Per Share — Basic | | $ | 2.82 |
| | $ | 2.69 |
| | $ | 2.81 |
| Net Income Per Share — Diluted | | $ | 2.80 |
| | $ | 2.67 |
| | $ | 2.78 |
|
| | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| Net Sales | | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
| Cost of Sales | | 2,189,279 |
| | 1,856,051 |
| | 1,812,006 |
| Gross Profit | | 883,995 |
| | 737,695 |
| | 707,422 |
| Selling, Distribution and Administrative, including depreciation | | 658,168 |
| | 562,309 |
| | 552,846 |
| Goodwill Impairment | | — |
| | — |
| | 64,794 |
| Operating Income | | 225,827 |
| | 175,386 |
| | 89,782 |
| Interest Expense | | 24,142 |
| | 8,831 |
| | 9,004 |
| Interest Income | | (657 | ) | | (290 | ) | | (241 | ) | Other (Income) Expense, net | | (2,376 | ) | | (121 | ) | | 2,041 |
| Income Before Income Taxes | | 204,718 |
| | 166,966 |
| | 78,978 |
| Income Tax Expense | | 63,093 |
| | 33,056 |
| | 49,401 |
| Net Income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| Net Income Per Share — Basic | | $ | 3.65 |
| | $ | 3.43 |
| | $ | 0.75 |
| Net Income Per Share — Diluted | | $ | 3.61 |
| | $ | 3.40 |
| | $ | 0.75 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (In thousands)
| | | | | | | | | | | | | | Year Ended June 30, | | 2015 |
| | 2014 |
| | 2013 |
| Net income per the statements of consolidated income | | $ | 115,484 |
| | $ | 112,821 |
| | $ | 118,149 |
| | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | Foreign currency translation adjustments | | (58,233 | ) | | 629 |
| | (1,358 | ) | Postemployment benefits: | | | | | | | Actuarial (loss) gain on remeasurement | | (776 | ) | | 1,402 |
| | 3,153 |
| Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | | 286 |
| | 382 |
| | 872 |
| Unrealized (loss) gain on investment securities available for sale | | (38 | ) | | 112 |
| | 10 |
| Total other comprehensive (loss) income, before tax | | (58,761 | ) | | 2,525 |
| | 2,677 |
| Income tax (benefit) expense related to items of other comprehensive income (loss) | | (205 | ) | | 719 |
| | 1,529 |
| Other comprehensive (loss) income, net of tax | | (58,556 | ) | | 1,806 |
| | 1,148 |
| Comprehensive income | | $ | 56,928 |
| | $ | 114,627 |
| | $ | 119,297 |
|
| | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| Net income per the statements of consolidated income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| | | | | | | | Other comprehensive (loss) income, before tax: | | | | | | | Foreign currency translation adjustments | | (8,875 | ) | | 2,238 |
| | (24,441 | ) | Post-employment benefits: | | | | | | | Actuarial gain (loss) on re-measurement | | 709 |
| | 2,038 |
| | (1,998 | ) | Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | | (73 | ) | | 506 |
| | 518 |
| Unrealized gain (loss) on investment securities available for sale | | 37 |
| | 91 |
| | (52 | ) | Total other comprehensive (loss) income, before tax | | (8,202 | ) | | 4,873 |
| | (25,973 | ) | Income tax expense (benefit) related to items of other comprehensive income (loss) | | 319 |
| | 1,029 |
| | (598 | ) | Other comprehensive (loss) income, net of tax | | (8,521 | ) | | 3,844 |
| | (25,375 | ) | Comprehensive income | | $ | 133,104 |
| | $ | 137,754 |
| | $ | 4,202 |
|
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (In thousands)
| | | | | | | | | | June 30, | | 2015 |
| | 2014 |
| Assets | | | | | Current assets | | | | | Cash and cash equivalents | | $ | 69,470 |
| | $ | 71,189 |
| Accounts receivable, less allowances of $10,621 and $10,385 | | 376,305 |
| | 375,732 |
| Inventories | | 362,419 |
| | 335,747 |
| Other current assets | | 51,111 |
| | 53,480 |
| Total current assets | | 859,305 |
| | 836,148 |
| Property — at cost | | | | | Land | | 12,950 |
| | 13,212 |
| Buildings | | 89,325 |
| | 89,886 |
| Equipment, including computers and software | | 166,515 |
| | 157,370 |
| Total property — at cost | | 268,790 |
| | 260,468 |
| Less accumulated depreciation | | 164,343 |
| | 156,872 |
| Property — net | | 104,447 |
| | 103,596 |
| Identifiable intangibles, net | | 198,828 |
| | 159,508 |
| Goodwill | | 254,406 |
| | 193,494 |
| Deferred tax assets | | 97 |
| | 21,166 |
| Other assets | | 17,885 |
| | 20,257 |
| Total Assets | | $ | 1,434,968 |
| | $ | 1,334,169 |
| Liabilities | | | | | Current liabilities | | | | | Accounts payable | | $ | 179,825 |
| | $ | 172,401 |
| Current portion of long term debt | | 3,349 |
| | 2,720 |
| Compensation and related benefits | | 63,780 |
| | 55,760 |
| Other current liabilities | | 63,118 |
| | 60,074 |
| Total current liabilities | | 310,072 |
| | 290,955 |
| Long-term debt | | 317,646 |
| | 167,992 |
| Post-employment benefits | | 19,627 |
| | 23,611 |
| Other liabilities | | 46,295 |
| | 51,303 |
| Total Liabilities | | 693,640 |
| | 533,861 |
| Shareholders’ Equity | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — |
| | — |
| Common stock — no par value; 80,000 shares authorized; 54,213 shares issued | | 10,000 |
| | 10,000 |
| Additional paid-in capital | | 160,072 |
| | 156,999 |
| Retained earnings | | 969,548 |
| | 896,776 |
| Treasury shares — at cost (14,308 and 12,650 shares) | | (338,121 | ) | | (261,852 | ) | Accumulated other comprehensive income (loss) | | (60,171 | ) | | (1,615 | ) | Total Shareholders’ Equity | | 741,328 |
| | 800,308 |
| Total Liabilities and Shareholders’ Equity | | $ | 1,434,968 |
| | $ | 1,334,169 |
|
| | | | | | | | | | June 30, | | 2018 |
| | 2017 |
| Assets | | | | | Current assets | | | | | Cash and cash equivalents | | $ | 54,150 |
| | $ | 105,057 |
| Accounts receivable, less allowances of $13,566 and $9,628 | | 548,811 |
| | 390,931 |
| Inventories | | 422,069 |
| | 345,145 |
| Other current assets | | 32,990 |
| | 41,409 |
| Total current assets | | 1,058,020 |
| | 882,542 |
| Property — at cost | | | | | Land | | 14,411 |
| | 14,250 |
| Buildings | | 104,419 |
| | 97,529 |
| Equipment, including computers and software | | 177,813 |
| | 162,432 |
| Total property — at cost | | 296,643 |
| | 274,211 |
| Less accumulated depreciation | | 175,300 |
| | 166,143 |
| Property — net | | 121,343 |
| | 108,068 |
| Identifiable intangibles, net | | 435,947 |
| | 163,562 |
| Goodwill | | 646,643 |
| | 206,135 |
| Other assets | | 23,788 |
| | 27,288 |
| Total Assets | | $ | 2,285,741 |
| | $ | 1,387,595 |
| Liabilities | | | | | Current liabilities | | | | | Accounts payable | | $ | 256,886 |
| | $ | 180,614 |
| Current portion of long-term debt | | 19,183 |
| | 4,814 |
| Compensation and related benefits | | 73,370 |
| | 58,785 |
| Other current liabilities | | 83,112 |
| | 65,540 |
| Total current liabilities | | 432,551 |
| | 309,753 |
| Long-term debt | | 944,522 |
| | 286,769 |
| Post-employment benefits | | 11,985 |
| | 16,715 |
| Other liabilities | | 81,720 |
| | 29,102 |
| Total Liabilities | | 1,470,778 |
| | 642,339 |
| Shareholders’ Equity | | | | | Preferred stock — no par value; 2,500 shares authorized; none issued or outstanding | | — |
| | — |
| Common stock — no par value; 80,000 shares authorized; 54,213 shares issued; 38,703 and 39,041 shares outstanding, respectively | | 10,000 |
| | 10,000 |
| Additional paid-in capital | | 169,383 |
| | 164,655 |
| Retained earnings | | 1,129,678 |
| | 1,033,751 |
| Treasury shares — at cost (15,510 and 15,172 shares), respectively | | (403,875 | ) | | (381,448 | ) | Accumulated other comprehensive loss | | (90,223 | ) | | (81,702 | ) | Total Shareholders’ Equity | | 814,963 |
| | 745,256 |
| Total Liabilities and Shareholders’ Equity | | $ | 2,285,741 |
| | $ | 1,387,595 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS (In thousands)
| | | | | | | | | | | | | | Year Ended June 30, | | 2015 |
| | 2014 |
| | 2013 |
| Cash Flows from Operating Activities | | | | | | | Net income | | $ | 115,484 |
| | $ | 112,821 |
| | $ | 118,149 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Depreciation and amortization of property | | 16,578 |
| | 13,977 |
| | 12,501 |
| Amortization of intangibles | | 25,797 |
| | 14,023 |
| | 13,233 |
| Amortization of stock appreciation rights and options | | 1,610 |
| | 1,808 |
| | 2,317 |
| Deferred income taxes | | (4,961 | ) | | (8,209 | ) | | 10,179 |
| Provision for losses on accounts receivable | | 2,597 |
| | 3,970 |
| | 2,267 |
| Unrealized foreign exchange transaction losses (gains) | | (727 | ) | | 204 |
| | (1,410 | ) | Other share-based compensation expense | | 2,851 |
| | 2,703 |
| | 3,444 |
| Shares issued for deferred compensation plans | | 45 |
| | 161 |
| | 241 |
| Gain on sale of property | | (1,291 | ) | | (53 | ) | | (321 | ) | Changes in operating assets and liabilities, net of acquisitions: | | | | | | | Accounts receivable | | 13,129 |
| | (29,089 | ) | | (15,721 | ) | Inventories | | (15,704 | ) | | (29,171 | ) | | (26,745 | ) | Other operating assets | | 797 |
| | 17,966 |
| | (7,857 | ) | Accounts payable | | 1,040 |
| | 21,369 |
| | 12,206 |
| Other operating liabilities | | (2,707 | ) | | (12,370 | ) | | (11,086 | ) | Cash provided by Operating Activities | | 154,538 |
| | 110,110 |
| | 111,397 |
| Cash Flows from Investing Activities | | | | | | | Property purchases | | (14,933 | ) | | (20,190 | ) | | (12,214 | ) | Proceeds from property sales | | 1,932 |
| | 877 |
| | 979 |
| Net cash paid for acquisition of businesses, net of cash acquired of $0, $1,369, and $0 in 2015, 2014 and 2013, respectively | | (160,620 | ) | | (184,324 | ) | | (67,590 | ) | Cash used in Investing Activities | | (173,621 | ) | | (203,637 | ) | | (78,825 | ) | Cash Flows from Financing Activities | | | | | | | Net (repayments) borrowings under revolving credit facility, classified as long term | | (17,000 | ) | | 69,000 |
| | — |
| Borrowings under long term debt facilities | | 170,000 |
| | 100,000 |
| | — |
| Long term debt repayments | | (2,717 | ) | | (647 | ) | | — |
| Purchases of treasury shares | | (76,515 | ) | | (36,732 | ) | | (53 | ) | Dividends paid | | (42,663 | ) | | (40,410 | ) | | (37,194 | ) | Excess tax benefits from share-based compensation | | 1,042 |
| | 2,674 |
| | 2,566 |
| Acquisition holdback payments | | (7,693 | ) | | (1,839 | ) | | (3,843 | ) | Exercise of stock appreciation rights and options | | 235 |
| | 96 |
| | 499 |
| Cash provided by (used in) Financing Activities | | 24,689 |
| | 92,142 |
| | (38,025 | ) | Effect of exchange rate changes on cash | | (7,325 | ) | | (590 | ) | | 175 |
| Decrease in cash and cash equivalents | | (1,719 | ) | | (1,975 | ) | | (5,278 | ) | Cash and cash equivalents at beginning of year | | 71,189 |
| | 73,164 |
| | 78,442 |
| Cash and Cash Equivalents at End of Year | | $ | 69,470 |
| | $ | 71,189 |
| | $ | 73,164 |
| | | | | | | | Supplemental Cash Flow Information | | | | | | | Cash paid during the year for: | | | | | | | Income taxes | | $ | 69,272 |
| | $ | 51,548 |
| | $ | 51,816 |
| Interest | | 5,851 |
| | 1,026 |
| | 501 |
|
| | | | | | | | | | | | | | Year Ended June 30, | | 2018 |
| | 2017 |
| | 2016 |
| Cash Flows from Operating Activities | | | | | | | Net income | | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Goodwill impairment | | — |
| | — |
| | 64,794 |
| Depreciation and amortization of property | | 17,798 |
| | 15,306 |
| | 15,966 |
| Amortization of intangibles | | 32,065 |
| | 24,371 |
| | 25,580 |
| Amortization of stock appreciation rights and options | | 1,961 |
| | 1,891 |
| | 1,543 |
| Deferred income taxes | | 1,615 |
| | (2,852 | ) | | (6,581 | ) | Provision for losses on accounts receivable | | 2,803 |
| | 2,071 |
| | 4,303 |
| Unrealized foreign exchange transaction (gains) losses | | (667 | ) | | (333 | ) | | 61 |
| Other share-based compensation expense | | 4,666 |
| | 3,629 |
| | 2,524 |
| (Gain) loss on sale of property | | (335 | ) | | (1,541 | ) | | 337 |
| Other | | — |
| | 103 |
| | — |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | | Accounts receivable | | (83,103 | ) | | (42,267 | ) | | 26,414 |
| Inventories | | (33,436 | ) | | (3,624 | ) | | 25,081 |
| Other operating assets | | 6,947 |
| | (6,162 | ) | | 2,964 |
| Accounts payable | | 50,345 |
| | 32,076 |
| | (28,644 | ) | Other operating liabilities | | 5,020 |
| | 8,041 |
| | (1,905 | ) | Cash provided by Operating Activities | | 147,304 |
| | 164,619 |
| | 162,014 |
| Cash Flows from Investing Activities | | | | | | | Property purchases | | (23,230 | ) | | (17,045 | ) | | (13,130 | ) | Proceeds from property sales | | 978 |
| | 2,924 |
| | 603 |
| Cash paid for acquisition of businesses, net of cash acquired | | (775,654 | ) | | (2,773 | ) | | (62,504 | ) | Cash used in Investing Activities | | (797,906 | ) | | (16,894 | ) | | (75,031 | ) | Cash Flows from Financing Activities | | | | | | | Net borrowings (repayments) under revolving credit facility, classified as long term | | 19,500 |
| | (33,000 | ) | | (19,000 | ) | Borrowings under long-term debt facilities | | 780,000 |
| | — |
| | 125,000 |
| Long-term debt repayments | | (125,420 | ) | | (3,353 | ) | | (98,662 | ) | Debt issuance costs | | (3,298 | ) | | — |
| | (719 | ) | Purchases of treasury shares | | (22,778 | ) | | (8,242 | ) | | (37,465 | ) | Dividends paid | | (45,858 | ) | | (44,619 | ) | | (43,330 | ) | Excess tax benefits from share-based compensation | | — |
| | — |
| | 208 |
| Acquisition holdback payments | | (319 | ) | | (11,307 | ) | | (18,913 | ) | Exercise of stock appreciation rights and options | | 102 |
| | 656 |
| | 896 |
| Taxes paid for shares withheld | | (1,645 | ) | | (3,484 | ) | | (1,022 | ) | Cash provided by (used in) Financing Activities | | 600,284 |
| | (103,349 | ) | | (93,007 | ) | Effect of exchange rate changes on cash | | (589 | ) | | 820 |
| | (3,585 | ) | (Decrease) increase in cash and cash equivalents | | (50,907 | ) | | 45,196 |
| | (9,609 | ) | Cash and cash equivalents at beginning of year | | 105,057 |
| | 59,861 |
| | 69,470 |
| Cash and Cash Equivalents at End of Year | | $ | 54,150 |
| | $ | 105,057 |
| | $ | 59,861 |
| | | | | | | | Supplemental Cash Flow Information | | | | | | | Cash paid during the year for: | | | | | | | Income taxes | | 41,724 |
| | 38,772 |
| | 54,749 |
| Interest | | 25,560 |
| | 8,561 |
| | 9,497 |
|
See notes to consolidated financial statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended June 30, 2015, 2014 and 2013 | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Income (Loss) |
| | Total Shareholders' Equity |
| Balance at July 1, 2012 | | 41,967 |
| | $ | 10,000 |
| | $ | 150,070 |
| | $ | 743,360 |
| | $ | (226,730 | ) | | $ | (4,569 | ) | | $ | 672,131 |
| Net income | | | | | | | | 118,149 |
| | | | | | 118,149 |
| Other comprehensive income (loss) | | | | | | | | | | | | 1,148 |
| | 1,148 |
| Cash dividends — $0.88 per share | | | | | | | | (37,194 | ) | | | | | | (37,194 | ) | Purchases of common stock for treasury | | (1 | ) | | | | | | | | (53 | ) | | | | (53 | ) | Treasury shares issued for: | | | | | | | | | | | | | |
| Exercise of stock appreciation rights and options | | 129 |
| | | | (175 | ) | | | | 1,086 |
| | | | 911 |
| Performance share awards | | 53 |
|
|
|
| (1,675 | ) |
|
|
| 74 |
|
|
|
| (1,601 | ) | Deferred compensation plans | | 5 |
| | | | 131 |
| | | | 110 |
| | | | 241 |
| Compensation expense — stock appreciation rights and options | | | | | | 2,317 |
| | | | | | | | 2,317 |
| Other share-based compensation expense | | | | | | 3,444 |
| | | | | | | | 3,444 |
| Other | | 16 |
| | | | (219 | ) | | 47 |
| | 294 |
| | | | 122 |
| Balance at June 30, 2013 | | 42,169 |
| | 10,000 |
| | 153,893 |
| | 824,362 |
| | (225,219 | ) | | (3,421 | ) | | 759,615 |
| Net income | | | | | | | | 112,821 |
| | | | | | 112,821 |
| Other comprehensive income (loss) | | | | | | | | | | | | 1,806 |
| | 1,806 |
| Cash dividends — $0.96 per share | | | | | | | | (40,410 | ) | | | | | | (40,410 | ) | Purchases of common stock for treasury | | (760 | ) | | | | | | | | (36,732 | ) | | | | (36,732 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 76 |
| | | | 849 |
| | | | 324 |
| | | | 1,173 |
| Performance share awards | | 36 |
| | | | (1,062 | ) | | | | (21 | ) | | | | (1,083 | ) | Restricted stock units | | 31 |
| | | | (1,110 | ) | | | | (247 | ) | | | | (1,357 | ) | Deferred compensation plans | | 3 |
| | | | 98 |
| | | | 63 |
| | | | 161 |
| Compensation expense — stock appreciation rights and options | | | | | | 1,808 |
| | | |
| | | | 1,808 |
| Other share-based compensation expense | | | | | | 2,703 |
| | | | | | | | 2,703 |
| Other | | 8 |
| | | | (180 | ) | | 3 |
| | (20 | ) | | | | (197 | ) | Balance at June 30, 2014 | | 41,563 |
| | 10,000 |
| | 156,999 |
| | 896,776 |
| | (261,852 | ) | | (1,615 | ) | | 800,308 |
| Net income | | | | | | | | 115,484 |
| | | | | | 115,484 |
| Other comprehensive income (loss) | | | | | | | | | | | | (58,556 | ) | | (58,556 | ) | Cash dividends — $1.04 per share | | | | | | | | (42,663 | ) | | | | | | (42,663 | ) | Purchases of common stock for treasury | | (1,740 | ) | | | | | | | | (76,515 | ) | | | | (76,515 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 34 |
| | | | 552 |
| | | | 415 |
| | | | 967 |
| Performance share awards | | 12 |
| | | | (425 | ) | | | | 52 |
| | | | (373 | ) | Restricted stock units | | 36 |
| | | | (1,312 | ) | | | | 76 |
| | | | (1,236 | ) | Deferred compensation plans | | 1 |
| | | | 24 |
| | | | 21 |
| | | | 45 |
| Compensation expense — stock appreciation rights and options | | | | | | 1,610 |
| | | | | | | | 1,610 |
| Other share-based compensation expense | | | | | | 2,851 |
| | | | | | | | 2,851 |
| Other | | (1 | ) | | | | (227 | ) | | (49 | ) | | (318 | ) | | | | (594 | ) | Balance at June 30, 2015 | | 39,905 |
| | $ | 10,000 |
| | $ | 160,072 |
| | $ | 969,548 |
| | $ | (338,121 | ) | | $ | (60,171 | ) | | $ | 741,328 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended June 30, 2018, 2017 and 2016 | | Shares of Common Stock Outstanding |
| | Common Stock |
| | Additional Paid-In Capital |
| |
Retained Earnings |
| | Treasury Shares- at Cost |
| | Accumulated Other Comprehensive Income (Loss) |
| | Total Shareholders' Equity |
| Balance at July 1, 2015 | | 39,905 |
| | $ | 10,000 |
| | $ | 160,072 |
| | $ | 969,548 |
| | $ | (338,121 | ) | | $ | (60,171 | ) | | $ | 741,328 |
| Net income | | | | | | | | 29,577 |
| | | | | | 29,577 |
| Other comprehensive income (loss) | | | | | | | | | | | | (25,375 | ) | | (25,375 | ) | Cash dividends — $1.10 per share | | | | | | | | (54,266 | ) | | | | | | (54,266 | ) | Purchases of common stock for treasury | | (951 | ) | | | | | | | | (37,465 | ) | | | | (37,465 | ) | Treasury shares issued for: | | | | | | | | | | | | | |
| Exercise of stock appreciation rights and options | | 64 |
| | | | (391 | ) | | | | 1,000 |
| | | | 609 |
| Performance share awards | | 8 |
| |
| | (308 | ) | |
| | 116 |
| |
| | (192 | ) | Restricted stock units | | 15 |
| | | | (530 | ) | | | | 232 |
| | | | (298 | ) | Compensation expense — stock appreciation rights and options | |
| | | | 1,543 |
| | | |
| | | | 1,543 |
| Other share-based compensation expense | | | | | | 2,524 |
| | | | | | | | 2,524 |
| Other | | 16 |
| | | | (381 | ) | | (38 | ) | | 350 |
| | | | (69 | ) | Balance at June 30, 2016 | | 39,057 |
| | 10,000 |
| | 162,529 |
| | 944,821 |
| | (373,888 | ) | | (85,546 | ) | | 657,916 |
| Net income | | | | | | | | 133,910 |
| | | | | | 133,910 |
| Other comprehensive income (loss) | | | | | | | | | | | | 3,844 |
| | 3,844 |
| Cash dividends — $1.14 per share | | | | | | | | (45,005 | ) | | | | | | (45,005 | ) | Purchases of common stock for treasury | | (163 | ) | | | | | | | | (8,242 | ) | | | | (8,242 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 111 |
| | | | (2,218 | ) | | | | 105 |
| | | | (2,113 | ) | Performance share awards | | 10 |
| | | | (360 | ) | | | | 126 |
| | | | (234 | ) | Restricted stock units | | 15 |
| | | | (624 | ) | | | | 227 |
| | | | (397 | ) | Compensation expense — stock appreciation rights and options | | | | | | 1,891 |
| | | | | | | | 1,891 |
| Other share-based compensation expense | | | | | | 3,629 |
| | | | | | | | 3,629 |
| Other | | 11 |
| | | | (192 | ) | | 25 |
| | 224 |
| | | | 57 |
| Balance at June 30, 2017 | | 39,041 |
| | 10,000 |
| | 164,655 |
| | 1,033,751 |
| | (381,448 | ) | | (81,702 | ) | | 745,256 |
| Net income | | | | | | | | 141,625 |
| | | | | | 141,625 |
| Other comprehensive income (loss) | | | | | | | | | | | | (8,050 | ) | | (8,050 | ) | Reclassifications of certain income tax effects from accumulated other comprehensive loss | | | | | | | | 471 |
| | | | (471 | ) | | — |
| Cash dividends — $1.18 per share | |
| | | | | | (46,162 | ) | | | | | | (46,162 | ) | Purchases of common stock for treasury | | (393 | ) | | | |
| | | | (22,778 | ) | | | | (22,778 | ) | Treasury shares issued for: | | | | | | | | | | | | | | | Exercise of stock appreciation rights and options | | 19 |
| | | | (482 | ) | | | | 84 |
| | | | (398 | ) | Performance share awards | | 5 |
| | | | (273 | ) | | | | (24 | ) | | | | (297 | ) | Restricted stock units | | 15 |
| | | | (740 | ) | | | | (56 | ) | | | | (796 | ) | Compensation expense — stock appreciation rights and options | | | | | | 1,961 |
| | | | | | | | 1,961 |
| Other share-based compensation expense | | | | | | 4,666 |
| | | | | | | | 4,666 |
| Other | | 16 |
| | | | (404 | ) | | (7 | ) | | 347 |
| | | | (64 | ) | Balance at June 30, 2018 | | 38,703 |
| | $ | 10,000 |
| | $ | 169,383 |
| | $ | 1,129,678 |
| | $ | (403,875 | ) | | $ | (90,223 | ) | | $ | 814,963 |
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
NOTE 1: BUSINESS AND ACCOUNTING POLICIES Business Applied Industrial Technologies, Inc. and subsidiaries (the “Company” or “Applied”) is a leading distributor of bearings, power transmission products, engineered fluid power components and systems, specialty flow control solutions, and other industrial distributorsupplies, serving Maintenance Repair & Operations (MRO) and Original Equipment Manufacturer (OEM) customers in virtually every industry. In addition, Applied provides engineering, design and systems integration for industrial, and fluid power, and flow control applications, as well as customized mechanical, fabricated rubber, and fluid power, and flow control shop services. Applied also offers maintenance trainingstoreroom services and inventory management solutions that provide added value to its customers. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems. Consolidation The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. For the year ended June 30, 2013 the financial results of the Company’s Canadian and Mexican subsidiaries were included in the consolidated financial statements for the twelve months ended May 31. During fiscal 2014, the Company eliminated the one month reporting lag for both the Canadian and Mexican subsidiaries in the first and third quarters respectively. See the "Change in Accounting Principle" section below for additional information related to the elimination of the reporting lag. Foreign Currency The financial statements of the Company’s Canadian, Mexican, Australian and New Zealand subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive (loss) income (loss) in the statements of consolidated comprehensive income. Gains and losses resulting from transactions denominated in foreign currencies are included in the statements of consolidated income as a component of other (income) expense, (income), net. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. Marketable Securities The primary marketable security investments of the Company include money market and mutual funds held in a rabbi trust for a non-qualified deferred compensation plan. These are included in other assets in the consolidated balance sheets, are classified as trading securities, and are reported at fair value based on quoted market prices. Changes in the fair value of the investments during the period are recorded in other (income) expense, (income), net in the statements of consolidated income. Concentration of Credit Risk The Company has a broad customer base representing many diverse industries across North America, Australia, New Zealand, and New Zealand.Singapore. As such, the Company does not believe that a significant concentration of credit risk exists in its accounts receivable. The Company’s cash and cash equivalents consist of deposits with commercial banks and regulated non-bank subsidiaries. While Appliedthe Company monitors the creditworthiness of these institutions, a crisis in the financial systems could limit access to funds and/or result in the loss of principal. The terms of these deposits and investments provide that all monies are available to the Company upon demand.
Allowances for Doubtful Accounts The Company evaluates the collectibility of trade accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is adjusted based on recent trends of customers and industries estimated to be greater credit risks, trends within the entire customer pool, and changes in the overall aging of accounts receivable. Accounts are written off against the allowance when it becomes evident collection will not occur. While theCompany has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts. Inventories Inventories are valued at the average cost method, using the last-in, first-out (LIFO) method for U.S. inventories and the average cost method for foreign inventories. The Company adopted the link chain dollar value LIFO method of accounting for U.S. inventories in fiscal 1974. At June 30, 2015,2018, approximately 22.1%16.8% of the Company’s domestic inventory dollars relate to LIFO layers added in the 1970s. The Company maintains five LIFO pools based on the following product groupings: bearings, power transmission products, rubber products, fluid power products and other products. LIFO layers and/or liquidations are determined consistently year-to-year. The Company evaluates the recoverability of its slow moving or obsoleteand inactive inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence, and, in certain instances, can be eligible for return under supplier return programs. Supplier Purchasing Programs The Company enters into agreements with certain suppliers providing inventory purchase incentives. The Company’s inventory purchase incentive arrangements are unique to each supplier and are generally annual programs ending at either the Company’s fiscal year end or the supplier’s year end; however, program length and ending dates can vary. Incentives are received in the form of cash or credits against purchases upon attainment of specified purchase volumes and are received either monthly, quarterly or annually. The incentives are generally a specified percentage of the Company’s net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases. The Company accrues for the receipt of these inventory purchase incentives based upon cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases expected during the life of the program. Supplier programs are analyzed each quarter to determine the appropriateness of the amount of purchase incentives accrued. Upon program completion, differences between estimates and actual incentives subsequently received have not been material. Benefits under these supplier purchasing programs are recognized under the Company’s LIFO inventory accounting methodmethods as a reduction of cost of sales when the inventories representing these purchases are recorded as cost of sales. Accrued incentives expected to be settled as a credit against future purchases are reported on the consolidated balance sheetsheets as an offset to amounts due to the related supplier. Property and Related Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets and is included in selling, distribution and administrative expenses in the accompanying statements of consolidated income. Buildings, building improvements and leasehold improvements are depreciated over ten to thirty years or the life of the lease if a shorter period, and equipment is depreciated over three to ten years. The Company capitalizes internal use software development costs in accordance with guidance on accounting for costs of computer software developed or obtained for internal use. Amortization of software begins when it is ready for its intended use, and is computed on a straight-line basis over the estimated useful life of the software, generally not to exceed twelve years. Capitalized software and hardware costs are classified as property on the consolidated balance sheets. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows. Impairment losses, if any, would be measured based upon the difference between the carrying amount and the fair value of the assets.
Goodwill and Intangible Assets Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized. Goodwill is reviewed for impairment annually as of January 1 or whenever changes in conditions indicate an evaluation should be completed. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company utilizes discounted cash flow models and market multiples for comparable businesses to determine the fair value of reporting units. Evaluating impairment requires significant judgment by management, including estimated future operating results, estimated future cash flows, the long-term rate of growth of the business, and determination of an appropriate discount rate. While the Company uses available information to prepare the estimates and evaluations, actual results could differ significantly. The Company recognizes acquired identifiable intangible assets such as customer relationships, trade names, vendor relationships, and non-competition agreements apart from goodwill. Customer relationship identifiable intangibles are amortized using the sum-of-the-years-digits method or the expected cash flow method over estimated useful lives consistent with assumptions used in the determination of their value. Amortization of all other finite-lived identifiable intangible assets is computed using the straight-line method over the estimated period of benefit. Amortization of identifiable intangible assets is included in selling, distribution and administrative expensesexpense in the accompanying statements of consolidated income. Identifiable intangible assets with finite lives are reviewed for impairment when changes in conditions indicate carrying value may not be recoverable. Identifiable intangible assets with indefinite lives are reviewed for impairment on an annual basis or whenever changes in conditions indicate an evaluation should be completed. The Company does not currently have any indefinite livedindefinite-lived identifiable intangible assets. Self-Insurance Liabilities The Company maintains business insurance programs with significant self-insured retention covering workers’ compensation, business, automobile, general product liability and other claims. The Company accrues estimated losses including those incurred but not reported using actuarial calculations, models and assumptions based on historical loss experience. The Company also maintains a self-insured health benefits plan which provides medical benefits to U.S. based employees electing coverage under the plan. The Company estimates its reserve for all unpaid medical claims, including those incurred but not reported, based on historical experience, adjusted as necessary based upon management’s reasoned judgment. Revenue Recognition Sales are recognized when there is evidence of an arrangement, the sales price is fixed, collectibility is reasonably assured and the product’s title and risk of loss is transferred to the customer. Typically, these conditions are met when the product is shipped to the customer. The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net sales. The Company reports its sales net of actual sales returns and the amount of reserves established for anticipated sales returns based on historical rates. Sales tax collected from customers is excluded from net sales in the accompanying statements of consolidated income. Shipping and Handling Costs The Company records freight payments to third parties in cost of sales and internal delivery costs in selling, distribution and administrative expensesexpense in the accompanying statements of consolidated income. Internal delivery costs in selling, distribution and administrative expenses were approximately $24,430, $16,230$19,320, $20,060 and $15,560$21,480 for the fiscal years ended June 30, 2015, 20142018, 2017 and 2013, respectively.2016, respectively. Income Taxes Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes, giving consideration to enacted tax laws. Uncertain tax positions meeting a more-likely-than-not recognition threshold are recognized in accordance with the Accounting Standards Codification ("ASC") Topic 740 - Income Taxes topic of the ASC (Accounting Standards Codification). The Company recognizes accrued interest and penalties related to unrecognized income tax benefits in the provision for income taxes.
Share-Based Compensation Share-based compensation represents the cost related to share-based awards granted to employees under eitherthe 2015 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, or the 2007 Long-Term Performance Plan. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the requisite service period. Non-qualified stock appreciation rights (SARs) and stock options are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant and the fair values are determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate and the expected dividend yield. SARs and stock option awards generally vest over four years of continuous service and have ten-yearten-year contractual terms. The fair value of restricted stock awards, restricted stock units (RSUs), and performance shares are based on the closing market price of Company common stock on the grant date. Treasury Shares Shares of common stock repurchased by the Company are recorded at cost as treasury shares and result in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the weighted-average cost method for determining the cost of shares reissued. The difference between the cost of the shares and the reissuance price is added to or deducted from additional paid-in capital. ChangesRecently Adopted Accounting Guidance
Change in Accounting Principle - Net Periodic and Post-retirement Benefit Costs U.S. Inventory Costing Methodology
From fiscal 2013 throughIn March 2017, the endFASB issued its final standard on improving the presentation of net periodic pension and postretirement benefit costs. This standard, issued as ASU 2017-07, requires that an employer report the service cost component for defined benefit plans and postretirement plans in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This update is effective for annual financial statement periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period. The Company early adopted ASU 2017-07 in the first quarter of fiscal 2014, the Company implemented SAP as its new enterprise resource planning system (ERP) at its U.S. service centers. As implementation occurred at each service center, the method used to apply the link chain dollar value last-in first-out (LIFO) method of accounting changed for the inventories at that location.2018. The new inventory costing methodology utilizes the weighted-average cost method to determine the current year LIFO indices as well as any new LIFO layers established, whereas previously, current costs were used. Upon completion of the implementation, on July 1, 2014 the Company changed its accounting policy to the new method. Differences between amounts recognized in the financial statements during the implementation period and the previous accounting policy prior to July 1, 2014 were immaterial.
The Company believes that this change in accounting principle is preferable under the circumstances because weighted-average cost will provide a better reflection of actual transactions and inventory purchases, resulting in improved matching of actual costs and current revenues. This change will also result in greater consistency in inventory costing across the organization, as certain other U.S. locations were previously using weighted-average cost for similar LIFO calculations in their legacy inventory systems, and the new ERP system will make inventory costing a more efficient process within the U.S. ASC 250, "Accounting Changes and Error Corrections," requires that unless it is impracticable to do so, the voluntary adoption of a new accounting principle should be done retrospectively to all prior periods. Before July 1, 2014, the Company’s former ERP system did not capture weighted-average costs within the U.S. and the data needed to recalculate previous LIFO indices does not exist. Thus, the Company has concluded it is impracticable to recognize a cumulative effect or to retrospectively apply the effect of this change in accounting principle prior to July 1, 2014, but believes that those effects would be immaterial in all periods.
Alignment of Canadian Subsidiary Reporting
Effective July 1, 2013, the Company aligned the consolidation of the Company’s Canadian subsidiary in the consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes that this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principle and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $1,200adoption of this guidance resulted in the reclassification of the other components of net benefit cost from selling, distribution, and administrative expense to other (income) expense, net in the statements of consolidated income, forresulting in an increase to operating income. There is no impact to income before income taxes, net income, or net income per share. Therefore, $143, $155, and $113 of service costs are included in selling, distribution and administrative expense, and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net in the month of June 2013 and has been included within “Other (Income) Expense, net” on the statementstatements of consolidated income for the yearyears ended June 30, 2014.2018, and 2017, and 2016, respectively. The statement of consolidated incomeCompany used a practical expedient where the amounts disclosed in our Benefit Plans footnote for the prior year ended June 30, 2014 reflectscomparative periods were the same results, had the financial statements been retrospectively adjusted, with the exception of net income which would have decreased by $1,200. Net sales, operating income and net incomebasis for the year ended June 30, 2013 would have decreased by $1,050, $600estimation for applying the retrospective presentation requirements.
Accumulated Other Comprehensive Income In January 2018, the FASB issued its final standard on reporting comprehensive income. The standard, issued as ASU 2018-02, allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and $500 hadJobs Act. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company early adopted ASU 2018-02 in the financial statements been retrospectively adjusted.
Alignment of Mexican Subsidiary Reporting
Effective January 1, 2014,fiscal 2018 using the Company alignedat the consolidationbeginning of the Company’s Mexican subsidiaryperiod of adoption method. The impact of adoption was a reclassification of $471 from accumulated other comprehensive loss to retained earnings.
Change in Accounting Principle - Simplifying the test for Goodwill Impairment In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard, issued as ASU 2017-04, eliminates step 2 from the goodwill impairment test and instead requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the consolidated financial statements, which previously included the results on a one month reporting lag. The Company believes thatfourth quarter of fiscal 2018 and will apply this change in accounting principle is preferable as it provides contemporaneous reporting within our consolidated financial statements. In accordance with applicable accounting literature, the elimination of a one month reporting lag of a subsidiary is treated as a change in accounting principleguidance prospectively to its annual and requires retrospective application. The Company determined that the effect of this change is not material to the financial statements for all periods presented and therefore, the Company has not presented retrospective application of this change. The net impact of the lag elimination was $200 of income for the month of December 2013 and has been included within “Other (Income) Expense, net” on the statement of consolidated income for year ended June 30, 2014. Net sales, operating income and net income for the year ended June 30, 2014 would have decreased by $1,100, $100 and $250 had the financial statements been retrospectively adjusted. Net sales, operating income and net income for the year ended June 30, 2013 would have decreased by $900, $400 and $250 had the financial statements been retrospectively adjusted.interim goodwill impairment tests. NewRecently Issued Accounting PronouncementsGuidance
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers. The standard, issued as Accounting Standards Update (ASU)ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
industry specific guidance. The core principle of this model is that "an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services." On July 9,In August 2015, the FASB agreedissued ASU 2015-14 to delay the effective date of ASU 2014-09 by one year. In accordance with the delay, the update is effective for financial statement periods beginning after December 15, 2017.2017 and may be adopted either retrospectively or on a modified retrospective basis. Early adoption is permitted, but not before financial statement periods beginning after December 15, 2016. In March 2016 the FASB issued ASU 2016-08 and ASU 2016-10, and in May 2016 the FASB issued ASU 2016-12, which clarify the guidance in ASU 2014-09 but do not change the core principle of the revenue recognition model. The Company has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business processes, and financial statement disclosures. We have substantially completed an analysis of revenue streams at each of the business units and are evaluating the impact the new standard will have on revenue recognition. The Company primarily sells purchased products and recognizes revenue at point of sale or delivery and the majority of its revenue will continue to be recognized at a point in time under the new standard. A small percentage of revenue will be recognized using an over time revenue recognition model. The new standard will be adopted in the first quarter of fiscal 2019 using the modified retrospective method of adoption, and the Company will recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings as of July 1, 2018. The standard is not expected to have a material impact on the Company's consolidated financial statements, except for expanded disclosures on revenue in order to comply with the new guidance. The Company will continue to evaluate the impacts of the adoption of the standard and these assessments are subject to change. In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. The core principle of this update is that a "lessee should recognize the assets and liabilities that arise from leases." This update is effective for financial statement periods beginning after December 15, 2018, with earlier application permitted. The Company has established a cross-functional team to evaluate the new standard and has begun implementing new lease administration software. The Company is still determining the financial impact that this standard update will have on its consolidated financial statements, but anticipates it will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the consolidated balance sheet. The Company will continue to evaluate the impacts of the adoption of the standard and these assessments are subject to change. In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures. In June 2014,August 2016, the FASB issued its final standard on accounting for share-basedthe classification of certain cash receipts and cash payments whenwithin the termsstatement of an award provide that a performance target could be achieved after the requisite service period. Thecash flows. This standard, issued as ASU 2014-12, clarifies that2016-15, makes a performance target that affects vestingnumber of changes meant to add or clarify guidance on the classification of certain cash receipts and that can be achieved afterpayments in the requisite service period, should be treated as a performance condition. Thestatement of cash flows. This update is effective for annual and interim financial statement periods beginning after December 15, 2015,2018, with early adoption permitted. The Company has not yet determined the impact of this pronouncement on its financial statements and related disclosures. In April 2015,October 2016, the FASB issued its final standard on simplifying the presentationincome tax consequences of debt issue costs.intra-entity transfers of assets other than inventory. This standard, issued as ASU 2015-03,2016-16, requires that all costs incurred to issue debt be presented inan entity recognize the balance sheet as a direct reduction fromincome tax consequences of an intra-entity transfer of an asset other than inventory when the carrying valuetransfer occurs and eliminates the exception for an intra-entity transfer of the debt, similar to the presentation of debt discounts.an asset other than inventory. This update is effective for annual and interim financial statement periods beginning after December 15, 2015, and interim periods within those fiscal years,2017, with early adoption permitted. The Company will adopt this standard when it becomes effective in the first quarter of fiscal 2019, and it is not expected to have a material impact on the Company’s financial statements and related disclosures. In May 2017, the FASB issued its final standard on scope of modification accounting. This standard, issued as 2017-09, provides guidance about which change to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This update is effective for annual and interim financial statement periods beginning after December 15, 2017, with early adoption permitted. The Company has not yet determined the impact of the adoption of this guidance will result in the reclassification of the unamortized debt issuance costspronouncement on the consolidated balance sheets, which were $622its financial statements and $703 at June 30, 2015 and 2014, respectively.related disclosures.
NOTE 2: 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. KnoxFCX Acquisition
On July 1, 2014,January 31, 2018, the Company acquiredcompleted the acquisition of 100% of the outstanding stockshares of Knox Oil Field SupplyFCX Performance, Inc. (“Knox”("FCX"), headquartered in San Angelo, Texas, fora Columbus, Ohio based distributor of specialty process flow control products and services. The total consideration of $132,000, including cash paid of $118,000 at closing. The primary reasontransferred for the acquisition was $781,781, which was financed by cash-on-hand and a new credit facility comprised of Knox is to complementa $780,000 Term Loan A and expanda $250,000 revolver, effective with the Company’s capabilities to serve the upstream oil and gas industry in the United States.transaction closing. See note 5 Debt. As a distributor of oilfield supplieshighly engineered valves, instruments, pumps and relatedlifecycle services to MRO and OEM customers across diverse industrial and process end markets, this business iswill be included in the Service Center Based DistributionFluid Power & Flow Control Segment. The Company funded the acquisition by drawing $120,000 from the previously uncommitted shelf facility with Prudential Investment Management at a fixed interest rate of 3.19% with an average seven year life. The remaining $14,000 purchase price will be paid as acquisition holdback payments on the first three anniversaries of the acquisition with interest at a fixed rate of 1.50% per annum.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of KnoxFCX based on their preliminary estimated fair values at the acquisition date: date, which are subject to adjustment. The purchase accounting will be finalized within one year from the acquisition date. | | | | | | Knox Acquisition |
| | 2015 |
| Accounts receivable | $ | 19,100 |
| Inventories | 18,800 |
| Property | 3,900 |
| Identifiable intangible assets | 58,500 |
| Goodwill | 63,200 |
| Total assets acquired | 163,500 |
| Accounts payable and accrued liabilities | 7,200 |
| Deferred income taxes | 24,300 |
| Net assets acquired | $ | 132,000 |
| | | Purchase price | $ | 132,800 |
| Reconciliation of fair value transferred: | | Working Capital Adjustments | (800 | ) | Total Consideration | $ | 132,000 |
|
| | | | | | FCX Acquisition |
| | 2018 |
| Cash | $ | 11,141 |
| Accounts receivable | 80,836 |
| Inventories | 47,325 |
| Other current assets | 1,657 |
| Property | 8,282 |
| Identifiable intangible assets | 305,420 |
| Goodwill | 439,164 |
| Other assets | 775 |
| Total assets acquired | $ | 894,600 |
| Accounts payable and accrued liabilities | 54,518 |
| Other liabilities | 2,677 |
| Deferred tax liabilities | 55,624 |
| Net assets acquired | $ | 781,781 |
| | | Purchase price | $ | 784,281 |
| Reconciliation of fair value transferred: | | Working Capital Adjustments | (2,500 | ) | Total Consideration | $ | 781,781 |
|
NoneGoodwill acquired of the goodwill acquired$160,814 is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies
Net sales, operating income and other benefits that the Company believes will resultnet income from the FCX acquisition of Knox. Reliance Acquisition
On May 1, 2014, the Company acquired 100% of the outstanding stock of Reliance Industrial Products (“Reliance”), headquartered in Nisku, Alberta, Canada, with operations in Western Canada and the Western United States, for a total purchase priceincluded in the amountCompany’s results since January 31, 2018, the date of $188,500. The primary reasons for the acquisition, are to provide the Company enhanced capabilities to serve the upstream oil and gas industry in the United States and Canada. A distributor of fluid conveyance and oilfield supplies, this business is included in the Service Center Based Distribution Segment. The Company funded the acquisition by using available cash in Canada in the amount of $31,900, existing revolving credit facilities of $36,600 and a new $100,000 five year term loan facility, with the remainder of $20,000 to be paid in equal amounts as acquisition holdback payments on the first two anniversaries of the acquisition, plus interest at 2% per annum.
The following table summarizes the consideration transferred, assets acquired, and liabilities assumed in connection with the acquisition of Reliance based on their estimated fair values at the acquisition date:
| | | | | | Reliance Acquisition |
| | 2014 |
| Accounts receivable | $ | 20,600 |
| Inventories | 22,900 |
| Other current assets | 6,000 |
| Property | 12,900 |
| Identifiable intangible assets | 73,200 |
| Goodwill | 79,500 |
| Total assets acquired | 215,100 |
| Accounts payable and accrued liabilities | 15,800 |
| Deferred income taxes | 19,500 |
| Net assets acquired | $ | 179,800 |
| | | Purchase price | $ | 188,500 |
| Reconciliation of fair value transferred: | | Cash acquired | (1,400 | ) | Working capital adjustments | (8,200 | ) | Debt assumed | 900 |
| Total Consideration | $ | 179,800 |
|
None of the goodwill acquired is expected to be deductible for income tax purposes. The goodwill recognized is attributable primarily to expected synergies and other benefits that the Company believes will result from the acquisition of Reliance. | | | | | | January 31, 2018 to June 30, 2018 |
| Net sales | $ | 249,752 |
| Operating income | 16,845 |
| Net income | 8,758 |
|
The Companycompany incurred $1,448$2,849 in third partythird-party costs during fiscal 20142018 pertaining to the acquisition of Reliance. These expensesFCX, which are included in the selling, distribution and administration expense line in the statementstatements of consolidated income for the year ended June 30, 2014.fiscal 2018. Knox and Reliance Pro Forma Results (Unaudited)
The following unaudited pro forma consolidated results of operations have been prepared as if the RelianceFCX acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2013 and the Knox acquisition (including the related acquisition costs) had occurred at the beginning of fiscal 2014: | | | | | | | | Pro forma, year ended June 30: | 2014 |
| 2013 |
| Sales | $ | 2,687,903 |
| $ | 2,600,453 |
| Operating income | $ | 184,164 |
| $ | 187,419 |
| Net income | $ | 121,158 |
| $ | 128,779 |
| Diluted net income per share | $ | 2.86 |
| $ | 3.03 |
|
| | | | | | | | Pro forma, year ended June 30: | 2018 |
| 2017 |
| Net sales | $ | 3,330,430 |
| $ | 2,943,583 |
| Operating income | 234,603 |
| 196,194 |
| Net income | 158,181 |
| 126,270 |
| Diluted net income per share | $ | 4.03 |
| $ | 3.20 |
|
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect additional depreciation and amortization that would have been chargedrecorded assuming the fair value adjustments to property, plant, and equipment, and amortizableidentified intangible assets had been applied as of July 1, 2013.2016. In addition, pro forma adjustments have been made for the interest expense that would have been incurred as a result of the indebtedness used to finance the acquisitions. The pro forma net income amounts also incorporate an adjustment to the recorded income tax expense for the income tax effect of the pro forma adjustments described above. These pro forma results of operations do not include any anticipated synergies or other effects of the planned integration of Reliance and Knox;FCX; accordingly, such pro forma adjustments do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred as of the date indicated or that may result in the future.
Other Fiscal 2015 Acquisitions
Other acquisitions during the year include the acquisition of substantially all of the net assets of Rodamientos y Derivados del Norte S.A. de C.V., a Mexican distributor of bearings and power transmission products and related products, and Great Southern Bearings / Northam Bearings, a Western Australia distributor of bearings and power transmission products on July 1, 2014 as well as Ira Pump and Supply Inc. (Ira Pump) a Texas distributor of oilfield pumps and supplies on November 3, 2014. These companies are included in the Service Center Based Distribution Segment. The total combined consideration for these acquisitions was approximately $54,900. Net tangible assets acquired were $21,200 and intangibles including goodwill were $33,700, based upon estimated fair values at the acquisition date. The estimated fair values related to Ira Pump are preliminary and subject to adjustment. The Company funded these acquisitions from borrowings under our existing debt facilities. Total acquisition holdback payments of $6,900 will be paid at various times through July 2017. The results of operations for the Mexican, Australian and Ira Pump acquisitions are not material for any period presented.future.
Other Fiscal 2014 Acquisitions2018 Acquisition In December 2013,On July 3, 2017, the Company acquired substantially all100% of the net assetsoutstanding stock of Texas Oilpatch Services Corporation,Diseños, Construcciones y Fabricaciones Hispanoamericanas, S.A. ("DICOFASA"), a Texas distributor of bearings, oil seals, power transmission products,accessories and related replacement parts to the oilfield industry. The acquired businesscomponents for hydraulic systems and lubrication, located in Puebla, Mexico. DICOFASA is included in the Service Center Based Distribution segment. The purchase price for thisthe acquisition was $17,000,$5,920, net tangible assets acquired was $3,863were $3,395, and intangibles, including goodwill was $13,137.$2,525 based upon estimated fair values at the acquisition date. The purchase price includes $2,550$906 of acquisition holdback paymentspayments. Due to changes in foreign currency exchange rates, the balance of $842 is included in other current liabilities and other liabilities on the consolidated balance sheets as of June 30, 2018, which have beenwill be paid into an escrow account controlled byon the first three anniversaries of the acquisition with interest at a third party.fixed rate of 1.5% per annum. The Company funded this acquisition using available cash. The acquisition price and the results of operations offor the acquired entity are not material in relation to the Company’sCompany's consolidated financial statements.
Fiscal 2013 Acquisitions2017 Acquisition In December 2012,On March 3, 2017, the Company acquired substantially all of the net assets of Norma Bearings, Inc.Sentinel Fluid Controls ("Sentinel"), a distributor of bearingshydraulic and power transmission products, located in Laval, Quebec. The acquired businesslubrication components, systems and solutions operating from four locations. Sentinel is included in the Service Center Based DistributionFluid Power & Flow Control segment. In December 2012,The purchase price for the acquisition was $3,755, net tangible assets acquired were $3,130, and goodwill was $625 based upon estimated fair values at the acquisition date. The purchase price included $982 of acquisition holdback payments, of which $328 and $175 were paid during fiscal years 2018 and 2017, respectively. The remaining balance of $479 is included in other current liabilities and other liabilities on the consolidated balance sheets, which will be paid plus interest at various times in the future. The Company funded the amount paid for the acquisition at closing 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 2016 Acquisitions On June 14, 2016, the Company acquired 100% of the outstanding stock of Seals Unlimited ("Seals"), a distributor of sealing, fastener, and hose products located in Burlington, Ontario. On January 4, 2016, the Company acquired substantially all of the net assets of Parts Associates, Inc.HUB Industrial Supply ("HUB"), a distributor of maintenance suppliesconsumable industrial products operating from three locations - Lake City, FL, Indianapolis, IN, and solutions, headquartered in Cleveland, Ohio. The acquired business is included in the Service Center Based Distribution segment. In November 2012,Las Vegas, NV. On August 3, 2015, the Company acquired substantially all of the net assets of Hyquip,Atlantic Fasteners Co., Inc., a Wisconsin distributor of a broad line of hydraulic, rubber and plastic industrial hose and tubing, plus related accessories. The acquired business is included in the Fluid Power Businesses segment. In September 2012, the Company acquired 100% of the outstanding stock of Bearings & Oil Seals Specialists Inc. ("Atlantic Fasteners"), a distributor of gaskets, seals, bearingC-Class consumables including industrial fasteners and power transmission products,related industrial supplies located in Hamilton, Ontario. The acquired business isAgawam, MA. Seals, HUB, and Atlantic Fasteners are all included in the Service Center Based Distribution segment. In August 2012,On October 1, 2015, the Company acquired 100%substantially all of the outstanding stocknet assets of SKF Group's company-owned distribution businessS.G. Morris Co. ("SGM"). SGM, headquartered in AustraliaCleveland, OH, is a distributor of hydraulic components throughout Ohio, Western Pennsylvania and New Zealand ("Applied Australia"). As one of the largest bearing suppliers in these markets, Applied Australia also distributes seals, lubrication products,West Virginia and power transmission products. The acquired business is included in the Service Center Based DistributionFluid Power & Flow Control segment. The following table summarizes thetotal combined consideration for these acquisitions was approximately $65,900, net tangible assets acquired were $22,700, and intangibles including goodwill were $43,200 based upon estimated fair values of assets acquired and liabilities assumed for these acquisitions: | | | | | | 2013 |
| Accounts receivable | $ | 7,500 |
| Inventories | 23,700 |
| Other current assets | 200 |
| Property | 1,100 |
| Identifiable Intangibles assets | 19,800 |
| Goodwill | 24,400 |
| Total assets acquired | 76,700 |
| Accounts payable and accrued liabilities | 1,900 |
| Other current liabilities | 6,200 |
| Net assets acquired | $ | 68,600 |
| | | Purchase price | $ | 68,600 |
|
at the acquisition dates. The purchase price included $1,015 that was deferred, sometotal combined consideration includes $3,300 of which has been paid as acquisition holdback payments, of which $1,250 was paid during fiscal year 2017. The remaining balance of $2,050 is included in fiscal 2015other current liabilities on the consolidated balance sheets, which will be paid plus interest in October 2018. The Company funded the amounts paid for the acquisitions at closing using
available cash and 2014. Additional 2013 pro-forma information hasborrowings under the revolving credit facility at variable interest rates. The acquisition prices and the results of operations for the acquired entities are not been included as it is not material.material in relation to the Company's consolidated financial statements. Holdback Liabilities for Acquisitions Acquisition holdback payments of approximately $19,200, $6,500$2,592, $283, $415 and $3,900$75 will be made in fiscal 2016, 20172019, 2020, 2021, and 2018,2024, respectively. The related liabilities for these payments are recorded in the Consolidated Balance Sheetsconsolidated balance sheets in other current liabilities for the amounts due in fiscal year 20162019 and other liabilities for the amounts due in fiscal years 20172020 through 2018.2024. NOTE 3: INVENTORIES Inventories consist of the following: | | | | | | | | | | June 30, | | 2015 |
| | 2014 |
| U.S. inventories at average cost | | $ | 397,524 |
| | $ | 363,692 |
| Foreign inventories at average cost | | 116,674 |
| | 123,468 |
| | | 514,198 |
| | 487,160 |
| Less: Excess of average cost over LIFO cost for U.S. inventories | | 151,779 |
| | 151,413 |
| Inventories on consolidated balance sheets | | $ | 362,419 |
| | $ | 335,747 |
|
| | | | | | | | | | June 30, | | 2018 |
| | 2017 |
| U.S. inventories at average cost | | $ | 443,521 |
| | $ | 373,984 |
| Foreign inventories at average cost | | 117,711 |
| | 108,734 |
| | | 561,232 |
| | 482,718 |
| Less: Excess of average cost over LIFO cost for U.S. inventories | | 139,163 |
| | 137,573 |
| Inventories on consolidated balance sheets | | $ | 422,069 |
| | $ | 345,145 |
|
The overall impact of LIFO layer liquidations increased gross profit by $579, $9,414, and $2,100 in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. In fiscal 2013,2017, reductions in U.S. inventories, primarily in the bearings pool which included the scrapping of approximately $6,000 of product, resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The overall impact of LIFO layer liquidations increased gross profit by $6,300 in fiscal 2013. There were no LIFO layer liquidations in fiscal 2015 or 2014. NOTE 4: GOODWILL AND INTANGIBLES The changes in the carrying amount of goodwill for both the Service Center Based Distribution Segmentsegment and the Fluid Power Businesses& Flow Control segment for the years ended June 30, 20152018 and 20142017 are as follows: | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power Businesses |
| | Total |
| Balance at July 1, 2013 | $ | 105,920 |
| | $ | 929 |
| | $ | 106,849 |
| Goodwill acquired during the year | 84,798 |
| | — |
| | 84,798 |
| Other, primarily currency translation | 1,847 |
| | — |
| | 1,847 |
| Balance at June 30, 2014 | 192,565 |
| | 929 |
| | 193,494 |
| Goodwill acquired during the year | 77,728 |
| | — |
| | 77,728 |
| Other, primarily currency translation | (16,816 | ) | | — |
| | (16,816 | ) | Balance at June 30, 2015 | $ | 253,477 |
| | $ | 929 |
| | $ | 254,406 |
|
| | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Balance at July 1, 2016 | $ | 198,486 |
| | $ | 4,214 |
| | $ | 202,700 |
| Goodwill added during the year | 3,220 |
| | 625 |
| | 3,845 |
| Other, primarily currency translation | 34 |
| | (444 | ) | | (410 | ) | Balance at June 30, 2017 | 201,740 |
| | 4,395 |
| | 206,135 |
| Goodwill added during the year | 2,525 |
| | 439,164 |
| | 441,689 |
| Other, primarily currency translation | (1,181 | ) | | — |
| | (1,181 | ) | Balance at June 30, 2018 | $ | 203,084 |
| | $ | 443,559 |
| | $ | 646,643 |
|
At June 30, 2015, 2014During the first quarter of fiscal 2017, the Company recorded an adjustment to the preliminary estimated fair value of intangible assets related to the HUB acquisition. The fair values of the customer relationships and 2013, accumulatedtrade names intangible assets were decreased by $2,636 and $584, respectively, with a corresponding total increase to goodwill of $3,220. The changes to the preliminary estimated fair values resulted in a decrease to amortization expense of $156 during fiscal 2017, which is recorded in selling, distribution and administrative expense in the statements of consolidated income.
On July 1, 2016, the Company enacted a change in its management reporting structure which changed the composition of the Canada service center reporting unit. This triggering event required the Company to perform an interim goodwill impairment losses subsequenttest for the Canada service center reporting unit. The Company performed step one of the goodwill impairment test for the Canada service center reporting unit as of July 1, 2016 and determined that the reporting unit had excess fair value of approximately $8,000 or 5% when compared to fiscal year 2002 totaled $36,605 and relate entirelyits carrying amount of approximately $163,000. In conjunction with this management change, $2,628 of goodwill was reallocated from the Canada service center reporting unit to the Fluid Power Businesses segment.U.S. service center reporting unit based on the relative fair value as of July 1, 2016. The Company has sevensix (6) reporting units and performed itsfor which an annual goodwill impairment assessment was performed as of January 1, 2015.2018. The Company concluded that all of the reporting units’ fair value exceeded their carrying amounts
by at least 30% as of January 1, 2018. The fair values of the reporting units in accordance with the goodwill impairment test were determined using the Income and Market approaches. The Income approach employs the discounted cash flow method reflecting projected cash flows expected to be generated by market participants and then adjusted for time value of money factors. The Market approach utilizes an analysis of comparable publicly traded companies. The Company had seven (7) reporting units for which an annual goodwill impairment assessment was performed as of January 1, 2016. The Company concluded that five (5) of the reporting units had material excesses ofunits’ fair value compared tosubstantially exceeded their carrying amounts. The Company concluded thatcarrying value for two (2) reporting units (Canada service center and Australia / Australia/New Zealand) had excessZealand service center) exceeded the fair value, indicating there may be goodwill impairment. The fair values of the reporting units in accordance with step one of the goodwill impairment test were determined using the Income and Market approaches. Step two of the goodwill impairment test compares the fair value of approximately $39,000 and $4,000 or 15% and 14%, respectively when compared tothe reporting unit goodwill with the carrying amountsamount of approximately $258,000goodwill. The implied fair value of goodwill is determined in the same manner as in a business combination. The fair value of the reporting unit from step one is allocated to all of the assets and $28,000, respectively. liabilities of the reporting unit, including unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Step two of the goodwill impairment test for the Canada service center reporting unit was completed in the third quarter of fiscal 2016. The analysis resulted in a goodwill impairment of $56,022 for the Canada service center reporting unit. The non-cash impairment charge was the result of the overall decline in the industrial economy in Canada coupled with the substantial and sustained decline in the oil and gas sector during calendar year 2015. This led to reduced spending by customers and reduced revenue expectations. The uncertainty regarding the oil and gas industries and overall industrial economy in Canada also led the reporting unit to reduce expectations. Step two of the goodwill impairment test for the Australia/New Zealand reporting unit was completed in the third quarter of fiscal 2016. The analysis concluded that all of the Australia/New Zealand reporting unit’s goodwill was impaired, and therefore the Company recorded a non-cash impairment expense of $8,772 in the third quarter of fiscal 2016. The impairment charge was primarily the result of the decline in the mining and extraction industries in Australia, reduced spending by customers, and the effects of reduced revenue expectations. The techniques used in the Company's impairment testtests have incorporated a number of assumptions that the Company believes to be reasonable and to reflect known market conditions forecast at the assessment date.measurement dates. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes all efforts to forecast future cash flows as accurately as possible with the information available at the time the forecast is made. To this end, themeasurement date. The Company evaluates the appropriateness of its assumptions as well as itsand overall forecasts by comparing projected results of upcoming years with actual results of preceding years and validating that differences therein are reasonable.years. Key assumptions, all of which are Level 3 inputs,based assumptions relate to pricing trends, inventory costs, discount rate, customer demand, and the long-term growth and foreign exchange rates.revenue growth. A number of benchmarks from independent industry and other economic publications were also used. Changes in future actual results, assumptions, and estimates after the assessmentmeasurement date may lead to an outcome where additional impairment charges would be required in future
periods. Specifically, actual results may vary from the Company’s forecasts and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the conclusions may differ in reflection of prevailing market conditions. At June 30, 2018 and 2017, accumulated goodwill impairment losses subsequent to fiscal year 2002 totaled $64,794 related to the Service Center Based Distribution segment and $36,605 related to the Fluid Power & Flow Control segment. The Company's identifiable intangible assets resulting from business combinations are amortized over their estimated period of benefit and consist of the following:following: | | | | | | | | | | | | | June 30, 2015 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 225,332 |
| | $ | 65,789 |
| | $ | 159,543 |
| Trade names | 42,689 |
| | 13,187 |
| | 29,502 |
| Vendor relationships | 14,465 |
| | 7,258 |
| | 7,207 |
| Non-competition agreements | 4,578 |
| | 2,002 |
| | 2,576 |
| Total Intangibles | $ | 287,064 |
| | $ | 88,236 |
| | $ | 198,828 |
|
| | | | | | | | | | | | | June 30, 2018 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 465,691 |
| | $ | 125,009 |
| | $ | 340,682 |
| Trade names | 112,939 |
| | 22,454 |
| | 90,485 |
| Vendor relationships | 11,425 |
| | 7,382 |
| | 4,043 |
| Non-competition agreements | 2,761 |
| | 2,024 |
| | 737 |
| Total Intangibles | $ | 592,816 |
| | $ | 156,869 |
| | $ | 435,947 |
|
| | | | | | | | | | | | | June 30, 2014 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 170,395 |
| | $ | 48,285 |
| | $ | 122,110 |
| Trade names | 36,912 |
| | 10,394 |
| | 26,518 |
| Vendor relationships | 15,446 |
| | 6,628 |
| | 8,818 |
| Non-competition agreements | 3,322 |
| | 1,260 |
| | 2,062 |
| Total Intangibles | $ | 226,075 |
| | $ | 66,567 |
| | $ | 159,508 |
|
| | | | | | | | | | | | | June 30, 2017 | Amount |
| | Accumulated Amortization |
| | Net Book Value |
| Finite-Lived Intangibles: | | | | | | Customer relationships | $ | 235,009 |
| | $ | 102,414 |
| | $ | 132,595 |
| Trade names | 43,873 |
| | 19,295 |
| | 24,578 |
| Vendor relationships | 14,152 |
| | 9,141 |
| | 5,011 |
| Non-competition agreements | 3,788 |
| | 2,410 |
| | 1,378 |
| Total Intangibles | $ | 296,822 |
| | $ | 133,260 |
| | $ | 163,562 |
|
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off. During 2015,2018, the Company acquired identifiable intangible assets with ana preliminary acquisition cost allocation and weighted-average life as follows: | | | | | | | | Acquisition Cost Allocation |
| | Weighted-Average Life | Customer relationships | $ | 68,078 |
| | 19.5 years | Trade names | 7,627 |
| | 14.7 years | Non-competition agreements | 1,664 |
| | 5.0 years | Total Intangibles Acquired | $ | 77,369 |
| | 18.7 years |
| | | | | | | | Acquisition Cost Allocation |
| | Weighted-Average Life | Customer relationships | $ | 234,370 |
| | 20.0 years | Trade names | 71,050 |
| | 15.0 years | Total Intangibles Acquired | $ | 305,420 |
| | 18.8 years |
AmortizationAmortization of identifiable intangibles totaled $25,797, $14,023$32,065, $24,371 and $13,233$25,580 in fiscal 2015, 20142018, 2017 and 2013,2016, respectively, and is included in selling, distribution and administrative expenses in the statements of consolidated income. Future amortization expense based on the Company’s identifiable intangible assets as of June 30, 20152018 is estimated to be $24,600 for 2016, $23,000 for 2017, $20,900 for 2018, $19,200$44,000 for 2019, $42,500 for 2020, $40,200 for 2021, $37,800 for 2022 and $17,500$35,300 for 2020.2023.
A significant portion of our intangible assets relate to recent acquisitions that primarily operate in the oil and gas sectors. Considering the recent downturn in the energy market, a prolonged period of low oil and natural gas prices may result in asset impairments, including potential impairment of the carrying value of our goodwill and finite-lived intangible assets.
NOTE 5: DEBT Revolving Credit Facility & Term Loan TheIn January 2018, in conjunction with the acquisition of FCX, the Company hasrefinanced its existing credit facility and entered into a revolvingnew five-year credit facility with a group of banks expiring in May 2017.January 2023. This agreement provides for a $780,000 unsecured borrowings of up to $150,000.term loan and a $250,000 unsecured revolving credit facility. Fees on this facility range from 0.09%0.10% to 0.175%0.20% per year based upon the Company's leverage ratio at each quarter end. Borrowings under this agreement carry variable interest rates tied to either LIBOR prime, or the bank’s cost of fundsprime at the Company’sCompany's discretion. This agreement also enables the Company to refinance this debt on a long-term basis. At June 30, 2015 and 2014,2018, the Company had $52,000 and $69,000, respectively,$775,125 outstanding under this credit facility.the term loan and $19,500 outstanding under the revolver. Unused lines under this facility, net of outstanding letters of credit of $3,764$3,625 to secure certain insurance obligations, totaled $94,236$226,875 at June 30, 20152018, and arewere available to fund future acquisitions or other capital and operating requirements. The weighted-average interest rate on the loansterm loan as of June 30, 2018 was 4.13%. The weighted average interest rate on the amount outstanding onunder the revolving credit facility as of June 30, 20152018 was 1.15%3.93%.
The new credit facility replaced the Company's previous credit facility agreement. At June 30, 2017, the Company had $120,313 outstanding under the term loan in the previous credit facility agreement, which carried a variable interest rate tied to LIBOR and was 2.25% as of June 30, 2017. No amount was outstanding under the revolver as of June 30, 2017. Unused lines under this facility, net of outstanding letters of credit of $2,441 to secure certain insurance obligations, totaled $247,559 at June 30, 2017. Additionally, the Company had letters of credit outstanding with a separate bank, not associated with theeither revolving credit agreement, in the amount of $1,841,$2,698 as of June 30, 2018 and June 30, 2017, respectively, in order to secure certain insurance obligations. Other Long-Term Borrowings The Company entered into a $100,000 unsecured five-year term loan with a group of banks in April2014 with a final maturity date in April2019. Borrowings under this agreement carry a variable interest rate tied to LIBOR, which at June 30, 2015 was a rate of 1.19%. The term loan has an outstanding amount of $96,875 and $99,375 at June 30, 2015 and 2014, respectively.
In April 2014 the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.5% fixed interest rate note is held by the State of Ohio Development Services Agency with a remaining term of nine years, maturing in May 2024. At June 30, 2015 and 2014, $2,120 and $2,337 was outstanding, respectively.
At June 30, 2015,2018 and June 30, 2017, the Company had borrowings outstanding under its unsecured shelf facility agreement with Prudential Investment Management of $170,000. Fees on this facility range from 0.25% to 1.25% per year based on the Company's leverage ratio at each quarter end. The "Series C" notes have a principal amount of $120,000 and carry a fixed interest rate of 3.19%, which isand are due in equal principal payments in July 2020, 2021, and 2022. The "Series D" notes have a principleprincipal amount of $50,000, and carry a fixed interest rate of 3.21% which is, and are due in equal principal payments in October 2019 and 2023. As of June 30, 2015,2018, $50,000 in additional financing was available under this facility.
In 2014, the Company assumed $2,359 of debt as a part of the headquarters facility acquisition. The 1.50% fixed interest rate note is held by the State of Ohio Development Services Agency, maturing in May 2024. At June 30, 2018 and 2017, $1,438 and $1,669 was outstanding, respectively. Unamortized debt issue costs of $551 and $105 are included as a reduction of current portion of long-term debt on the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively. Unamortized debt issue costs of $1,807 and $294 are included as a reduction of long-term debt on the consolidated balance sheets as of June 30, 2018 and June 30, 2017, respectively. The table below summarizes the aggregate maturities of amounts outstanding under long-term borrowing arrangements for each of the next five years: | | | | | Fiscal Year | Aggregate Maturity |
| 2016 | $ | 3,349 |
| 2017 | $ | 57,227 |
| 2018 | $ | 5,856 |
| 2019 | $ | 83,359 |
| 2020 | $ | 25,238 |
| Thereafter | $ | 145,966 |
|
| | | | | Fiscal Year | Aggregate Maturity |
| 2019 | $ | 19,734 |
| 2020 | 49,613 |
| 2021 | 79,241 |
| 2022 | 84,120 |
| 2023 | 708,124 |
| Thereafter | 25,231 |
|
Covenants The revolvingnew credit facility the term loan agreement, and the unsecured shelf facility contain restrictive covenants regarding liquidity, net worth, financial ratios, and other covenants. At June 30, 2015,2018, the most restrictive of these covenants required that the Company have net indebtedness less than three4.25 times consolidated income before interest, taxes, depreciation and amortization. At June 30, 2018, the Company's indebtedness was less than 3.0 times consolidated income before interest, taxes, depreciation and amortization. The Company was in compliance with all financial covenants at June 30, 2018.
NOTE 6: FAIR VALUE MEASUREMENTS Marketable securities measured at fair value at June 30, 20152018 and June 30, 20142017 totaled $9,330$10,318 and $11,011,$10,481, 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 consolidated balance sheets and their fair values were valued using quoted market prices (Level 1 in the fair value hierarchy). As of June 30, 2015,2018, the carrying value of the Company's fixed interest rate debt outstanding under its unsecured shelf facility agreement with Prudential Investment Management approximates fair value (Level 2 in the fair value hierarchy). The revolving credit facility and the term loan contain variable interest rates and their carrying values approximate fair value (Level 2 in the fair value hierarchy).
NOTE 7: INCOME TAXES Income Before Income Taxes The components of income before income taxes are as follows: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| U.S. | $ | 152,618 |
| | $ | 147,980 |
| | $ | 153,546 |
| Foreign | 23,253 |
| | 18,282 |
| | 24,119 |
| Income before income taxes | $ | 175,871 |
| | $ | 166,262 |
| | $ | 177,665 |
|
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| U.S. | $ | 186,874 |
| | $ | 154,472 |
| | $ | 139,960 |
| Foreign | 17,844 |
| | 12,494 |
| | (60,982 | ) | Income before income taxes | $ | 204,718 |
| | $ | 166,966 |
| | $ | 78,978 |
|
Provision The provision (benefit) for income taxes consists of: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| Current: | | | | | | Federal | $ | 52,861 |
| | $ | 50,455 |
| | $ | 38,859 |
| State and local | 6,884 |
| | 6,576 |
| | 5,736 |
| Foreign | 5,603 |
| | 4,619 |
| | 4,742 |
| Total current | 65,348 |
| | 61,650 |
| | 49,337 |
| Deferred: | | | | | | Federal | (3,799 | ) | | (5,328 | ) | | 10,277 |
| State and local | (153 | ) | | (267 | ) | | 346 |
| Foreign | (1,009 | ) | | (2,614 | ) | | (444 | ) | Total deferred | (4,961 | ) | | (8,209 | ) | | 10,179 |
| Total | $ | 60,387 |
| | $ | 53,441 |
| | $ | 59,516 |
|
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| Current: | | | | | | Federal | $ | 48,131 |
| | $ | 26,456 |
| | $ | 45,226 |
| State and local | 8,038 |
| | 4,692 |
| | 6,349 |
| Foreign | 5,309 |
| | 4,760 |
| | 4,407 |
| Total current | 61,478 |
| | 35,908 |
| | 55,982 |
| Deferred: | | | | | | Federal | 5,955 |
| | 852 |
| | 397 |
| State and local | (586 | ) | | 535 |
| | (30 | ) | Foreign | (3,754 | ) | | (4,239 | ) | | (6,948 | ) | Total deferred | 1,615 |
| | (2,852 | ) | | (6,581 | ) | Total | $ | 63,093 |
| | $ | 33,056 |
| | $ | 49,401 |
|
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on certain un-remitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, and creates new taxes on certain foreign-sourced earnings. During fiscal 2018, the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate from 35% to 21%. The rate change was administratively effective as of the beginning of our fiscal year, resulting in the Company using a blended statutory rate for the annual period of 28.06%. The corporate income tax rate change had a favorable impact to the Company of $12,113 for fiscal 2018. The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act for which the accounting under ASC 740 is incomplete. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act. Accordingly, as of June 30, 2018 we have not completed our accounting for the tax effects of the Act. For fiscal 2018, we recognized a provisional tax liability of $3,877 related to the one-time transition tax on certain un-remitted earnings of foreign subsidiaries, which is payable over eight years. We also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. The Company recorded a provisional amount of $2,414 of additional deferred income tax expense related to the re-measurement of our deferred tax balance. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Overall, considering the decrease in the corporate income tax rate and the expense related to the transition tax and deferred tax re-measurement, the Act resulted in a net tax benefit of $5,822 for fiscal 2018, which is included as a component of income tax expense in the statements of consolidated income. During the fourth quarter of fiscal 2017, the Company recorded a net tax benefit of $22,246 pertaining to a worthless stock deduction. The tax benefit of this deduction was based on the write-off of the Company's investment in one of its Canadian subsidiaries for U.S. tax purposes reduced by $1,019 of tax provided for a valuation allowance applicable to the related state deferred income tax asset.
The exercise of non-qualified stock appreciation rights and options during fiscal 2015, 20142018, 2017 and 20132016 resulted in $352, $1,462$419, $1,921 and $1,675,$212, respectively, of income tax benefits to the Company derived from the difference between the market and option price of the shares at the date of exercise and the option price.fair value of the options on the grant date. Vesting of stock awards and other stock compensation in fiscal 2015, 20142018, 2017 and 20132016 resulted in $690, $1,211$430, $482 and $890,$(4), respectively, of incremental income tax benefits (expense) over the amounts previously reported for financial reporting purposes. TheseDue to the adoption of ASU 2016-09 in fiscal 2017, the tax benefits for fiscal 2018 and 2017 were recorded in income tax expense in the statements of consolidated income, while the fiscal 2016 tax expense was recorded in additional paid-in capital.
Effective Tax Rates The following reconciles the U.S. federal statutory income tax rate to the Company’s effective income tax rate: | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| Statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | Effects of: | | | | | | State and local taxes | 2.5 | % | | 2.4 | % | | 2.3 | % | U.S. tax on foreign income, net | — | % | | (1.6 | )% | | — | % | Foreign income taxes | (2.5 | )% | | (2.6 | )% | | (2.3 | )% | Deductible dividend | (0.5 | )% | | (0.5 | )% | | (0.5 | )% | Valuation Allowance | 0.5 | % | | — | % | | — | % | Other, net | (0.7 | )% | | (0.6 | )% | | (1.0 | )% | Effective income tax rate | 34.3 | % | | 32.1 | % | | 33.5 | % |
| | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| Statutory income tax rate | 28.1 | % | | 35.0 | % | | 35.0 | % | Effects of: | | | | | | State and local taxes | 3.1 |
| | 2.8 |
| | 5.2 |
| U.S. federal tax reform | 3.1 |
| | — |
| | — |
| Worthless stock deduction | — |
| | (13.9 | ) | | — |
| Stock compensation | (0.4 | ) | | (1.4 | ) | | — |
| Goodwill impairment | — |
| | — |
| | 27.1 |
| Impact of foreign operations | (1.3 | ) | | (2.3 | ) | | (3.0 | ) | Deductible dividend | (0.3 | ) | | (0.4 | ) | | (0.9 | ) | Valuation allowance | (0.9 | ) | | 0.3 |
| | 0.5 |
| Other, net | (0.6 | ) | | (0.3 | ) | | (1.3 | ) | Effective income tax rate | 30.8 | % | | 19.8 | % | | 62.6 | % |
Consolidated Balance Sheets Significant components of the Company’s deferred tax assets and liabilities are as follows: | | | | | | | | | June 30, | 2015 |
| | 2014 |
| Deferred tax assets: | | | | Compensation liabilities not currently deductible | $ | 28,902 |
| | $ | 30,662 |
| Expenses and reserves not currently deductible | 9,115 |
| | 8,364 |
| Goodwill and intangibles | 7,363 |
| | 8,294 |
| Foreign tax credit | 1,155 |
| | — |
| Net operating loss carryforwards (expiring in years 2017-2034) | 860 |
| | 386 |
| Other | 289 |
| | 281 |
| Total deferred tax assets | 47,684 |
| | 47,987 |
| Less: Valuation allowance | (917 | ) | | — |
| Deferred tax assets, net of valuation allowance | 46,767 |
| | 47,987 |
| Deferred tax liabilities: | | | | Inventories | (5,499 | ) | | (6,490 | ) | Goodwill and intangibles | (38,707 | ) | | (23,254 | ) | Depreciation and differences in property bases | (9,328 | ) | | (10,219 | ) | Total deferred tax liabilities | (53,534 | ) | | (39,963 | ) | Net deferred tax (liabilities) assets | $ | (6,767 | ) | | $ | 8,024 |
| Net deferred tax (liabilities) assets are classified as follows: | | | | Other current assets | $ | 13,293 |
| | $ | 11,371 |
| Deferred tax assets (long-term) | 97 |
| | 21,166 |
| Other liabilities | (20,157 | ) | | (24,513 | ) | Net deferred tax (liabilities) assets | $ | (6,767 | ) | | $ | 8,024 |
|
| | | | | | | | | June 30, | 2018 |
| | 2017 |
| Deferred tax assets: | | | | Compensation liabilities not currently deductible | $ | 19,334 |
| | $ | 26,873 |
| Other expenses and reserves not currently deductible | 13,169 |
| | 11,601 |
| Goodwill and intangibles | 3,197 |
| | 5,661 |
| Foreign tax credit (expiring in years 2025-2026) | 413 |
| | 709 |
| Net operating loss carryforwards (expiring in years 2023-2038) | 11,315 |
| | 5,729 |
| Other | 199 |
| | 119 |
| Total deferred tax assets | 47,627 |
| | 50,692 |
| Less: Valuation allowance | (38 | ) | | (1,831 | ) | Deferred tax assets, net of valuation allowance | 47,589 |
| | 48,861 |
| Deferred tax liabilities: | | | | Inventories | (8,196 | ) | | (7,447 | ) | Goodwill and intangibles | (86,176 | ) | | (30,482 | ) | Depreciation and differences in property bases | (9,294 | ) | | (10,122 | ) | Total deferred tax liabilities | (103,666 | ) | | (48,051 | ) | Net deferred tax (liabilities) assets | $ | (56,077 | ) | | $ | 810 |
| Net deferred tax (liabilities) assets are classified as follows: | | | | Other assets | $ | 2,103 |
| | $ | 8,985 |
| Other liabilities | (58,180 | ) | | (8,175 | ) | Net deferred tax (liabilities) assets | $ | (56,077 | ) | | $ | 810 |
|
Valuation allowances are provided against deferred tax assets where it is considered more-likely-than-not that the Company will not realize the benefit of such assets. The remaining net deferred tax asset is the amount
management believes is more-likely-than-not of being realized. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory rates and future income levels. As a result of the Act, the Company’s net unremitted foreign earnings of $77,374 have been subject to U.S. federal income taxes are provided on the portiontaxation. As of non-U.S. subsidiaries' income that is not considered to be permanently reinvested outside the U.S. and may be remitted to the U.S. At June 30, 2015,2018, all such undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested and for whichreinvested. Therefore, no U.S. tax hastaxes have been provided totaled approximately $139,042. Determinationthat would result from the remittance of thesuch earnings. The net amount of the unrecognized tax liability with respect to the distribution of these earnings is not practicable; however,estimated to be approximately $1,986. In addition, we expect foreign tax credits would be available to either offset or partially reduce U.S. income taxesthe tax cost in the event of a distribution. In 2014, the Company recognized a tax benefit of $2,804 related to U.S. tax on foreign income which reduced the Company's effective tax rate by approximately 1.6%. This tax benefit was due to the reversal of taxes previously
accrued on a portion of the undistributed earnings of non-U.S. subsidiaries applicable to a change in the permanent reinvestment assertion. In 2015, $17,793 of cash was distributed by one of the Company's non-U.S. subsidiaries as a non-taxable return of capital. All undistributed earnings of non-U.S. subsidiaries are considered to be permanently reinvested outside of the U.S. at June 30, 2015.
Unrecognized Income Tax Benefits The Company and its subsidiaries file income tax returns in U.S. federal, various state, local and foreign jurisdictions. The following table sets forth the changes in the amount of unrecognized tax benefits for the years ended June 30, 2015, 20142018, 2017 and 2013:2016: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| Unrecognized Income Tax Benefits at beginning of the year | $ | 2,364 |
| | $ | 2,655 |
| | $ | 1,539 |
| Current year tax positions | 472 |
| | 730 |
| | 957 |
| Prior year tax positions | — |
| | — |
| | 790 |
| Expirations of statutes of limitations | (160 | ) | | (1,007 | ) | | (565 | ) | Settlements | (72 | ) | | (14 | ) | | (66 | ) | Unrecognized Income Tax Benefits at end of year | $ | 2,604 |
| | $ | 2,364 |
| | $ | 2,655 |
|
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| Unrecognized Income Tax Benefits at beginning of the year | $ | 3,533 |
| | $ | 2,915 |
| | $ | 2,604 |
| Current year tax positions | 143 |
| | 574 |
| | 539 |
| Prior year tax positions | 636 |
| | 259 |
| | — |
| Expirations of statutes of limitations | (324 | ) | | (189 | ) | | (132 | ) | Settlements | — |
| | (26 | ) | | (96 | ) | Unrecognized Income Tax Benefits at end of year | $ | 3,988 |
| | $ | 3,533 |
| | $ | 2,915 |
|
Included in the balance of unrecognized income tax benefits at June 30, 2015, 20142018, 2017 and 20132016 are $2,377, $2,104$3,725, $3,323 and $2,342,$2,691, respectively, of income tax benefits that, if recognized, would affect the effective income tax rate. During 2015, 20142018, 2017 and 2013,2016, the Company recognized $49$(110) and $16$163 and $3$127 of (benefit) expense, respectively, for interest and penalties related to unrecognized income tax benefits in its statements of consolidated income. The Company had a liability for penalties and interest of $497$677 and $449$787 as of June 30, 20152018 and 2014,2017, respectively. The Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months. The Company is subject to U.S. federal income tax examinations for the tax years 20122015 through 20152018 and to state and local income tax examinations for the tax years 20092012 through 2015.2018. In addition, the Company is subject to foreign income tax examinations for the tax years 20082011 through 2015.2018. The Company’s unrecognized income tax benefits are included in other liabilities in the consolidated balance sheets since payment of cash is not expected within one year.
NOTE 8: SHAREHOLDERS’ EQUITY Treasury Shares At June 30, 2015,2018, 596 shares of the Company’s common stock held as treasury shares were restricted as collateral under escrow arrangements relating to change in control and director and officer indemnification agreements.
Accumulated Other Comprehensive Income (Loss) Changes in the accumulated other comprehensive income (loss) for the years ended June 30, 20152018, 2017, and 2014, is2016, are comprised of the following: amounts, shown net of taxes: | | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized gain (loss) on securities available for sale |
| | Postemployment benefits |
| | Total Accumulated other comprehensive income (loss) |
| Balance at July 1, 2012 | $ | 1,718 |
| | $ | (58 | ) | | $ | (6,229 | ) | | $ | (4,569 | ) | Other comprehensive income (loss) | (1,358 | ) | | 6 |
| | 1,967 |
| | 615 |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 533 |
| | 533 |
| Net current-period other comprehensive income (loss), net of taxes | (1,358 | ) | | 6 |
| | 2,500 |
| | 1,148 |
| Balance at June 30, 2013 | $ | 360 |
| | $ | (52 | ) | | $ | (3,729 | ) | | $ | (3,421 | ) | Other comprehensive income (loss) | 629 |
| | 73 |
| | 871 |
| | 1,573 |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 233 |
| | 233 |
| Net current-period other comprehensive income (loss), net of taxes | 629 |
| | 73 |
| | 1,104 |
| | 1,806 |
| Balance at June 30, 2014 | $ | 989 |
| | $ | 21 |
| | $ | (2,625 | ) | | $ | (1,615 | ) | Other comprehensive income (loss) | (58,233 | ) | | (25 | ) | | (472 | ) | | (58,730 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 174 |
| | 174 |
| Net current-period other comprehensive income (loss), net of taxes | (58,233 | ) | | (25 | ) | | (298 | ) | | (58,556 | ) | Balance at June 30, 2015 | $ | (57,244 | ) | | $ | (4 | ) | | $ | (2,923 | ) | | $ | (60,171 | ) |
| | | | | | | | | | | | | | | | | | Foreign currency translation adjustment |
| | Unrealized (loss) gain on securities available for sale |
| | Post-employment benefits |
| | Total accumulated other comprehensive (loss) income |
| Balance at July 1, 2015 | $ | (57,244 | ) | | $ | (4 | ) | | $ | (2,923 | ) | | $ | (60,171 | ) | Other comprehensive loss | (24,441 | ) | | (34 | ) | | (1,215 | ) | | (25,690 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 315 |
| | 315 |
| Net current-period other comprehensive loss | (24,441 | ) | | (34 | ) | | (900 | ) | | (25,375 | ) | Balance at June 30, 2016 | (81,685 | ) | | (38 | ) | | (3,823 | ) | | (85,546 | ) | Other comprehensive income | 2,238 |
| | 59 |
| | 1,239 |
| | 3,536 |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | 308 |
| | 308 |
| Net current-period other comprehensive income | 2,238 |
| | 59 |
| | 1,547 |
| | 3,844 |
| Balance at June 30, 2017 | (79,447 | ) | | 21 |
| | (2,276 | ) | | (81,702 | ) | Other comprehensive (loss) income | (8,549 | ) | | 20 |
| | 524 |
| | (8,005 | ) | Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | — |
| | (45 | ) | | (45 | ) | Amounts reclassified for certain income tax effects to retained earnings | 22 |
| | 9 |
| | (502 | ) | | (471 | ) | Net current-period other comprehensive (loss) income | (8,527 | ) | | 29 |
| | (23 | ) | | (8,521 | ) | Balance at June 30, 2018 | $ | (87,974 | ) | | $ | 50 |
| | $ | (2,299 | ) | | $ | (90,223 | ) |
Other Comprehensive Income (Loss) Details of other comprehensive income (loss) are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2015 | | 2014 | | 2013 | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| Foreign currency translation adjustments | $ | (58,233 | ) | | $ | — |
| | $ | (58,233 | ) | | $ | 629 |
| | $ | — |
| | $ | 629 |
| | $ | (1,358 | ) | | $ | — |
| | $ | (1,358 | ) | Postemployment benefits: | | | | | | | | | | | | | | | | | | Actuarial gain (loss) on remeasurement | (776 | ) | | (304 | ) | | (472 | ) | | 1,402 |
| | 531 |
| | 871 |
| | 3,153 |
| | 1,186 |
| | 1,967 |
| Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | 286 |
| | 112 |
| | 174 |
| | 382 |
| | 149 |
| | 233 |
| | 872 |
| | 339 |
| | 533 |
| Unrealized gain (loss) on investment securities available for sale | (38 | ) | | (13 | ) | | (25 | ) | | 112 |
| | 39 |
| | 73 |
| | 10 |
| | 4 |
| | 6 |
| Other comprehensive income (loss) | $ | (58,761 | ) | | $ | (205 | ) | | $ | (58,556 | ) | | $ | 2,525 |
| | $ | 719 |
| | $ | 1,806 |
| | $ | 2,677 |
| | $ | 1,529 |
| | $ | 1,148 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended June 30, | 2018 | | 2017 | | 2016 | | Pre-Tax Amount |
| | Tax Expense (Benefit) |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax Expense |
| | Net Amount |
| | Pre-Tax Amount |
| | Tax (Benefit) Expense |
| | Net Amount |
| Foreign currency translation adjustments | $ | (8,875 | ) | | $ | (326 | ) | | $ | (8,549 | ) | | $ | 2,238 |
| | $ | — |
| | $ | 2,238 |
| | $ | (24,441 | ) | | $ | — |
| | $ | (24,441 | ) | Post-employment benefits: | | | | | | | | | | | | | | | | | | Actuarial gain (loss) on re-measurement | 709 |
| | 185 |
| | 524 |
| | 2,038 |
| | 799 |
| | 1,239 |
| | (1,998 | ) | | (783 | ) | | (1,215 | ) | Reclassification of actuarial losses and prior service cost into SD&A expense and included in net periodic pension costs | (73 | ) | | (28 | ) | | (45 | ) | | 506 |
| | 198 |
| | 308 |
| | 518 |
| | 203 |
| | 315 |
| Unrealized gain (loss) on investment securities available for sale | 37 |
| | 17 |
| | 20 |
| | 91 |
| | 32 |
| | 59 |
| | (52 | ) | | (18 | ) | | (34 | ) | Reclassification of certain income tax effects to retained earnings | — |
| | 471 |
| | (471 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Other comprehensive (loss) income | $ | (8,202 | ) | | $ | 319 |
| | $ | (8,521 | ) | | $ | 4,873 |
| | $ | 1,029 |
| | $ | 3,844 |
| | $ | (25,973 | ) | | $ | (598 | ) | | $ | (25,375 | ) |
Net Income Per Share Basic net income per share is based on the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effect of potential common shares outstanding. Under the two-class method of computing net income per share, non-vested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. The Company’s participating securities include RSUsRestricted Stock Units ("RSUs") and restricted stock awards. The Company calculated basic and diluted net income per share under both the treasury
stock method and the two-class method. For the years presented there were no material differences in the net income per share amounts calculated using the two methods. Accordingly, the treasury stock method is disclosed below. The following table presents amounts used in computing net income per share and the effect on the weighted-average number of shares of dilutive potential common shares: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| Net Income | $ | 115,484 |
| | $ | 112,821 |
| | $ | 118,149 |
| Average Shares Outstanding: | | | | | | Weighted-average common shares outstanding for basic computation | 40,892 |
| | 41,942 |
| | 42,060 |
| Dilutive effect of potential common shares | 295 |
| | 389 |
| | 482 |
| Weighted-average common shares outstanding for dilutive computation | 41,187 |
| | 42,331 |
| | 42,542 |
| Net Income Per Share — Basic | $ | 2.82 |
| | $ | 2.69 |
| | $ | 2.81 |
| Net Income Per Share — Diluted | $ | 2.80 |
| | $ | 2.67 |
| | $ | 2.78 |
|
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| Net Income | $ | 141,625 |
| | $ | 133,910 |
| | $ | 29,577 |
| Average Shares Outstanding: | | | | | | Weighted-average common shares outstanding for basic computation | 38,752 |
| | 39,013 |
| | 39,254 |
| Dilutive effect of potential common shares | 529 |
| | 391 |
| | 212 |
| Weighted-average common shares outstanding for dilutive computation | 39,281 |
| | 39,404 |
| | 39,466 |
| Net Income Per Share — Basic | $ | 3.65 |
| | $ | 3.43 |
| | $ | 0.75 |
| Net Income Per Share — Diluted | $ | 3.61 |
| | $ | 3.40 |
| | $ | 0.75 |
|
Stock appreciation rights and options relating to 435, 28966, 141 and 212775 shares of common stock were outstanding at June 30, 2015, 20142018, 2017 and 2013,2016, respectively, but were not included in the computation of diluted earnings per share for the fiscal years then ended as they were anti-dilutive.
NOTE 9: SHARE-BASED COMPENSATION Share-Based Incentive Plans Following approval by the Company's shareholders in October 2015, the 2015 Long-Term Performance Plan (the "2015 Plan") replaced the 2011 Long-Term Performance Plan. The 20112015 Plan, which expires in 2016,2020, provides for granting of SARs, stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee or, in the case of director awards, the Corporate Governance Committee of the Board of Directors (together referred to as the Committee) may determine to officers, other key employees and members of the Board of Directors. Grants are generally made at regularly scheduled committee meetings. Compensation costs charged to expense under award programs paid (or to be paid) with shares (including SARs, stock options, performance shares, restricted stock, and RSUs) are summarized in the table below: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| SARs and options | $ | 1,610 |
| | $ | 1,808 |
| | $ | 2,317 |
| Performance shares | 836 |
| | 309 |
| | 1,074 |
| Restricted stock and RSUs | 2,015 |
| | 2,394 |
| | 2,370 |
| Total compensation costs under award programs | $ | 4,461 |
| | $ | 4,511 |
| | $ | 5,761 |
|
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| SARs and options | $ | 1,961 |
| | $ | 1,891 |
| | $ | 1,543 |
| Performance shares | 2,006 |
| | 1,331 |
| | 446 |
| Restricted stock and RSUs | 2,660 |
| | 2,298 |
| | 2,078 |
| Total compensation costs under award programs | $ | 6,627 |
| | $ | 5,520 |
| | $ | 4,067 |
|
Such amounts are included in selling, distribution and administrative expense in the accompanying statements of consolidated income. The total income tax benefit recognized in the statements of consolidated income for share-based compensation plans was $1,749, $1,768$1,923, $4,848 and $2,241$1,595 for fiscal years 2015, 20142018, 2017 and 2013,2016, respectively. It has been the practice of the Company to issue shares from treasury to satisfy requirements of awards paid with shares. The aggregate unrecognized compensation cost for share-based award programs paid (or with the potential to be paid)paid at June 30, 20152018 are summarized in the table below: | | | | | | | June 30, (Shares in thousands) | 2015 |
| | Expected Period of Recognition (Years) | SARs and options | $ | 1,792 |
| | 2.4 | Performance shares | 3,701 |
| | 1.7 | Restricted stock and RSUs | 1,898 |
| | 2.3 | Total unrecognized compensation costs under award programs | $ | 7,391 |
| | 2.0 |
| | | | | | | June 30, | 2018 |
| | Average Expected Period of Expected Recognition (Years) | SARs and options | $ | 3,729 |
| | 2.5 | Performance shares | 3,282 |
| | 1.7 | Restricted stock and RSUs | 2,173 |
| | 1.9 | Total unrecognized compensation costs under award programs | $ | 9,184 |
| | 2.1 |
Cost of these programs will be recognized as expense over the weighted-average remaining vesting period of 2.02.1 years. The aggregate number of shares of common stock which may be awarded under the 20112015 Plan is 2,000;2,500; shares available for future grants at June 30, 20152018 were 1,107.1,655.
Stock Appreciation Rights and Stock Options The weighted-average assumptions used for SARs and stock option grants issued in fiscal 2015, 20142018, 2017 and and 20132016 are: | | | | | | | | | | | 2015 |
| | 2014 |
| | 2013 |
| Expected life, in years | 4.7 |
| | 4.6 |
| | 5.5 |
| Risk free interest rate | 1.4 | % | | 1.3 | % | | 0.9 | % | Dividend yield | 2.5 | % | | 2.5 | % | | 2.5 | % | Volatility | 29.0 | % | | 31.8 | % | | 43.3 | % | Per share fair value of SARs and stock options granted during the year | $9.53 | | $11.02 | | $13.11 |
| | | | | | | | | | | 2018 |
| | 2017 |
| | 2016 |
| Expected life, in years | 6.0 |
| | 4.8 |
| | 4.4 |
| Risk free interest rate | 2.1 | % | | 1.2 | % | | 1.3 | % | Dividend yield | 2.5 | % | | 2.5 | % | | 2.5 | % | Volatility | 24.3 | % | | 24.1 | % | | 26.0 | % | Per share fair value of SARs and stock options granted during the year | $11.25 | | $7.97 | | $6.79 |
The expected life is based upon historical exercise experience of the officers, other key employees and members of the Board of Directors. The risk free interest rate is based upon U.S. Treasury zero-coupon bonds with remaining terms equal to the expected life of the SARs and stock options. The assumed dividend yield has been estimated based upon the Company’s historical results and expectations for changes in dividends and stock prices. The volatility assumption is calculated based upon historical daily price observations of the Company’s common stock for a period equal to the expected life.
SARs are redeemable solely in Company common stock. The exercise price of stock option awards may be settled by the holder with cash or by tendering Company common stock. A summary of SARs and stock options activity is presented below: | | | | | | | | | Shares |
| | Weighted-Average Exercise Price |
| Year Ended June 30, 2015 | | (Shares in thousands) | | Outstanding, beginning of year | 1,039 |
| | $ | 33.40 |
| Granted | 208 |
| | 47.69 |
| Exercised | (75 | ) | | 25.23 |
| Forfeited | (56 | ) | | 48.47 |
| Outstanding, end of year | 1,116 |
| | $ | 35.86 |
| Exercisable at end of year | 781 |
| | $ | 31.32 |
|
| | | | | | | | | Shares |
| | Weighted-Average Exercise Price |
| Year Ended June 30, 2018 | | (Shares in thousands) | | Outstanding, beginning of year | 1,218 |
| | $ | 42.26 |
| Granted | 286 |
| | 58.40 |
| Exercised | (58 | ) | | 37.55 |
| Forfeited | (45 | ) | | 55.64 |
| Outstanding, end of year | 1,401 |
| | $ | 45.32 |
| Exercisable at end of year | 789 |
| | $ | 41.08 |
| Expected to vest at end of year | 1,379 |
| | $ | 45.22 |
|
The weighted-average remaining contractual terms for SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were 5.66.6, 5.3, and 4.56.6 years, respectively. The aggregate intrinsic values of SARs and stock options outstanding, exercisable, and exercisableexpected to vest at June 30, 20152018 were $7,559$34,869 $22,927, and $7,311,$34,440, respectively. The aggregate intrinsic value of the SARs and stock options exercised during fiscal 2015, 20142018, 2017, and 20132016 was $1,601, $5,241$1,765, $8,396, and $7,135,$2,422, respectively. The total fair value of shares vested during fiscal 2015, 20142018, 2017, and 20132016 was $2,187, $2,080$2,149, $1,788, and $2,135,$1,291, respectively. Performance Shares Performance shares are paid in shares of Applied stock at the end of a three-year period provided the Company achieves goals established by the committee. The number of Applied shares payable will vary depending on the level of the goals achieved. A summary of nonvested performance shares activity at June 30, 20152018 is presented below:below: | | | | | | | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2015 | | (Shares in thousands) | | Nonvested, beginning of year | 41 |
| | $ | 35.97 |
| Awarded | 18 |
| | 49.43 |
| Forfeitures | (1 | ) | | 50.40 |
| Vested | (20 | ) | | 27.28 |
| Nonvested, end of year | 38 |
| | $ | 46.66 |
|
| | | | | | | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2018 | | (Shares in thousands) | | Nonvested, beginning of year | 52 |
| | $ | 43.99 |
| Awarded | 51 |
| | 47.13 |
| Vested | (10 | ) | | 48.76 |
| Nonvested, end of year | 93 |
| | $ | 45.16 |
|
The Committee set three one-year goals for each of the 2015, 20142018, 2017 and 20132016 grants. Each fiscal year during the three-year term has its own separate goals, tied to the Company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and after-tax return on assets (ROA). Achievement during any particular fiscal year is awarded and “banked” for payout at the end of the three-year term. Based uponFor the outstanding grants as of June 30, 2015,2018, the maximum number of shares which could be earned in future periods was 78.67.
Restricted Stock and Restricted Stock Units Restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting. Restricted stock awards vest over periods of one to four years. RSUs are grants valued in shares of Applied stock, but shares are not issued until the grants vest onethree to four years from the award date, assuming continued employment with Applied. Applied primarily pays dividend equivalents on RSUs on a current basis. A summary of the status of the Company’s non-vested restricted stock and RSUs at June 30, 20152018 is presented below: | | | | | | | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2015 | | (Share amounts in thousands) | | Nonvested, beginning of year | 133 |
| | $ | 37.60 |
| Granted | 48 |
| | 46.48 |
| Forfeitures | (7 | ) | | 48.81 |
| Vested | (84 | ) | | 32.54 |
| Nonvested, end of year | 90 |
| | $ | 46.18 |
|
| | | | | | | | | Shares |
| | Weighted-Average Grant-Date Fair Value |
| Year Ended June 30, 2018 | | (Share amounts in thousands) | | Nonvested, beginning of year | 116 |
| | $ | 46.91 |
| Granted | 53 |
| | 62.62 |
| Forfeitures | (10 | ) | | 54.96 |
| Vested | (43 | ) | | 52.58 |
| Nonvested, end of year | 116 |
| | $ | 51.27 |
|
NOTE 10: BENEFIT PLANS Retirement Savings Plan Substantially all U.S. employees participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. Participants may elect 401(k) contributions of up to 50% of their compensation, subject to Internal Revenue Code maximums. The Company partially matches 401(k) contributions by participants. The Company had also made discretionary profit-sharing contributions to the Retirement Savings Plan for fiscal 2013. The discretionary profit-sharing contribution was ended in fiscal 2014. The Company’s expense for profit sharing and matching of employees’ 401(k) contributions was $3,156, $2,788$6,551, $6,677 and $11,231$2,535 during fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Deferred Compensation Plans The Company has deferred compensation plans that enable certain employees of the Company to defer receipt of a portion of their compensation. Non-employee directors were able to defer receipt of director fees until January 1, 2015. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Assets held in these rabbi trusts consist of investments in money market and mutual funds and Company common stock. Post-employment Benefit Plans The Company provides the following post-employment benefits which, except for the Qualified Defined Benefit Retirement Plan and Key Executive Restoration Plan, are unfunded: Supplemental Executive Retirement Benefits Plan The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable and determinable at retirement based upon a percentage of the participant’s historical compensation. The Executive Organization and Compensation Committee of the Board of Directors froze participant benefits (credited service and final average earnings) and entry into the Supplemental Executive Retirement Benefits Plan (SERP) effective December 31, 2011. Key Executive Restoration Plan In fiscal 2012, the Company adopted the Key Executive Restoration Plan (KERP), an unfunded,a funded, non-qualified deferred compensation plan, to replace the SERP. The Company recorded $300 ,$234$359, $289, and $233$268 of expense associated with this plan in fiscal 2015, 20142018, 2017, and 2013,2016, respectively. Qualified Defined Benefit Retirement Plan The Company has a qualified defined benefit retirement plan that provides benefits to certain hourly employees at retirement. These employees do not participate in the Retirement Savings Plan. The benefits are based on length of service and date of retirement.
Salary Continuation Benefits The Company has agreements with certain retirees of acquired companies to pay monthly retirement benefits through fiscal 2020. Retiree Health Care Benefits The Company provides health care benefits, through third-party policies, to eligible retired employees who pay a specified monthly premium. Premium payments are based upon current insurance rates for the type of
coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired employees at no cost to the individual. The Company uses a June 30 measurement date for all plans. The following table sets forth the changes in benefit obligations and plan assets during the year and the funded status for the post-employment plans at June 30: | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
| Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of the year | $ | 34,558 |
| | $ | 40,664 |
| | $ | 2,790 |
| | $ | 3,719 |
| Service cost | 97 |
| | 77 |
| | 53 |
| | 48 |
| Interest cost | 896 |
| | 1,180 |
| | 95 |
| | 139 |
| Plan participants’ contributions | — |
| | — |
| | 64 |
| | 63 |
| Benefits paid | (6,697 | ) | | (7,251 | ) | | (238 | ) | | (246 | ) | Amendments | (8 | ) | | 188 |
| |
| | — |
| Actuarial (gain) loss during year | 1,148 |
| | (300 | ) | | (620 | ) | | (933 | ) | Benefit obligation at end of year | $ | 29,994 |
| | $ | 34,558 |
| | $ | 2,144 |
| | $ | 2,790 |
| Change in plan assets: | | | | | | | | Fair value of plan assets at beginning of year | $ | 7,245 |
| | $ | 6,697 |
| | $ | — |
| | $ | — |
| Actual gain (loss) on plan assets | 247 |
| | 763 |
| | — |
| | — |
| Employer contributions | 6,390 |
| | 7,036 |
| | 174 |
| | 183 |
| Plan participants’ contributions | — |
| | — |
| | 64 |
| | 63 |
| Benefits paid | (6,697 | ) | | (7,251 | ) | | (238 | ) | | (246 | ) | Fair value of plan assets at end of year | $ | 7,185 |
| | $ | 7,245 |
| | $ | — |
| | $ | — |
| Funded status at end of year | $ | (22,809 | ) | | $ | (27,313 | ) | | $ | (2,144 | ) | | $ | (2,790 | ) |
| | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| Change in benefit obligation: | | | | | | | | Benefit obligation at beginning of the year | $ | 24,411 |
| | $ | 26,605 |
| | $ | 1,684 |
| | $ | 2,235 |
| Service cost | 124 |
| | 126 |
| | 19 |
| | 29 |
| Interest cost | 729 |
| | 687 |
| | 52 |
| | 63 |
| Plan participants’ contributions | — |
| | — |
| | 68 |
| | 69 |
| Benefits paid | (3,181 | ) | | (1,562 | ) | | (223 | ) | | (237 | ) | Amendments | — |
| | — |
| | — |
| | (245 | ) | Actuarial gain during year | (549 | ) | | (1,445 | ) | | (109 | ) | | (230 | ) | Benefit obligation at end of year | $ | 21,534 |
| | $ | 24,411 |
| | $ | 1,491 |
| | $ | 1,684 |
| Change in plan assets: | | | | | | | | Fair value of plan assets at beginning of year | $ | 6,530 |
| | $ | 6,737 |
| | $ | — |
| | $ | — |
| Actual gain on plan assets | 516 |
| | 578 |
| | — |
| | — |
| Employer contributions | 3,837 |
| | 776 |
| | 155 |
| | 168 |
| Plan participants’ contributions | — |
| | — |
| | 68 |
| | 69 |
| Benefits paid | (3,181 | ) | | (1,561 | ) | | (223 | ) | | (237 | ) | Fair value of plan assets at end of year | $ | 7,702 |
| | $ | 6,530 |
| | $ | — |
| | $ | — |
| Funded status at end of year | $ | (13,832 | ) | | $ | (17,881 | ) | | $ | (1,491 | ) | | $ | (1,684 | ) |
The amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income (loss)loss for the post-employment plans were as follows: | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | June 30, | 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
| Amounts recognized in the consolidated balance sheets: | | | | | | | | Other current liabilities | $ | 5,256 |
| | $ | 6,390 |
| | $ | 220 |
| | $ | 220 |
| Post-employment benefits | 17,553 |
| | 20,923 |
| | 1,924 |
| | 2,570 |
| Net amount recognized | $ | 22,809 |
| | $ | 27,313 |
| | $ | 2,144 |
| | $ | 2,790 |
| Amounts recognized in accumulated other comprehensive (loss) income: | | | | | | | | Net actuarial (loss) gain | $ | (7,311 | ) | | $ | (6,474 | ) | | $ | 1,492 |
| | $ | 960 |
| Prior service cost | (208 | ) | | (293 | ) | | 1,219 |
| | 1,490 |
| Total amounts recognized in accumulated other comprehensive (loss) income | $ | (7,519 | ) | | $ | (6,767 | ) | | $ | 2,711 |
| | $ | 2,450 |
|
| | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | June 30, | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| Amounts recognized in the consolidated balance sheets: | | | | | | | | Other current liabilities | $ | 3,298 |
| | $ | 2,814 |
| | $ | 220 |
| | $ | 220 |
| Post-employment benefits | 10,534 |
| | 15,067 |
| | 1,271 |
| | 1,464 |
| Net amount recognized | $ | 13,832 |
| | $ | 17,881 |
| | $ | 1,491 |
| | $ | 1,684 |
| Amounts recognized in accumulated other comprehensive loss: | | | | | | | | Net actuarial (loss) gain | $ | (4,781 | ) | | $ | (5,798 | ) | | $ | 1,121 |
| | $ | 1,167 |
| Prior service cost | — |
| | (35 | ) | | 554 |
| | 922 |
| Total amounts recognized in accumulated other comprehensive loss | $ | (4,781 | ) | | $ | (5,833 | ) | | $ | 1,675 |
| | $ | 2,089 |
|
The following table provides information for pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets: | | | | | | | | | | Pension Benefits | June 30, | 2015 |
| | 2014 |
| Projected benefit obligations | $ | 29,994 |
| | $ | 34,558 |
| Accumulated benefit obligations | 29,994 |
| | 34,558 |
| Fair value of plan assets | 7,185 |
| | 7,245 |
|
| | | | | | | | | | Pension Benefits | June 30, | 2018 |
| | 2017 |
| Projected benefit obligations | $ | 21,534 |
| | $ | 24,411 |
| Accumulated benefit obligations | 21,534 |
| | 24,411 |
| Fair value of plan assets | 7,702 |
| | 6,530 |
|
The net periodic costs (benefits) are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| | 2015 |
| | 2014 |
| | 2013 |
| Service cost | $ | 97 |
| | $ | 77 |
| | $ | 78 |
| | $ | 53 |
| | $ | 48 |
| | $ | 80 |
| Interest cost | 896 |
| | 1,180 |
| | 1,260 |
| | 95 |
| | 139 |
| | 188 |
| Expected return on plan assets | (495 | ) | | (416 | ) | | (403 | ) | | — |
| | — |
| | — |
| Recognized net actuarial loss (gain) | 559 |
| | 611 |
| | 735 |
| | (87 | ) | | (38 | ) | | (53 | ) | Amortization of prior service cost | 86 |
| | 78 |
| | 83 |
| | (272 | ) | | (271 | ) | | 107 |
| Net periodic cost (benefits) | $ | 1,143 |
| | $ | 1,530 |
| | $ | 1,753 |
| | $ | (211 | ) | | $ | (122 | ) | | $ | 322 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| | 2018 |
| | 2017 |
| | 2016 |
| Service cost | $ | 124 |
| | $ | 126 |
| | $ | 91 |
| | $ | 19 |
| | $ | 29 |
| | $ | 22 |
| Interest cost | 729 |
| | 687 |
| | 879 |
| | 52 |
| | 63 |
| | 75 |
| Expected return on plan assets | (472 | ) | | (460 | ) | | (491 | ) | | — |
| | — |
| | — |
| Recognized net actuarial loss (gain) | 424 |
| | 872 |
| | 913 |
| | (154 | ) | | (181 | ) | | (210 | ) | Amortization of prior service cost | 27 |
| | 86 |
| | 86 |
| | (369 | ) | | (271 | ) | | (271 | ) | Recognition of prior service cost upon plan curtailment | 8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Net periodic cost (benefits) | $ | 840 |
| | $ | 1,311 |
| | $ | 1,478 |
| | $ | (452 | ) | | $ | (360 | ) | | $ | (384 | ) |
In accordance with the Company's adoption of ASU 2017-07, the Company reports the service cost component of the net periodic post-employment costs in the same line item in the income statement as other compensation costs arising from services rendered by the employees during the period. The other components of net periodic post-employment costs are presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Therefore, $143, $155, and $113 of service costs are included in selling, distribution and administrative expense, and $245, $796, and $981 of net other periodic post-employment costs are included in other (income) expense, net in the statements of consolidated income for the years ended June 30, 2018, 2017, and 2016, respectively. The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $914 and $86, respectively.$185. The estimated net actuarial gain and income from prior service cost for the retiree health care benefits that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $211$121 and $271,$369, respectively. Assumptions TheA discount rate is used to determine the present value of future payments. In general, the Company’s liability increases as the discount rate decreases and decreases as the discount rate increases. The Company computes a weighted-average discount rate taking into account anticipated plan payments and the associated interest rates from the Citigroup Pension Discount Yield Curve and the Findley Discount Curve. During fiscal 2015, the Society of Actuaries released a series of updated mortality tables resulting from recent studies measuring mortality rates for various groups of individuals. As of June 30, 2015, the Company adopted these mortality tables, which reflect improved trends in longevity and have the effect of increasing the estimate of benefits to be received by plan participants.
The weighted-average actuarial assumptions used to determine benefit obligations and net periodic benefit cost for the plans were as follows: | | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | June 30, | 2015 |
| | 2014 |
| | 2015 |
| | 2014 |
| Assumptions used to determine benefit obligations at year end: | | | | | | | | Discount rate | 3.0 | % | | 2.8 | % | | 4.0 | % | | 3.8 | % | Assumptions used to determine net periodic benefit cost: | | | | | | | | Discount rate | 2.8 | % | | 3.0 | % | | 3.8 | % | | 4.0 | % | Expected return on plan assets | 7.0 | % | | 7.0 | % | | N/A |
| | N/A |
|
| | | | | | | | | | | | | | Pension Benefits | | Retiree Health Care Benefits | June 30, | 2018 |
| | 2017 |
| | 2018 |
| | 2017 |
| Assumptions used to determine benefit obligations at year end: | | | | | | | | Discount rate | 3.5 | % | | 2.8 | % | | 3.8 | % | | 3.3 | % | Assumptions used to determine net periodic benefit cost: | | | | | | | | Discount rate | 2.8 | % | | 2.3 | % | | 3.3 | % | | 2.9 | % | Expected return on plan assets | 7.0 | % | | 7.0 | % | | N/A |
| | N/A |
|
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for retiree health care benefits were 6.8% and 7.0% as of June 30, 20152018 and 2014,2017, respectively, decreasing to 5.0% by 2023.2027. A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 20152018 and for the year then ended: | | | | | | | | | | One-Percentage Point | | | Increase |
| | Decrease |
| Effect on total service and interest cost components of periodic expense | $ | 20 |
| | $ | (17 | ) | Effect on post-retirement benefit obligation | 209 |
| | (177 | ) |
| | | | | | | | | | One-Percentage Point | | | Increase | | Decrease | Effect on total service and interest cost components of periodic expense | $ | 9 |
| | $ | (8 | ) | Effect on post-retirement benefit obligation | 152 |
| | (130 | ) |
Plan Assets The fair value of each major class of plan assets for the Company’s Qualified Defined Benefit Retirement Plan areis valued using either quoted market prices in active markets for identical instruments; Level 1 in the fair value hierarchy, or other inputs that are observable, either directly or indirectly; Level 2 in the fair value hierarchy. Following are the fair values and target allocation as of June 30: | | | | | | | | | | | | Target Allocation | | Fair Value | | | | 2015 |
| | 2014 |
| Asset Class: | | | | | | Equity* securities (Level 1) | 40 – 70% | | $ | 4,022 |
| | $ | 3,813 |
| Debt securities (Level 2) | 20 – 50% | | 2,930 |
| | 3,155 |
| Other (Level 1) | 0 – 20% | | 233 |
| | 277 |
| Total | 100% | | $ | 7,185 |
| | $ | 7,245 |
|
| | | | | | | | | | | | Target Allocation | | Fair Value | | | | 2018 |
| | 2017 |
| Asset Class: | | | | | | Equity* securities (Level 1) | 40 – 70% | | $ | 6,226 |
| | $ | 3,880 |
| Debt securities (Level 2) | 20 – 50% | | 1,337 |
| | 2,538 |
| Other (Level 1) | 0 – 20% | | 139 |
| | 112 |
| Total | 100% | | $ | 7,702 |
| | $ | 6,530 |
|
* Equity securities do not include any Company common stock. The Company has established an investment policy and regularly monitors the performance of the assets of the trust maintained in conjunction with the Qualified Defined Benefit Retirement Plan. The strategy implemented by the trustee of the Qualified Defined Benefit Retirement Plan is to achieve long-term objectives and invest the pension assets in accordance with ERISA and fiduciary standards. The long-term primary objectives are to provide for a reasonable amount of long-term capital, without undue exposure to risk; to protect the Qualified Defined Benefit Retirement Plan assets from erosion of purchasing power; and to provide investment results that meet or exceed the actuarially assumed long-term rate of return. The expected long-term rate of return on assets assumption was developed by considering the historical returns and the future expectations for returns of each asset class as well as the target asset allocation of the pension portfolio. Cash Flows Employer Contributions The Company expects to contribute $5,300$3,300 to its pension benefit plans and $170$130 to its retiree health care benefit plans in fiscal 2016.2019. Contributions do not equal estimated future benefit payments as certain payments are made from plan assets.assets. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as applicable, are expected to be paid in each of the next five years and in the aggregate for the subsequent five years: | | | | | | | | | During Fiscal Years | Pension Benefits |
| | Retiree Health Care Benefits |
| 2016 | $ | 5,600 |
| | $ | 170 |
| 2017 | 1,800 |
| | 180 |
| 2018 | 2,300 |
| | 190 |
| 2019 | 4,000 |
| | 180 |
| 2020 | 3,300 |
| | 170 |
| 2021 through 2025 | 7,400 |
| | 620 |
|
| | | | | | | | | During Fiscal Years | Pension Benefits |
| | Retiree Health Care Benefits |
| 2019 | $ | 3,700 |
| | $ | 130 |
| 2020 | 3,800 |
| | 120 |
| 2021 | 1,300 |
| | 110 |
| 2022 | 1,300 |
| | 110 |
| 2023 | 1,400 |
| | 100 |
| 2024 through 2028 | 5,200 |
| | 530 |
|
NOTE 11: LEASES The Company leases many service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The Company leased its corporate headquarters facility until purchasing it in April 2014. The minimum annual rental commitments under non-cancelable operating leases as of June 30, 20152018 are as follows: | | | | | During Fiscal Years | | 2016 | $ | 24,900 |
| 2017 | 19,700 |
| 2018 | 14,600 |
| 2019 | 10,900 |
| 2020 | 5,800 |
| Thereafter | 6,500 |
| Total minimum lease payments | $ | 82,400 |
|
| | | | | During Fiscal Years | | 2019 | $ | 38,100 |
| 2020 | 27,500 |
| 2021 | 17,800 |
| 2022 | 11,200 |
| 2023 | 5,800 |
| Thereafter | 11,000 |
| Total minimum lease payments | $ | 111,400 |
|
Rental expense incurred for operating leases, principally from leases for real property, vehicles and computer equipment was $39,300$41,000 in 2015, $36,9002018, $35,900 in 20142017 and $36,300$37,300 in 2013,2016, and was classified within selling, distribution and administrative expenses onin the Statementsstatements of Consolidated Income.consolidated income. The Company maintains lease agreements for many of the operating facilities of businesses it acquires from previous owners. In many cases, the previous owners of the business acquired become employees of Applied and occupy management positions within those businesses. The payments under lease agreements of this nature totaled $3,100, $2,500$2,400, $2,400, and $1,200$3,800 and in fiscal 2015, 20142018, 2017, and 2013.2016, respectively. NOTE 12: SEGMENT AND GEOGRAPHIC INFORMATION Effective July 1, 2017, the Company completed a number of changes to its organizational structure that resulted in a change in how the Company manages its businesses, allocates resources and measures performance. As a result, the Company has revised its reportable segments to reflect how management currently reviews financial information and makes operating decisions. All Canadian and Mexican subsidiaries are now grouped under the Service Center Based Distribution segment. All prior-period amounts have been adjusted to reflect the reportable segment change. The Company's reportable segments are: Service Center Based Distribution and Fluid Power Businesses.& Flow Control. These reportable segments contain the Company's various operating segments which have been aggregated based upon similar economic and operating characteristics. The Service Center Based Distribution segment provides customers with solutions to their maintenance, repair and original equipment manufacturing needs through the distribution of industrial products including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion products, tools, safety products, and other industrial and maintenance supplies. The Fluid Power Businesses& Flow Control segment distributes engineered fluid power components and specialty flow control solutions and operates shops that assemble fluid power systems and components, performs equipment repair, and offers technical advice to customers.
The accounting policies of the Company’s reportable segments are generally the same as those described in note 1. Intercompany sales, primarily from the Fluid Power Businesses& Flow Control segment to the Service Center Based Distribution segment of $24,087, $21,809$25,556, $22,719, and $20,217,$20,261, in fiscal 2015, 20142018, 2017, and 2013,2016, respectively, have been eliminated in the following table.table.
Segment Financial Information | | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power Businesses |
| | Total |
| Year Ended June 30, 2015 | | | | | | Net sales | $ | 2,254,768 |
| | $ | 496,793 |
| | $ | 2,751,561 |
| Operating income for reportable segments | 140,421 |
| | 48,535 |
| | 188,956 |
| Assets used in the business | 1,230,543 |
| | 204,425 |
| | 1,434,968 |
| Depreciation and amortization of property | 15,196 |
| | 1,382 |
| | 16,578 |
| Capital expenditures | 13,531 |
| | 1,402 |
| | 14,933 |
| Year Ended June 30, 2014 | | | | | | Net sales | $ | 1,973,359 |
| | $ | 486,519 |
| | $ | 2,459,878 |
| Operating income for reportable segments | 118,857 |
| | 44,621 |
| | 163,478 |
| Assets used in the business | 1,116,311 |
| | 217,858 |
| | 1,334,169 |
| Depreciation and amortization of property | 12,399 |
| | 1,578 |
| | 13,977 |
| Capital expenditures | 18,744 |
| | 1,446 |
| | 20,190 |
| Year Ended June 30, 2013 | | | | | | Net sales | $ | 2,003,440 |
| | $ | 458,731 |
| | $ | 2,462,171 |
| Operating income for reportable segments | 138,484 |
| | 41,083 |
| | 179,567 |
| Assets used in the business | 859,547 |
| | 199,159 |
| | 1,058,706 |
| Depreciation and amortization of property | 10,692 |
| | 1,809 |
| | 12,501 |
| Capital expenditures | 10,415 |
| | 1,799 |
| | 12,214 |
|
| | | | | | | | | | | | | | Service Center Based Distribution |
| | Fluid Power & Flow Control |
| | Total |
| Year Ended June 30, 2018 | | | | | | Net sales | $ | 2,346,418 |
| | $ | 726,856 |
| | $ | 3,073,274 |
| Operating income for reportable segments | 136,718 |
| | 83,194 |
| | 219,912 |
| Assets used in the business | 1,198,296 |
| | 1,087,445 |
| | 2,285,741 |
| Depreciation and amortization of property | 15,336 |
| | 2,462 |
| | 17,798 |
| Capital expenditures | 18,492 |
| | 4,738 |
| | 23,230 |
| Year Ended June 30, 2017 | | | | | | Net sales | $ | 2,180,358 |
| | $ | 413,388 |
| | $ | 2,593,746 |
| Operating income for reportable segments | 115,794 |
| | 46,569 |
| | 162,363 |
| Assets used in the business | 1,187,054 |
| | 200,541 |
| | 1,387,595 |
| Depreciation and amortization of property | 14,375 |
| | 931 |
| | 15,306 |
| Capital expenditures | 14,566 |
| | 2,479 |
| | 17,045 |
| Year Ended June 30, 2016 | | | | | | Net sales | $ | 2,150,478 |
| | $ | 368,950 |
| | $ | 2,519,428 |
| Operating income for reportable segments | 113,111 |
| | 37,174 |
| | 150,285 |
| Assets used in the business | 1,132,222 |
| | 179,803 |
| | 1,312,025 |
| Depreciation and amortization of property | 15,049 |
| | 917 |
| | 15,966 |
| Capital expenditures | 12,500 |
| | 630 |
| | 13,130 |
|
ERP related assets are included in assets used in the business and capital expenditures within the Service Center Based Distribution segment. Within the geographic disclosures, these assets are included in the United States. Expenses associated with the ERP are included in the Corporate and other income, net, line in the reconciliation of operating income for reportable segments to the consolidated income before income taxes table below. A reconciliation of operating income for reportable segments to the consolidated income before income taxes is as follows: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| Operating income for reportable segments | $ | 188,956 |
| | $ | 163,478 |
| | $ | 179,567 |
| Adjustments for: | | | | | | Intangible amortization — Service Center Based Distribution | 19,561 |
| | 7,336 |
| | 5,829 |
| Intangible amortization — Fluid Power Businesses | 6,236 |
| | 6,687 |
| | 7,404 |
| Corporate and other income, net | (21,460 | ) | | (14,903 | ) | | (10,065 | ) | Total operating income | 184,619 |
| | 164,358 |
| | 176,399 |
| Interest expense, net | 7,869 |
| | 249 |
| | 165 |
| Other expense (income), net | 879 |
| | (2,153 | ) | | (1,431 | ) | Income before income taxes | $ | 175,871 |
| | $ | 166,262 |
| | $ | 177,665 |
|
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| Operating income for reportable segments | $ | 219,912 |
| | $ | 162,363 |
| | $ | 150,285 |
| Adjustments for: | | | | | | Intangible amortization — Service Center Based Distribution | 17,375 |
| | 18,954 |
| | 19,913 |
| Intangible amortization — Fluid Power & Flow Control | 14,690 |
| | 5,417 |
| | 5,667 |
| Goodwill Impairment — Service Center Based Distribution | — |
| | — |
| | 64,794 |
| Corporate and other income, net | (37,980 | ) | | (37,394 | ) | | (29,871 | ) | Total operating income | 225,827 |
| | 175,386 |
| | 89,782 |
| Interest expense, net | 23,485 |
| | 8,541 |
| | 8,763 |
| Other (income) expense, net | (2,376 | ) | | (121 | ) | | 2,041 |
| Income before income taxes | $ | 204,718 |
| | $ | 166,966 |
| | $ | 78,978 |
|
Fluctuations in corporate and other income, net, are due to changes in corporate expenses, as well as in the amounts and levels of certain supplier support benefits and amounts of expenses being allocated to the segments. The expenses being allocated include corporate charges for working capital, logistics support and other items.
Product Category Net sales by product category are as follows: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| Industrial | $ | 2,013,447 |
| | $ | 1,739,496 |
| | $ | 1,776,172 |
| Fluid power | 738,114 |
| | 720,382 |
| | 685,999 |
| Net sales | $ | 2,751,561 |
| | $ | 2,459,878 |
| | $ | 2,462,171 |
|
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| Industrial | $ | 2,085,571 |
| | $ | 1,855,437 |
| | $ | 1,836,484 |
| Fluid power & flow control | 987,703 |
| | 738,309 |
| | 682,944 |
| Net sales | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
|
The fluid power & flow control product category includes sales of hydraulic, pneumatic, lubrication, filtration, and filtrationflow control components and systems, and repair services through the Company’s Fluid Power Businesses& Flow Control segment as well as the Service Center Based Distribution segment. Geographic Information Net sales are presented in geographic areas based on the location of the facility shipping the product. Long-lived assets are based on physical locations and are comprised of the net book value of property and intangible assets. Information by geographic area is as follows: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| Net Sales: | | | | | | United States | $ | 2,238,263 |
| | $ | 2,031,142 |
| | $ | 2,017,168 |
| Canada | 358,580 |
| | 291,117 |
| | 298,269 |
| Other Countries | 154,718 |
| | 137,619 |
| | 146,734 |
| Total | $ | 2,751,561 |
| | $ | 2,459,878 |
| | $ | 2,462,171 |
|
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| Net Sales: | | | | | | United States | $ | 2,615,041 |
| | $ | 2,182,552 |
| | $ | 2,117,485 |
| Canada | 273,622 |
| | 251,999 |
| | 257,797 |
| Other Countries | 184,611 |
| | 159,195 |
| | 144,146 |
| Total | $ | 3,073,274 |
| | $ | 2,593,746 |
| | $ | 2,519,428 |
|
| | | | | | | | | | | | | June 30, | 2015 |
| | 2014 |
| | 2013 |
| Long-Lived Assets: | | | | | | United States | $ | 217,597 |
| | $ | 153,945 |
| | $ | 144,289 |
| Canada | 76,565 |
| | 99,161 |
| | 19,038 |
| Other Countries | 9,113 |
| | 9,998 |
| | 11,183 |
| Total | $ | 303,275 |
| | $ | 263,104 |
| | $ | 174,510 |
|
| | | | | | | | | | | | | June 30, | 2018 |
| | 2017 |
| | 2016 |
| Long-Lived Assets: | | | | | | United States | $ | 501,373 |
| | $ | 207,126 |
| | $ | 225,538 |
| Canada | 50,261 |
| | 57,947 |
| | 66,304 |
| Other Countries | 5,656 |
| | 6,558 |
| | 7,163 |
| Total | $ | 557,290 |
| | $ | 271,631 |
| | $ | 299,005 |
|
Other countries consist of Mexico, Australia, New Zealand, and New Zealand.Singapore. NOTE 13: COMMITMENTS AND CONTINGENCIES The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company believes the likelihood is remote that the ultimate resolution of any of these matters 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. NOTE 14: OTHER (INCOME) EXPENSE, (INCOME), NET Other (income) expense, (income), net, consists of the following: | | | | | | | | | | | | | Year Ended June 30, | 2015 |
| | 2014 |
| | 2013 |
| Unrealized (gain) loss on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (442 | ) | | $ | (1,683 | ) | | $ | (1,280 | ) | Elimination of one-month Canadian and Mexican reporting lag, effective July 1, 2013 and January 1, 2014, respectively | — |
| | (1,342 | ) | | — |
| Foreign currency transaction (gains) losses | 1,251 |
| | 801 |
| | (143 | ) | Other, net | 70 |
| | 71 |
| | (8 | ) | Total other expense (income), net | $ | 879 |
| | $ | (2,153 | ) | | $ | (1,431 | ) |
| | | | | | | | | | | | | Year Ended June 30, | 2018 |
| | 2017 |
| | 2016 |
| Unrealized gain on assets held in rabbi trust for a non-qualified deferred compensation plan | $ | (785 | ) | | $ | (1,188 | ) | | $ | (87 | ) | Foreign currency transaction (gains) losses | (210 | ) | | 209 |
| | 1,039 |
| Net other periodic post-employment costs | 245 |
| | 796 |
| | 981 |
| Life insurance (income) expense, net | (1,628 | ) | | 107 |
| | 108 |
| Other, net | 2 |
| | (45 | ) | | — |
| Total other (income) expense, net | $ | (2,376 | ) | | $ | (121 | ) | | $ | 2,041 |
|
NOTE 15: SUBSEQUENT EVENTS
We have evaluated events and transactions occurring subsequent to June 30, 2015 through the date the financial statements were issued.
On August 3, 2015, the Company acquired all of the net assets of Atlantic Fasteners, located in Agawam, MA, for a purchase price of approximately $12,500. The Company funded this acquisition from borrowings under the revolving credit facility at a variable interest rate. As a distributor of fasteners and industrial supplies, this business will be included in the Service Center Based Distribution Segment from August 3, 2015.
56
QUARTERLY OPERATING RESULTS (In thousands, except per share amounts) (UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per Common Share | | Net Sales |
| | Gross Profit |
| | Operating Income |
| | Net Income |
| | Net Income |
| | Cash Dividend |
| 2015 | | | | | | | | | | | | First Quarter | $ | 702,325 |
| | $ | 194,932 |
| | $ | 46,165 |
| | $ | 29,122 |
| | $ | 0.70 |
| | $ | 0.25 |
| Second Quarter | 691,702 |
| | 195,713 |
| | 46,807 |
| | 29,707 |
| | 0.72 |
| | 0.25 |
| Third Quarter | 679,994 |
| | 187,363 |
| | 43,772 |
| | 28,610 |
| | 0.70 |
| | 0.27 |
| Fourth Quarter | 677,540 |
| | 191,806 |
| | 47,875 |
| | 28,045 |
| | 0.70 |
| | 0.27 |
| | $ | 2,751,561 |
| | $ | 769,814 |
| | $ | 184,619 |
| | $ | 115,484 |
| | $ | 2.80 |
| | $ | 1.04 |
| 2014 | | | | | | | | | | | | First Quarter | $ | 605,305 |
| | $ | 169,795 |
| | $ | 39,539 |
| | $ | 26,844 |
| | $ | 0.63 |
| | $ | 0.23 |
| Second Quarter | 581,949 |
| | 163,383 |
| | 39,837 |
| | 25,909 |
| | 0.61 |
| | 0.23 |
| Third Quarter | 618,006 |
| | 171,220 |
| | 40,173 |
| | 30,394 |
| | 0.72 |
| | 0.25 |
| Fourth Quarter | 654,618 |
| | 182,528 |
| | 44,809 |
| | 29,674 |
| | 0.71 |
| | 0.25 |
| | $ | 2,459,878 |
| | $ | 686,926 |
| | $ | 164,358 |
| | $ | 112,821 |
| | $ | 2.67 |
| | $ | 0.96 |
| 2013 | | | | | | | | | | | | First Quarter | $ | 610,519 |
| | $ | 164,533 |
| | $ | 44,318 |
| | $ | 29,532 |
| | $ | 0.70 |
| | $ | 0.21 |
| Second Quarter | 589,517 |
| | 162,919 |
| | 40,569 |
| | 27,043 |
| | 0.64 |
| | 0.21 |
| Third Quarter | 621,654 |
| | 174,400 |
| | 43,477 |
| | 29,302 |
| | 0.69 |
| | 0.23 |
| Fourth Quarter | 640,481 |
| | 181,110 |
| | 48,035 |
| | 32,272 |
| | 0.76 |
| | 0.23 |
| | $ | 2,462,171 |
| | $ | 682,962 |
| | $ | 176,399 |
| | $ | 118,149 |
| | $ | 2.78 |
| | $ | 0.88 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per Common Share | | Net Sales |
| | Gross Profit |
| | Operating Income |
| | Net Income |
| | Net Income |
| | Cash Dividend |
| 2018 | | | | | | | | | | | | First Quarter | $ | 680,701 |
| | $ | 192,424 |
| | $ | 51,837 |
| | $ | 33,721 |
| | $ | 0.86 |
| | $ | 0.29 |
| Second Quarter | 667,187 |
| | 188,360 |
| | 46,715 |
| | 30,950 |
| | 0.79 |
| | 0.29 |
| Third Quarter | 827,665 |
| | 239,524 |
| | 56,444 |
| | 36,592 |
| | 0.93 |
| | 0.30 |
| Fourth Quarter | 897,721 |
| | 263,687 |
| | 70,831 |
| | 40,362 |
| | 1.03 |
| | 0.30 |
| | $ | 3,073,274 |
| | $ | 883,995 |
| | $ | 225,827 |
| | $ | 141,625 |
| | $ | 3.61 |
| | $ | 1.18 |
| 2017 | | | | | | | | | | | | First Quarter | $ | 624,848 |
| | $ | 178,330 |
| | $ | 43,218 |
| | $ | 27,371 |
| | $ | 0.70 |
| | $ | 0.28 |
| Second Quarter | 608,123 |
| | 172,456 |
| | 37,656 |
| | 24,085 |
| | 0.61 |
| | 0.28 |
| Third Quarter | 679,304 |
| | 190,802 |
| | 45,467 |
| | 29,494 |
| | 0.75 |
| | 0.29 |
| Fourth Quarter | 681,471 |
| | 196,107 |
| | 48,249 |
| | 52,960 |
| | 1.34 |
| | 0.29 |
| | $ | 2,593,746 |
| | $ | 737,695 |
| | $ | 174,590 |
| | $ | 133,910 |
| | $ | 3.40 |
| | $ | 1.14 |
| 2016 | | | | | | | | | | | | First Quarter | $ | 641,904 |
| | $ | 181,012 |
| | $ | 41,026 |
| | $ | 24,291 |
| | $ | 0.61 |
| | $ | 0.27 |
| Second Quarter | 610,346 |
| | 173,167 |
| | 38,362 |
| | 23,947 |
| | 0.61 |
| | 0.27 |
| Third Quarter | 633,172 |
| | 174,793 |
| | (33,032 | ) | | (44,728 | ) | | (1.14 | ) | | 0.28 |
| Fourth Quarter | 634,006 |
| | 178,450 |
| | 42,445 |
| | 26,067 |
| | 0.66 |
| | 0.28 |
| | $ | 2,519,428 |
| | $ | 707,422 |
| | $ | 88,801 |
| | $ | 29,577 |
| | $ | 0.75 |
| | $ | 1.10 |
|
On August 14, 201510, 2018, there were 5,8934,307 shareholders of record including 4,3212,914 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company’s common stock is listed on the New York Stock Exchange. The closing price on August 14, 201510, 2018 was $40.77$72.20 per share. The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period. Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based on periodic physical inventory and the effect of year-end inventory quantities on LIFO costs. Fiscal 20152018 During the second quarter of fiscal 2018, the Tax Cuts and Jobs Act (the "Act") was enacted in the U.S., making significant changes to U.S. tax law. The Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate to a blended statutory rate for the annual period of 28.1%. The corporate income tax rate change had a favorable impact to the Company of $12.1 million for fiscal 2018. Further, we recognized provisional amounts for the one-time transition tax of $3.9 million and for the re-measurement of the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse of $2.4 million. Overall, the Act resulted in a net tax benefit of $5.8 million for fiscal 2018, which is included as a component of income tax expense in the statements of consolidated income. During the third quarter of fiscal 2018, the Company completed the acquisition of all of the outstanding shares of FCX Performance, Inc. (FCX), a Columbus, Ohio based distributor of specialty process flow control products and services. At the time of closing, FCX operated 68 locations with approximately 1,000 employees. The total consideration transferred for the acquisition was approximately $782 million, which was financed by cash-on-hand and a new credit facility comprised of a $780 million Term Loan A and $250 million revolver (the Credit Facility), effective with the transaction closing. This Credit Facility was used to finance the transaction, as well as to repay the Company's existing term loan outstanding prior to the acquisition date. Fiscal 2017 During the fourth quarter of fiscal 2015,2017, the Company recorded a tax benefit pertaining to a worthless stock tax deduction of $22.2 million, or $0.56 per share. This deduction is based on the write-off of its investment in one of its Canadian subsidiaries for U.S. tax purposes.
In fiscal 2017 reductions in U.S. inventories in the bearings pool resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. A portion of these reductions resulted from the scrapping of $6.0 million of bearings inventory which resulted in a similar amount of scrap expense being recognized in the fourth quarter of fiscal 2017. The overall impact of the fiscal 2017 LIFO layer liquidations increased gross profit by $9.4 million in the fourth quarter of fiscal 2017. The net benefit of the bearings products LIFO layer liquidation benefit, less the bearing product scrap expense was $3.4 million. Fiscal 2016 During the third quarter of fiscal 2016, the Company recorded goodwill impairment of $64.8 million related to the Canada and Australia/New Zealand service center reporting units within the Service Center Based Distribution reportable segment. After taxes, the impairment had a negative impact on earnings of $63.8 million and reduced earnings per share by $1.62 per share. During fiscal 2016, the Company incurred certain restructuring charges. During the third quarter, a reserve of $3.6 million was recorded within cost of sales for potential non-salable, non-returnable and excess inventory due to declining demand, primarily for Canada oil and gas operations. SD&A included expenses of $5.2 million during the fiscal year related to severance of $1.8 million. Also, we sold a building recognizing a gain of $1.5 million.and facility consolidations, primarily for oil and gas operations. Total restructuring charges reduced gross profit for the year by $3.6 million, operating income by $8.8 million, net income by $6.2 million and earnings per share by $0.16. During the fourth quarter of fiscal 2015, income tax expense increased due to recording a valuation allowance against certain deferred tax assets for foreign jurisdictions of $1.0 million. Also, an increase of tax rates in certain foreign jurisdictions at the end of the fiscal period increased tax expense by $1.2 million during the quarter. No LIFO layer liquidations took place during the year ended June 30, 2015.
Fiscal 2014
During the first quarter of fiscal 2014, the Company aligned the consolidation of the Company's Canadian subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $1.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, the Company aligned the consolidation of the Company's Mexican subsidiary which previously included results on a month reporting lag. The elimination of this lag resulted in the recognition of $0.2 million of additional income which was included within "Other income, net" on the Condensed Statements of Consolidated Income.
During the third quarter of fiscal 2014, $2.8 million of tax reserves were reversed. The impact of this reversal was a reduction in income tax expense of $2.8 million and a $0.07 increase in earnings per share.
No LIFO layer liquidations took place during the year ended June 30, 2014.
Fiscal 2013
During the fourth quarter of fiscal 2013,2016, the Company realized LIFO layer liquidation benefits of $6,300$2.1 million from certain inventory quantity levels decreasing. Additional scrap expense of $3.0 million above our normal scrap rate was also recorded in the June 30, 2013 quarter.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures On January 31, 2018, the Company completed the acquisition of FCX Performance, Inc ("FCX"). As permitted by SEC guidance, the scope of management’s evaluation of internal control over financing reporting as of June 30, 2018 did not include the internal control over financial reporting of FCX. However, we are extending our oversight and monitoring processes that support our internal control over financial reporting to include FCX's operations. 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.
Management's Report on Internal Control over Financial Reporting The Management of Applied Industrial Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President & Chief Executive Officer and the Vice President - Chief Financial Officer & Treasurer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s Management and Board of Directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of inherent limitations, internal control over financial reporting can provide only reasonable, not absolute, assurance with respect to the preparation and presentation of the consolidated financial statements and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2015.2018. This evaluation was based on the criteria set forth in the framework Internal"Internal Control —- Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management determined that the Company’s internal control over financial reporting was effective as of June 30, 2015.2018. The Company acquired Knox Oil Field SupplyFCX Performance Inc. (Knox)("FCX") on July 1, 2014.January 31, 2018. Management has excluded KnoxFCX from its assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2015. Knox2018. FCX represents approximately 11%39.5% and 4%8.1% of total assets and net sales, respectively, of the consolidated financial statement amounts as of and for the year ended June 30, 2015.2018. The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein. | | | | /s/ Neil A. Schrimsher | | /s/ Mark O. EiseleDavid K. Wells | President & Chief Executive Officer | | Vice President - Chief Financial Officer & Treasurer |
August 26, 201517, 2018
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Applied Industrial Technologies, Inc. Cleveland, Ohio
Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Applied Industrial Technologies, Inc. and subsidiaries (the "Company"“Company”) as of June 30, 2015,2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2018, of the Company and our report dated August 17, 2018, expressed an unqualified opinion on those consolidated financial statements. As described in Management'sManagement’s Report on Internal Control overControls Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Knox Oil Field SupplyFCX Performance Inc. ("Knox"FCX"), which was acquired on July 1, 2014January 31, 2018 and whose financial statements constitute 11% and 4%39.5% of total assets and 8.1% of net sales respectively, of the consolidated financial statement amountsstatements as of and for the year ended June 30, 2015.2018. Accordingly, our audit did not include the internal control over financial reporting at Knox. FCX. Basis for Opinion The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control overControls Over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2015 of the Company and our report dated August 26, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP Cleveland, Ohio August 26, 201517, 2018
Changes in Internal Control Over Financial Reporting The Company has undertaken a multi-year ERP (SAP) project to transform the Company's technology platforms and enhance its business information and transaction systems. The Company has completed its SAP implementation in its Western Canadian and U.S. Service Center Based Businesses, excluding recent acquisitions. In fiscal 2014, the Company initiated the transformation of its financial and accounting systems including fixed assets, general ledger and consolidation systems. All of these underlying financial and accounting systems, except for the consolidation system, have been transitioned to SAP during fiscal 2015. During fiscal year 2016 the Company will continue to evaluate and determine an appropriate deployment schedule for operations in Eastern Canada and other operations not on SAP, as well as refine our current business and system processes. The company expects to convert to a new consolidation process and system at the beginning of fiscal 2016. Changes in the Company's key business applications and financial processes as a result of the continuing implementation of SAP and other business systems are being evaluated by management. The Company is designing processes and internal controls to address changes in the Company's internal control over financial reporting as a result of the SAP implementation. This ongoing SAP implementation presents risks to maintaining adequate internal controls over financial reporting.
Other than as described above, thereThere have not been any changes in internal control over financial reporting during the quarter ended June 30, 20152018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION. Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item as to Applied's directors is incorporated by reference to Applied's proxy statement relating to the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the caption “Item 1 - Election of Directors.” The information required by this Item as to Applied's executive officers has been furnished in this report in Part I, after Item 4, under the caption “Executive Officers of the Registrant.” The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to Applied's proxy statement, under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” Applied has a code of ethics, named the Code of Business Ethics, that applies to our employees, including our principal executive officer, principal financial officer, and principal accounting officer. The Code of Business Ethics is posted via hyperlink at the investor relations area of our www.applied.com website. In addition, amendments to and waivers from the Code of Business Ethics will be disclosed promptly at the same location. Information regarding the composition of Applied’s audit committee and the identification of audit committee financial experts serving on the audit committee is incorporated by reference to Applied's proxy statement, under the caption “Corporate Governance.” ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the captions “Executive Compensation” and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Applied's shareholders have approved the following equity compensation plans: the 1997 Long-Term Performance Plan, the 2007 Long-Term Performance Plan, the 2011 Long-Term Performance Plan, the 2015 Long-Term Performance Plan, the Deferred Compensation Plan, and the Deferred Compensation Plan for Non-Employee Directors. All of these plans are currently in effect. The following table shows information regarding the number of shares of Applied common stock that may be issued pursuant to equity compensation plans or arrangements of Applied as of June 30, 2015.2018. | | | | | | | | | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights |
| | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights |
| | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | Equity compensation plans approved by security holders | 1,116,188 |
| | $ | 35.86 |
| | * | Equity compensation plans not approved by security holders | 0 |
| | 0 |
| | 0 | Total | 1,116,188 |
| | $ | 35.86 |
| | * |
| | | | | | | | | | | | | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | Equity compensation plans approved by security holders | 1,378,637 |
| | | $45.22 | | * | Equity compensation plans not approved by security holders | — |
| | | — |
| | | — |
| | Total | 1,378,637 |
| | | $45.22 |
| * |
| | * | The 2015 Long-Term Performance Plan was adopted to replace the 2011 Long-Term Performance Plan and the 2011 Long-Term Performance Plan was adopted to replace the 2007 Long-Term Performance Plan, and the 2007 Long-Term Performance Plan replaced the 1997 Long-Term Performance Plan. Stock options and stock appreciation rights remain outstanding under each of the 19972007 and 20072011 plans, but no new awards are made under those plans. The aggregate number of shares that remained available for awards under the 20112015 Long-Term Performance Plan at June 30, 2015,2018 was 1,106,794. The number of shares issuable under the Deferred Compensation Plan for Non-Employee Directors and the Deferred Compensation Plan depends on the dollar amount of participant contributions deemed invested in Applied common stock. 1,665,033. |
Information concerning the security ownership of certain beneficial owners and management is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the caption “Holdings of Major Shareholders, Officers, and Directors.” ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the caption “Corporate Governance.” ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this Item is incorporated by reference to Applied's proxy statement for the annual meeting of shareholders to be held October 27, 2015,30, 2018, under the caption “Item 43 - Ratification of Auditors.”
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE. (a)1. Financial Statements. The following consolidated financial statements, notes thereto, the reports of independent registered public accounting firm, and supplemental data are included in Item 8 of this report: | | | | • | Report of Independent Registered Public Accounting Firm | | | | • | Statements of Consolidated Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Statements of Consolidated Comprehensive Income for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Consolidated Balance Sheets at June 30, 20152018 and 20142017 | | | | • | Statements of Consolidated Cash Flows for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Statements of Consolidated Shareholders' Equity For the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Notes to Consolidated Financial Statements for the Years Ended June 30, 2015, 2014,2018, 2017, and 20132016 | | | | • | Supplementary Data: | | | | | • | Quarterly Operating Results |
(a)2. Financial Statement Schedule. The following schedule is included in this Part IV, and is found in this report at the page indicated: | | | | | Page No. | | | | | Schedule II - Valuation and Qualifying Accounts: Pg. 6670 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto. (a)3. Exhibits. | | | * Asterisk indicates an executive compensation plan or arrangement. | Exhibit No. | Description | | | 3.1 | | | | 3.2 | | | | 4.1 | | | | 4.2 | Private Shelf Agreement dated as of November 27, 1996, as amended through October 30, 2014,June 29, 2018, between Applied and PGIM, Inc. (formerly known as Prudential Investment Management, Inc. (assignee of The Prudential Insurance Company of America)), conformed to show all amendments (filed as Exhibit 4.2 to Applied's Form 10-Q for the quarter ended March 31, 2015, SEC File No. 1-2299, and incorporated here by reference).amendments. | | | 4.3 | Request for Purchase dated May 30, 2014 and 3.19% Series C Notes dated July 1, 2014, under Private Shelf Agreement dated November 27, 1996, as most recently amended, on February 4, 2013, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 10.1 to Applied’s Form 8-K datedfiled July 1,2, 2014, SEC File No. 1-2299, and incorporated here by reference). | | |
| | | 4.4 | Request for Purchase dated October 22, 2014 and 3.21% Series D Notes dated October 30, 2014, under Private Shelf Agreement dated November 27, 1996, as amended, between Applied Industrial Technologies, Inc. and Prudential Investment Management, Inc. (filed as Exhibit 4.5 to Applied's Form 10-Q dated November 4,for the quarter ended September 30, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | 4.5 | Credit Agreement dated as of May 15, 2012,January 31, 2018, among Applied Industrial Technologies, Inc., KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 410.1 to Applied's Form 8-K dated May 17, 2012,filed February 6, 2018, SEC File No. 1-2299, and incorporated here by reference). | | | 4.6 | Credit Agreement dated as of April 25, 2014, among Applied Industrial Technologies, Inc., Key Bank National Association, as Agent, and various financial institutions (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 1, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | *10.1 | A written description of Applied's director compensation program is incorporated by reference to Applied’s proxy statement for the annual meeting of shareholders to be held October 27, 201530, 2018 under the caption “Director Compensation.” | | | *10.2 | | | | *10.3 | | | | *10.4 | Second | | | *10.5 | | | | *10.6 | 1997 Long-Term Performance Plan, as amended April 19, 2007 (filed as Exhibit 10(k) to Applied's Form 10-K for the year ended June 30, 2007, SEC File No. 1-2299, and incorporated here by reference). | | | *10.7 | Section 409A Amendment to the 1997 Long-Term Performance Plan (filed as Exhibit 10.4 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference). | | | *10.8 | | | | *10.910.7 | | | | *10.1010.8 | | | | *10.1110.9 | | | | *10.10 | | | | *10.1210.11 | | | | *10.1310.12 | | | | *10.1410.13 | Performance Shares | | | *10.1510.14 | Restricted Stock Units | | | *10.1610.15 | | | | *10.1710.16 | | | | *10.1810.17 | | | |
| | | *10.2010.19 | | | | *10.2110.20 | | | | *10.2210.21 | | | | *10.2310.22 | | | | *10.2410.23 | | | | *10.2510.24 | | | | *10.2610.25 | | | | *10.2710.26 | | | | *10.27 | | | | *10.28 | Supplemental Defined Contribution Plan (Post-2004 Terms) (filed as Exhibit 10.6 to Applied's Form 10-Q for the quarter ended December 31, 2008, SEC File No. 1-2299, and incorporated here by reference). | | | *10.29 | | | | *10.3010.29 | | | | *10.3110.30 | | | | *10.3210.31 | Form of | | | *10.3310.32 | | | | *10.3410.33 | | | | *10.3510.34 | | | | *10.3610.35 | Non-qualified Deferred Compensation Agreement between Applied | | | 10.3710.36 | Share Purchase Agreement dated April 25, 2014,and Plan of Merger by and among Applied Industrial Technologies, Inc., Applied Alberta, Inc., Michael Sirois, Sirois Family Trust, Georg Eger, Eger Family Trust, Blair Hetlinger, Christopher Sirois, Kenneth Pacula, Grant Bechtloff, Ryan Farley, Dwayne Letawsky, Douglas Kilbach, Steven Vanderwater, 1562039 Alberta Ltd., 1561902 Alberta Ltd., 1614176 Alberta Ltd., 1814971 Alberta Ltd.Fortress Merger Sub Holding LLC, Fortress Merger Sub LP, FCX Group Holdings, LP, FCX Group GP, LLC, and 1814966 Alberta Ltd.Harvest Partners, LP (filed as Exhibit 10.1 to Applied’sApplied's Form 8-K dated May 1, 2014,filed January 9, 2018, SEC File No. 1-2299, and incorporated here by reference). | | |
| | | 10.38 | Stock Purchase Agreement dated May 23, 2014, among Applied Industrial Technologies, Inc., Alex Dan Knox and Dayton Scott Knox (filed as Exhibit 10.1 to Applied’s Form 8-K dated May 27, 2014, SEC File No. 1-2299, and incorporated here by reference). | | | 21 | | | | 23 | | | | 24 | | | | 31 | | | | 32 | |
| | | | | 101.INS | XBRL Instance Document | | | 101.SCH | XBRL Taxonomy Extension Schema Document | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Applied 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 Applied'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.
ITEM 16. FORM 1O-K SUMMARY. Not applicable.
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2015, 2014,2018, 2017, AND 20132016 (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| Year Ended June 30, 2015 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 10,385 |
| | $ | 2,597 |
| | $ | 231 |
| (A) | | $ | 2,592 |
| (B) | | $ | 10,621 |
| Year Ended June 30, 2014 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 7,737 |
| | $ | 3,970 |
| | $ | (129 | ) | (A) | | $ | 1,193 |
| (B) | | $ | 10,385 |
| Year Ended June 30, 2013 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 8,332 |
| | $ | 2,267 |
| | $ | (104 | ) | (A) | | $ | 2,758 |
| (B) | | $ | 7,737 |
|
| | | | | | | | | | | | | | | | | | | | | | | | COLUMN A | | COLUMN B | | COLUMN C | | | COLUMN D | | | COLUMN E | DESCRIPTION | | Balance at Beginning of Period |
| | Additions Charged to Cost and Expenses |
| | Additions (Deductions) Charged to Other Accounts |
| | | Deductions from Reserve |
| | | Balance at End of Period |
| Year Ended June 30, 2018 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 9,628 |
| | $ | 2,803 |
| | $ | 4,578 |
| (A) | | $ | 3,443 |
| (B) | | $ | 13,566 |
| Year Ended June 30, 2017 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 11,034 |
| | $ | 2,071 |
| | $ | (133 | ) | (A) | | $ | 3,344 |
| (B) | | $ | 9,628 |
| Year Ended June 30, 2016 | | | | | | | | | | | | | Reserve deducted from assets to which it applies — accounts receivable allowances | | $ | 10,621 |
| | $ | 4,303 |
| | $ | (46 | ) | (A) | | $ | 3,844 |
| (B) | | $ | 11,034 |
|
| | (A) | Amounts in the year ending June 30, 2018 represent reserves recorded through purchase accounting for acquisitions made during the year of $3,549 and for the return of merchandise by customers of $1,029. Amounts in prior fiscal years represent reserves for the return of merchandise by customers. |
| | (B) | Amounts represent uncollectible accounts charged off. |
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. | | | | /s/ Neil A. Schrimsher | | /s/ Mark O. EiseleDavid K. Wells | Neil A. Schrimsher President & Chief Executive Officer | | Mark O. EiseleDavid K. Wells
Vice President-Chief Financial Officer & Treasurer | | | | /s/ Christopher Macey | | (Principal financial officer and principal accounting officer) | Christopher Macey Corporate Controller (Principal Accounting Officer) | | |
Date: August 26, 201517, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. | | | | * | | * | Peter A. Dorsman, Director | | L. Thomas Hiltz, Director | | | | * | | * | Edith Kelly-Green, Director | | Dan P. Komnenovich, Director | | | | * | | * | John F. Meier,Robert J. Pagano, Jr., Director | | J. Michael Moore,Vincent K. Petrella, Director | | | | * | | /s/ Neil A. Schrimsher | Vincent K. Petrella,Joe A. Raver, Director | | Neil A. Schrimsher, President & Chief Executive Officer and Director | | | | * | | * | Dr. Jerry Sue Thornton, Director | | Peter C. Wallace, Director and Chairman | | | | | | |
| | /s/ Fred D. Bauer | Fred D. Bauer, as attorney in fact | for persons indicated by “*” |
Date: August 26, 201517, 2018
s Versus Prior Period |
|